State Budgets Are Getting Blown Up by the Coronavirus Pandemic

New York is one of the states getting hammered by the coronavirus. Photo: Victor J. Blue/Bloomberg via Getty Images

One of the crucial but often overlooked differences between Democratic and Republican priorities in the red-hot debate over coronavirus relief efforts is that Democrats are determined to obtain a significant amount of direct relief for the state and local governments on the front lines of the fight against the pandemic, while Republicans (even though they enjoy a net advantage in power at the state level) are generally more focused on aid to individuals and businesses.

You can argue that any legislation that pumps $2 trillion into the suffering U.S. economy is going to benefit governments that rely on revenues from the incomes and business activities boosted by the aid. But there are particular issues facing the states, which unlike Washington, do not have unlimited borrowing powers and are rapidly depleting reserves built up during the recent period of steady economic growth. As City Journal observes, state tax collections are getting hit hard from a variety of directions, even as coronavirus-related spending needs spike.

States that rely on meetings, conventions, and tourism, or that derive substantial economic growth from energy production, or that depend on big gains in the financial markets from wealthy individuals, will be among the biggest losers unless the economy turns around fast.

This last factor is particularly important for states with progressive income taxes: Much of the income of wealthy individuals may be offset by big capital losses from the stock market plunges. And the same stock market plunges will reignite a state pension fund crisis that had been abating:

Unfunded pension debt, just $138 billion in 2007, stood at $1.2 trillion in 2018, using the states’ own estimates. The sharp run in the market since then had many state officials optimistically projecting that, when pension systems closed their books on the current fiscal year at the end of June, they would have made substantial progress toward paring that enormous debt—but all those market gains have vaporized for now, even as pension-system liabilities have swollen.

Direct costs associated with the pandemic are going to rise rapidly, particularly via the federal-state Medicaid program that provides health-care coverage for low-income Americans. The bipartisan National Governors Association is asking Congress for a sizable increase in the federal share of Medicaid spending as an emergency measure, but this is likely to collide with the determination of Trump administration officials and congressional Republicans to shrink rather than expand Medicaid.

And even states that were recently in good fiscal health are now looking at very hard times. That definitely includes California, as the San Francisco Chronicle reports:

In a January budget proposal of record size, Gov. Gavin Newsom touted a projected multibillion-dollar surplus and new programs to reshape homeless services, boost wildfire prevention and provide health care for immigrant seniors living in the country illegally.

That plan has been dashed by the economic turmoil caused by the coronavirus outbreak, which experts say is pushing the U.S. into a recession.

Although Newsom does not have to unveil a revised 2020-21 spending plan until May, it’s clear that the widespread shutdown of California’s economy will take a huge bite out of the personal-income, corporate and sales taxes that fund much of the state budget. The governor and lawmakers are facing scaled-back wish lists and the likelihood that they won’t be able to put this budget to rest even for months after it’s due.

Hard-hit New York is in equally big trouble when it comes to the state’s balance sheet, as the Wall Street Journal reports:

New York State Budget Director Robert Mujica, an appointee of Gov. Andrew Cuomo, said the state expects gross domestic product to shrink in the second quarter of this year and possibly beyond that. Last week, Comptroller Tom DiNapoli estimated state revenue would decline by $4 billion to $7 billion; Mr. Mujica said his latest estimate was a decrease of $9 billion to $15 billion.

The drop comes as state lawmakers work to develop a new spending plan before the state fiscal year ends on March 31. In January, Mr. Cuomo proposed a $178 billion budget, of which $105.8 billion covered operations. It assumed roughly $88 billion in state revenue, mostly from personal income taxes.

In an interview Monday with The Wall Street Journal, Mr. Mujica said the Democratic governor’s original proposal is “no longer viable,” absent massive assistance from the federal government to maintain planned outlays for school aid and public worker salaries.

Like the coronavirus pandemic itself, the situation in state capitals is likely to get much worse before it gets better. But in both cases, the effects will be with us for a long time.

State Budgets Getting Blown Up by Coronavirus Pandemic