The Pandemic Strains State Budgets

For States, Revenue Plummets as Costs Rise

July 1 is the start of the fiscal year for most state budgets and this year states have faced unprecedented challenges. Not only has tax revenue plummeted, but states are spending record amounts of money on public health measures, unemployment benefits, and other pandemic-related costs.

Income taxes and sales taxes account for two-thirds of states’ revenues. Shuttered shops and restaurants led to a significant drop-off in revenue from sales taxes, and unemployment caused income tax revenue to plummet as well. For example, Louisiana’s tax revenue fell by 43% in April 2020, compared to April 2019. Up north, New York’s revenue slid by over two-thirds.

States Will Receive Some Help

States have been gradually increasing spending for the past nine years. Before the pandemic, states were expecting revenue and spending to go up by about 2% in 2020. Instead of moving together as expected, revenue has gone down while spending has gone up.

Many states have financial reserves they can draw on, built up during the 2010s, but this money can only get them so far. The Federal Government offered a $110 billion lifeline to states to help make up for revenue shortfalls. However, the National Governors Association says this will not be enough and states will need $500 billion to recover.

Difficult Choices

Most states are required by law to balance their budgets by the end of the year. In order to accomplish this for 2020, states will be forced to slash spending in the middle of a pandemic and a recession.

Washington State is planning to cut its budget by 15%. Ohio’s governor told state agencies to decrease budgets by 20%. In California, the governor and the state legislature are deadlocked regarding a $14 billion budget cut. States have made it through recessions and moments of crisis before, and they will do it again, but not without difficult choices about budget cuts.

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