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How Much Covid Relief Do States Need?

Karl W. Smith
·4 mins read

(Bloomberg Opinion) -- When President Donald Trump blasted Democrats on Twitter last week over coronavirus relief, he was echoing a longstanding Republican concern that House Speaker Nancy Pelosi and other Democratic leaders are attempting to use the pandemic to bail out near-bankrupt states. Democrats, meanwhile, have argued that sharp cutbacks in state and local spending after Great Recession were to blame for the slow recovery of the aughts, and are terrified of repeating that same mistake.

No one can know for sure what course the virus will take, or what state and local governments will need to do in response. Nonetheless, it seems highly implausible that they will face costs as high as Democrats expect.

Democratic fears were bolstered by a Census Bureau report last week that state tax revenues fell by 29% year-over-year in the second quarter of 2020. States take in roughly $1 trillion a year in revenue, while local governments collect about $750 billion. So, some academic researchers have argued, the combined state-local shortfall is likely more than $500 billion annually.

And that’s before any accounting for increases in expenditures caused by the pandemic. Covering those costs, Democrats have argued, could easily require several hundred billion more, bringing the total need for state and local government relief to more than $900 billion.

Instead of looking forward, however, lawmakers should look back — at what has already been spent. Through the end of June, state and local governments had spent only 25% — roughly $35 billion — of the $139 billion they were allocated in the first relief package in March. And a few states have been accused of spending what little they have on projects and programs unrelated to the pandemic.

A complete and accurate accounting of how those funds were spent, if it were even possible, would take years. Regardless, the fact that money for critical needs such as testing has gone largely unspent suggests that direct pandemic expenditures are growing more slowly than anyone anticipated in March.

What about revenue data? That is more timely and reliable than spending — but the current projections of revenue shortfall are driven both by a misreading of that data and a failure to account for economic trends.

First, state revenues typically see a bump in the second quarter because income taxes are due in April. In 2019, for example, second-quarter tax receipts from corporations were 44% larger than the average of the previous three quarters. This year that second-quarter bump disappeared: Corporate receipts were up only 3%, probably because the IRS moved the filing deadline this year from April to July, specifically to give struggling businesses more time.

Once that delay is accounted for, state tax receipts were roughly flat. That makes sense, given that CARES Act relief funds caused personal income to skyrocket in April. Retail sales, for example, were down only 8% in the second quarter. Even more important, total retail sales had rebounded by June and continued to grow through July and August.

Local revenue is likely to be in even better shape. Only about 8% of it comes from general sales taxes, and the most important revenue source — the property tax — fell only 3% year-over-year. That translates into shortfalls for the last two quarters of this calendar year of $80 billion and $23 billion, respectively.

All that said, this is a fast-moving and uncertain crisis. Setting aside an additional $250 billion for state and local aid, roughly a third of Pelosi’s initial request, is prudent. Republicans ought to feel comfortable funding a buffer of that size without worrying too much that it will fuel spending binges through 2021. And Democrats can be confident that those funds will likely hold over state and local governments well into next year.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Karl W. Smith is a Bloomberg Opinion columnist. He was formerly vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina. He is also co-founder of the economics blog Modeled Behavior.

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