A major reason lawmakers have not come into special session here to address the budget shortfall is the lingering hope that Congress will provide additional federal funding to state and local governments. We’d like to see that, too, but Congress has remained gridlocked on the issue.
A Wall Street Journal editorial today suggests that state revenues are improving more rapidly than anticipated. That may be occurring here, as well. While we believe that the improvement will not be enough to undo the damage inflicted by the pandemic-related shutdowns and slow pace of recovery, the WSJ takes the position that the better-than-anticipated-but-still-lousy revenue pictures will take the urgency out of another aid package.
Congress’s latest virus relief package is hung up over aid to state and local governments with House Democrats still demanding as much as $1 trillion to forestall what they warn will be horrific cuts to public services. Don’t believe it. State tax revenues are rebounding as the economy reopens and improves.
The editorial walks through some of the numbers and points to other bright spots. For example,
The Federal Reserve has also helped state and local governments by keeping interest rates low and buying corporate debt and Treasurys. This has pushed investors into equities and higher-yielding assets. Municipal bond funds have seen larger inflows as investors seek a relatively safe tax-exempt yield. As a result, borrowing costs for many states and cities have fallen during the pandemic, which is one reason only Illinois and New York’s Metropolitan Transportation Authority have tapped the Fed’s municipal lending facility.
Low interest rates have also generated a boom in home buying and housing prices, especially in the suburbs. State and local governments generate roughly 40% of their general fund revenues from property taxes and won’t suffer as much budget pain as they did after the 2009 housing crisis.
Better news, also, about sales taxes.
Sales-tax revenue has also held up relatively well in most states, thanks in part to online retail, which most states and cities now tax since the Supreme Court gave them the go-ahead in 2018.
The editorial concludes,
The virus will be here for many more months, but the worst of the lockdowns should be over. Congress has already doled out tens of billions of dollars to state and local governments, and the Fed has repeatedly eased the terms of its state and municipal lending facility. States and cities could use more flexibility in how they spend the federal relief they’ve received so far, but their finances don’t justify tens of billions more from taxpayers.
We think that’s an arguable premise. Slightly outperforming a too-pessimistic forecast – and in the early stages of the pandemic, many economic projections were grim – is not the same as being made whole. But we do worry that the position taken by the WSJ editorial board will be shared by many in Congress. Waiting for a federal bailout becomes an ever more risky position for our legislators to take.