EconExtra is a series of posts that go beyond the textbook, relating current events and recent developments in economics to content standards, and providing resource suggestions to help you incorporate the current events into your lessons.

The Issue/ Huge State Revenue Shortfalls

The Tax Foundation summed up the situation back in April. The situation was dire enough to drive a $150 billion allocation to state and local governments as part of the CARES act referred to below. 

“The contrasting fiscal constraints of state and federal governments are on full display right now, as the federal government begins implementing a $2.2 trillion deficit-financed COVID-19 relief package while states must still find a way to balance their budgets as tax revenues decline and new needs arise. States must both close out the current fiscal year, in most cases without carrying over a negative ending balance, and budget for—or potentially revise an already-adopted budget for—fiscal year 2021 under tighter revenue constraints. In doing so, they have several tools at their disposal, but most can only buy time. Ultimately, states are constrained in a way the federal government is not: revenues and expenditures must be aligned, and the longer they are out of balance, the more intractable the problem becomes.”

These constraints are known as “Balanced Budget Requirements” (BBRs) and exist to some degree in all states but Vermont. BBRs usually apply only to a state’s operating budget, and not to capital or pension funds. Federal debt and deficits will be covered in next week’s post, but the State budget process might be an interesting introduction to the unit on Fiscal Policy (CEE National Content Standard 11).

Show this two-minute video from Georgia Public Broadcasting that explains how the budget process works in Georgia, but this is how BBRs work in general. Included is an explanation of fiscal year, balanced budget, and rainy-day fund.

State revenues are dropping as Covid-19 related expenses are rising. Loss of income taxes as unemployment rises, loss of sales tax as spending drops, and loss of excise and corporate tax revenues are hitting hard. Here is a sampling of headline-making news:

• State tax collections for March through July 2020 were 7.5 percent less than in the same months of 2019.
• California expects revenues to decline by $32 billion in 2021 alone, according to the Department of Finance.
• New York’s tax revenues will fall by $13 billion in 2021 and by $16 billion in 2022, according to the state’s Division of Budget.
• Colorado’s revenues could drop by as much as $2.6 billion in 2021 and $1.7 billion in 2022, according to the Legislative Council.

States have limited tools available to them in this situation. The first step is to use up any rainy day funds. Then come the cuts to jobs and services. For example, here are some headlines about cuts:

• Georgia cuts the K-12 Education budget by $1 billion.
• States are weighing cuts in basic services including education, health care and public safety.
• State and local governments have shed nearly 1.5 million jobs since the pandemic began.

Pre-pandemic Financial Health of States

To set the stage for the health of the states before the pandemic hit, Pew Research Trust posted an article this week that includes an interactive graphic on the status of state tax revenue at the end of 2019 compared to its pre-Great Recession peak. Here is an example with three states selected, all three compared to the average for all 50 states.

Revenue recovery is one measure.  The other is the status of each state's rainy day fund. The Tax Foundation article contains rainy day fund balances by state.

Expected Pandemic Shortfalls

How much do states expect to be short in 2020 and 2021? The Tax Policy Center evaluated revised forecasts of revenue from 27 states and determined that for both fiscal 2020 and 2021, state revenues could be down by as much as $200 billion. Not all states have the same fiscal years, so the chart below could be a bit misleading, but this next graph illustrates revenue shortfalls projected for those 27 states.

The Center on Budget Policy and Priorities has an even more detailed accounting of the expected contraction of revenue for fiscal 2020 and 2021 for every state. And back in July, CNBC covered the impending fiscal crises states were facing as many started a new fiscal year on July 1. There is also more descriptive information in these articles with details about the circumstances in several states.

State Tool Box

We have already mentioned that in the short term, states are limited in what actions they can take to bring budgets into balance after shocks like Covid-19.  Deloitte Insights published an article detailing both the near-term traditional measures states can take, but also explaining changes they could make in the longer term involving investments in structural and technology changes.

Project Ideas Utilizing these Resources

1) Research the following for your state using links included in this post (and a little state-specific research):

• How is a BBR implemented in your state? (Tax Foundation)
• Where did your state stand with respect to pre-Great Recession revenue at the end of 2019? (Pew Research Trust)
• How big is its rainy day fund? (Tax Foundation)
• How big is your state’s expected shortfall? What is the biggest driver of the shortfall? (Tax Policy Center/The Center on Budget Policy and Priorities)
• What actions are being taken by your state to deal with the budget shortfall? (local research may uncover which “short-term, traditional” methods are being used as explained in the Deloitte Insights)
• Which of Deloitte’s suggestions for the medium- to long-term would you recommend your state consider undertaking to save funds in the future? Explain your reasoning.

2) Research and replicate the NGPF “Your Tax Dollar In Action” activity for your state’s budget.

• How do the categories for a state differ from the spending categories for Federal spending?
• If possible, compare pre-pandemic spending to the projection for the pandemic year(s).
• Which spending categories are impacted disproportionately more when revenue drops?

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