Social distancing is essential to limit the spread of the novel coronavirus, but it also reduces opportunities for millions of Americans to earn a wage or buy goods and services from others. As a result, state and local income and sales taxes that fund education, public safety, and other essential services are drying up. Meanwhile, the rising unemployment rate is causing states to spend more on safety-net programs, such as unemployment insurance and Medicaid. Because most state and local governments are required to balance their budget, this fiscal squeeze is compelling them to cut their budgets right when people and businesses need government support the most.
PPI’s Center for Funding America’s Future has developed a tool to help estimate the additional aid state and local governments will need from the federal government over the next two years to compensate for lost economic activity. Users can input an unemployment rate in each quarter through 2021 (the default values for which are based on the Federal Reserve’s September 17th projections) and set the percent of emergency reserves they are comfortable asking states to draw down.
The results show how much money, beyond what Congress has already appropriated, states will need to fund their aid spending and make up for lost revenues without cutting their budgets or raising taxes. The figures only show the change in revenues or spending from what they were before the crisis, without accounting for the lost economic growth that was previously projected to occur in the coming years before the pandemic hit.
PPI currently estimates that state and local governments will need at least $250 billion in additional federal support between now and the end of 2021.
This estimate is based on the latest labor market data and experiences during past recessions, but it is important to note that the unique nature of the current crisis, as well as changes to state fiscal policy or the economy at-large since those recessions, has already meaningfully altered the expected impact on state and local government finances. In fact, our current baseline estimate is significantly smaller than the $500+ billion estimate produced by our calculator when it was first published in May. The biggest reason for the change is that better-than-expected economic news: the current unemployment rate, as well as the projected unemployment rates for future quarters, are below what they were projected to be four months ago.
Given the demonstrated unpredictability of the current economic crisis, PPI’s estimates should be considered a guideline rather than a concrete policy prescription. We strongly encourage congressional lawmakers to design programs that provide aid to state and local governments based on real economic indicators, rather than appropriating a precise amount of money that could easily be significantly larger or significantly smaller than what is needed.
We have also made some important methodological changes to our calculator. We no longer give users the option of including shortfalls in state unemployment insurance systems that are currently set to be recouped under current law from higher taxes that automatically apply to employers who lay off workers, as the unprecedented nature of this crisis has made it difficult to produce credible predictions based on the experiences of past recessions. Additionally, the calculator now includes the cost of supporting K-12 schools, which joins several other new spending needs beyond covering existing shortfalls, such as election security and creating a national state-led testing program (but still does not account for other costs directly related to addressing the pandemic, such as increased spending through public health insurance programs).
Click here to download the tool. (Updated September 22, 2020)
