Pandemic recalls Great Recession struggles

Larry Van GuilderAs I see it

The only certainties are death and taxes; the COVID-19 pandemic has lent a macabre twist to that axiom.

The coronavirus has certainly hastened death for thousands worldwide with no end to the misery it’s caused in sight. It has just as certainly pushed a growing collection of state and local governments close to a financial abyss as businesses close and sales and income tax collections plummet.

Yesterday, the Brookings Institution published a report online analyzing the likely immediate effects of the pandemic on state and local governments. Twelve states (Tennessee is not among them) have enacted unbudgeted appropriations or drawn on general revenue funds to assist public health agencies. An increase in health spending and Medicaid is inevitable as the pandemic wears on.

But co-authors Sage Belz and Louise Sheiner noted that, economically, these initiatives will pale beside the needs that will arise from the “coming recession.” Lost jobs are already slashing consumer spending, and sales and income tax revenues will fall off a cliff. They cite as an example the Great Recession of 2008-2009, during which state tax revenues fell by $120 billion, about 9 percent.

The rise in unemployment will necessitate increased spending on unemployment insurance and make more people Medicaid-eligible. The combination of lower tax revenue and increased funding needs will severely strain state and local budgets.

Unlike the federal government, most states cannot operate by running a deficit. Lost revenues must be made up by a combination of decreased spending and increased taxes or fees. Yet it took years following recovery from the 2008-2009 recession for states to rebuild budgets close to the pre-recession levels.

How quickly states and municipalities rebound from the coming recession depends a great deal on the federal government’s actions. The “Families First Coronavirus Response Act,” just passed, increased the federal share of Medicaid by 6.2 percent and gave some relief to state unemployment insurance funds. Additional stimulus programs are in the works, but the shape they will take and how far-reaching they will be remains to be seen.

Party affiliation matters less when state governors survey already squeezed budgets and consider what’s ahead. Some states are better prepared than others for what could be unprecedented “rainy day” needs.

California, for example, has compiled a $20 billion reserve fund. But others, as a recent Politico article noted, “will have to figure out which programs to cut for the first time in years. Illinois, for instance, doesn’t even have a rainy day fund.”

How prepared are we in Tennessee? Early projections were for the state to amass a budget surplus of $1.24 billion by the end of fiscal year 2020 and a rainy day reserve of $1.5 billion (based on the projected budget) at the close of fiscal year 2021.

The pandemic casts doubt on both projections. With 60 percent of state revenue dependent upon sales and use tax revenue, the state’s fiscal outlook will depend on the success of efforts to curb the spread of COVID-19 and the response of the federal government.

Larry Van Guilder is the business/government editor for Knox TN Today.

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