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 will compel 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 Congressional Budget Office’s May 19th projections), set the percent of emergency reserves they are comfortable asking states to draw down, and decide whether they want to include state unemployment insurance systems (which operate independently from most state budgets but face crushing demand today) in the calculations.
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 (including certain policies that kick in automatically under current law, such as higher unemployment taxes on businesses that are forced to lay off workers). The figures only show the change in revenues or spending from what it was 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 between $445 billion and $835 billion in additional federal support between now and the end of 2021, depending on how much federal policymakers want states to draw upon their emergency reserves and whether unemployment insurance is included in the calculation.
These estimates are based on the latest labor market data and experiences during past recessions, but it is important to note that the unique nature of this crisis, as well as changes to state fiscal policy or the economy at-large since those recessions, could meaningfully change the impact this crisis has on state and local governments. Also note that while the tool does account for the cost of a national state-led testing program, it does not account for other costs directly related to addressing the pandemic, such as procuring medical equipment for hospitals or treating COVID-19 through public health-insurance programs. Nevertheless, it provides a useful guideline for federal policymakers about the general scope of fiscal support that will be needed for state and local governments in the coming months.
Click here to download the tool. (Updated May 20, 2020)