State and Local Budget Cuts Jeopardize U.S. Recovery
As the coronavirus crisis grinds on, state and local leaders are warning of a looming fiscal meltdown.
by Brendan McDermott, Fiscal Policy Analyst
As the coronavirus crisis grinds on, state and local leaders are warning of a looming fiscal meltdown. Unlike the federal government, most state and local governments are required to balance their budgets, so they may need to implement painful budget cuts as unemployment soars and as tax collections dry up. Cuts are not inevitable, but they can only be avoided if the Democrat-controlled House and Republican-controlled Senate pass flexible aid for state and local governments. But rather than coming to the rescue, Congress is in gridlock over the next package of economic relief, in part because of misplaced Republican concerns about giving aid to state, county, and city governments.
Based on the most recent economic projections from the non-partisan Congressional Budget Office, the Progressive Policy Institute estimates that state and local governments will need an additional $445-$835 billion in federal support through the end of 2021 just to maintain their normal operations without cutting spending or raising taxes. If Congress does not pass more aid, the budget cuts made after the Great Recession suggests that schools and universities, Medicaid recipients, and state and local government employees will bear the brunt of the coming cutbacks. Steep budgets cuts would also lead to a more severe recession and a slower economic recovery.
The Center on Budget and Policy Priorities found that in the years after the 2008 financial crisis and subsequent recession, 44 states laid off or cut pay for state employees, 43 states cut higher-education spending, 31 cut health-care spending, 34 cut K-12 education spending, and 29 cut services or cash benefits for the elderly and disabled. Eight states also cut the maximum amount of time for which workers can draw unemployment benefits. Some of those cuts were never reversed: Pew Charitable Trusts estimates that a decade after the recession, states employed 132,300 fewer noneducational workers and spent $1,175 less per student on higher education than they did prior to the recession. As of 2016, states also spent 1.75 percent less on K-12 education in inflation-adjusted dollars than they had spent in 2008.
The cuts state and local leaders are considering now look a lot like those made during the Great Recession. Ohio leaders have proposed cutting $775 million from the state’s budget, primarily to K-12 education, Medicaid, and higher education. Colorado expects it will have to cut about a quarter of its discretionary spending, and is deliberating over cuts to K-12 education, health care programs, and infrastructure. In Oregon, leaders are considering cuts to policing, prisons, financial aid for college students, and social programs that benefit children, people battling addiction, and the elderly. Local governments of all sizes, from New York City to small cities in Mississippi, claim that they will have to furlough workers or cut back on city services such as transit and garbage pick-up.
Prior to the pandemic, roughly 20 million people worked for state and local governments. As those governments reduce their workforces, the already record-high unemployment rate could rise even further. Meanwhile, cutting aid to low-income people — those who are most likely to spend whatever money they receive — would hurt our most vulnerable citizens while also depressing consumption, which would hurt businesses and undermine the recovery.
These short-term cuts can also have longer-lasting consequences. For example, students who were affected by cuts to K-12 education in the wake of the Great Recession earned lower test scores years later, and even became less likely to attend college. The effects were particularly pronounced for black children, Latino children, and children in low-income families.
In a normal recession, sales taxes (states’ largest tax revenue source) fall less than other revenue sources like income taxes, lessening the blow the recession has on state and local budgets. But experts fear social distancing will cut into sales tax revenues more than it has in the past, as even people who didn’t experience a loss in income have fewer opportunities to spend what they earned. And oil-producing states, which tend to have large “rainy day” funds that could insulate them from fiscal crises, will have to reroute some of those reserves to offset revenue losses caused by historically low oil prices in addition to making up for pandemic-related losses.
The stakes are enormous, but the Trump administration is trying to tie aid for state and local governments to unhelpful tax cuts, while Congressional Republicans complain that aid would bail out poorly-managed states. But those claims are misguided, because the scale of state and local losses will dwarf what even the most fiscally-disciplined governments could have foreseen. Federal support for state budgets now will prevent government workers from joining the ranks of the unemployed and prevent budget cuts that would hurt vulnerable Americans, both of which would slow economic recovery. If Washington Republicans really are serious about restarting the economy as quickly as possible, they should stop stalling and start working with House Democrats to deliver the aid our states urgently need.
