Although the next state revenue forecast won’t be out until June, no one is under any illusions. The pandemic will result in deep revenue losses. The Seattle Times editorial board writes that the governor may begin the slicing when he signs the supplemental budget.
Inslee is expected to veto some new spending before signing the budget into law on Friday. He must not hold back. That requires political courage, but there is simply no choice.
State and local governments cannot commit to higher levels of spending going forward until the economic effects of coronavirus measures are better understood. That may take months.
Tax collections supporting state government are expected to plunge more than 10% this year. They could fall 15% or more, depending on how long it takes to resume normal activity.
The editorial hits on the adequacy of the rainy day fund. We explored that a bit yesterday.
The 2020 Legislature left the state fairly well positioned for a moderate slowdown, with about $2 billion in its rainy-day fund. But lawmakers also approved nearly $1 billion of new spending, much of which now appears unsustainable, given the necessary economic halt imposed to slow the spread of the coronavirus. The proposed two-year budget is now $53.8 billion, up 20% over the previous biennium.
The spending plan won’t stand.
Elected officials and the public must now triage spending priorities.
The governor has already vetoed some parts of the transportation budget, citing COVID-19 concerns, as the Washington Research Council reports.
The Brookings Institution has written of the pandemic’s impact on state and local finances.
Large scale “social distancing” will reduce consumer spending and workers’ wages and, in turn, cause sales and income tax revenues to plummet. State tax revenues declined by more than $120 billion—about 9 percent—during the Great Recession (Q2 2008 – Q2 2009), for example.
Increases in unemployment will boost spending on unemployment insurance and make more people eligible for Medicaid, both of which state governments help finance. Lower taxes and increased demands for funding will impose severe strains on state and local budgets.
The Brooking blog post is worth reading for insight into the operations of state budgets and the Great Recession’s impact. The authors note the recent federal aid package.
Congress recently enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2 trillion relief package that sets aside $150 billion in grants to help state and local governments pay for the costs of the health crisis. In addition, the Families First Coronavirus Response Act, enacted on March 18, raised the federal share of Medicaid by 6.2 percentage points. That increase is worth about $35 billion if it remains in effect all year, but is less than the increase during the Great Recession. The legislation also provided some help to state unemployment insurance programs.
These increases, while helpful, are clearly not nearly large enough to prevent states and localities from having to cut spending. The CARES Act provides only about half as much funding in dollars to state and local governments as was included in the American Recovery and Reinvestment Act of 2009, and states did not face the large increases in public health spending then that they do in the current crisis. Furthermore, Congress said the $150 billion can be used only to cover costs directly related to the coronavirus that weren’t already covered in the state or local governments’ budgets. The funds can’t be used to address increased spending on unemployment insurance or Medicaid or to make up revenue shortfalls, which, even under reasonably optimistic forecasts in which the economy starts recovering in the second half of the year, could be on the order of $100 billion or more. (State and local governments usually earn about $1.1 trillion in sales, excise, and income taxes in a year.)
The Center for Budget and Policy Priorities estimates Washington’s share of the $150 billion in grants to state and local government is just under $3 billion.
Stateline reports on the ongoing uncertainty for state officials,
Few state economists and budget analysts have calculated the fiscal impact of the pandemic so far, and it’s hard at this early stage to say how big the drop off in tax collections will be, said Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officers, a Washington, D.C.-based membership organization.
But the early estimates don’t look good, he said. “It looks like the drop-off that states could be facing this time could be more severe than the Great Recession.”
Another bleak indicator of the severity of the crisis:
Nearly 190,000 Washington state residents filed for unemployment insurance last week as the coronavirus pandemic continues to decimate the state’s economy.
The state’s 187, 501 new claims, filed during the week ending March 28, were reported Thursday morning by the U.S. Labor Department, and represent a 44% jump over the previous week’s already record-breaking number of nearly 130,000 claims.