State Budgets & Revenue:
Navigating the Pandemic and Lessons
from Prior Recessions

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Joe Crosby

Chairman and CEO, MultiState

The Senate Presidents’ Forum convened online June 3, 2020, to consider strategies for managing the financial impacts of the COVID-19 pandemic. The senators described their states’ revenue declines arising from the pandemic and consequent budget shortfalls. In a discussion led by state budget expert Joe Crosby, Chairman and CEO of MultiState, they explored solutions to these challenges. State leaders from across the country participated, along with additional senators and corporate members of the Forum.

States are seeing an unprecedented and rapid decline in state revenues, and state policy changes to compensate for these losses will depend on:

• The length of the downturn

• How robust the recovery will be (and according to CBO the economy could take 10 years to recover); and

• The ultimate shape and scope of federal assistance.

Key themes that emerged focused on variability among the states in::

• Revenue losses due to the pandemic and the impact of unemployment claims

• Access to federal assistance

• State policy changes

Estimated Revenue Losses

At the end of April, 2020, four states had less than one week of operating expenses left in their reserves, while another four states had two months of reserves, Mr. Crosby reported. But even robust reserves could be exhausted, as most states have seen a rapid and substantial decline in revenue (click on graphic to expand).

​Revenue Declines: Current Data

Source: MultiState Associates. Data as of May 26, 2020. Notes: Gray states have not yet published monthly sales tax figures. Courtesy Joe Crosby

In the period from April through June 2020, estimates of total state revenue losses range from $152 billion (Federation of Tax Administrators) to $185 billion (Center on Budget and Policy Priorities – CBPP), and represent more than 15% of the $900 billion total state FY 2020 annual budgets. This loss exceeds year-end balances plus rainy-day funds. Additional losses are projected for subsequent years: up to $370 billion for 2012 and $210 billion in 2022 (CBPP).

Delays in required income tax payments to July account for some of the revenue losses, but state sales taxes have also declined significantly in many states, Mr. Crosby pointed out, with some states losing as much as 30% in year-over-year (YOY) sales tax revenue.

Sen. Mike Shirkey (MI) commented that the data presented by Mr. Crosby were “Starkly revelatory” of the different impacts on the states. Michigan took the same precautionary actions as Ohio, but saw a much bigger impact from the virus with 5,595 deaths and a 30% YOY decline in sales tax revenues, while Ohio lost 2,200 people and saw a 12% YOY decline in sales tax revenue.

On the upside, Sen. Bill Ferguson (MD) pointed out that robust online purchasing activity significantly increased sales tax remittances, thanks to the Wayfair decision allowing states to collect sales taxes from out-of-state sellers and marketplaces.

Federal Funding

Sen. Andrea Stewart-Cousins (NY) reported that New York, one of the states hardest hit by the pandemic, faces a $13 billion deficit in tax revenues. She queried the Forum on other states’ experience with relying on federal assistance to help.

Existing federal assistance to the states amounts to $246 billion, Mr. Crosby noted:

• The CARES Act gave $150 billion in aid to state and local governments, allocated based primarily on population; $30 billion for education grants; and $25 billion for transit grants

• On March 6, the Supplemental Appropriations Bill allocated an additional $1 billion to state and local governments, mainly for public health.

• The Families First Coronavirus Relief Act provided $40 billion to state and local governments through a boost in the Medicaid Matching Rate.

But future federal funding such as that from the House proposal called the Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES Act), which proposes $1.08 trillion in state and local aid, is in question, as the Senate hesitates to provide trillions in aid to state and local governments.

The best solution is to get people back to work, safely and quickly, as federal legislators struggle to come to consensus on new state-aid packages.

Sen. Mitch Carmichael (WV) reported that revenues are below anticipated estimates for this quarter, and, while West Virginia’s state’s Rainy Day Fund is equal to 20% of the budget, it is more prudent to make up the deficit with federal funding and conserve the reserve. But the legislative and executive have different views on spending funding from the CARES Act. Meanwhile, in his state, which was not hard-hit by the pandemic, “people are over the pandemic and just want to get back to work and back out in the community,” he said.

Bonds

Sen. Peter Courtney (OR) pointed out that borrowing at very low interest rates for state infrastructure projects would be a possible stimulus to economic recovery. General obligation bonds with low interest rates are now attractive and could be used to fund construction projects, getting people back to work. Mr. Crosby noted variability among the states; that some that states can borrow inexpensively now, if they can manage the debt burden.

State Policy

State policy changes have been primarily administrative, such as extending the tax filing and payment deadlines in all states, and modifying nexus requirements to avoid punishing teleworkers (AL, DC, NJ, SC).  Legislation to modify and extend Net Operating Loss provisions has been introduced in some states (LA, KS, SC, PA). And states have considered modifying their conformity with the CARES Act provisions or decoupling from the Act funding, Mr. Crosby reported.

Sen. Toni Atkins (CA) described her state's attempt to "flatten the economic curve" through changes in state tax policy. The state has 5.4 million new unemployment claims, and faces an $18.8 billion unemployment liability and $54 billion budget deficit. Policy changes such as delay of income tax payments to July will help residents in the immediate moment, and establishment of an Economic Recovery Fund, which permits pre-payment of taxes, may flatten the economic curve but may cost some revenue in the "out years" when, presumably, the economy will have begun to recover. The state has existing bond capacity, but will try to avoid assuming more debt.

California’s governor has proposed triggers to force budget cuts, which the legislature is working to avoid. “The legislature will make budget cuts thoughtfully and carefully when necessary,” Sen. Atkins noted. “However, safety net services are critically important” as people face crises arising from the pandemic and unemployment.

Best Practices for the States

Mr. Crosby reported on trends that emerged in the aftermath of prior recessions in 2001 and 2007-2009, which may inform best practices for the states’ recovery from the COVID-19 pandemic. In the prior recessions, no state immediately increased or added taxes. With the economy reeling, and economic uncertainty, no new tax burdens were taken on by the states. Tax changes came a year or two later, after leaders took the time to consider existing conditions and challenges.

Track the Data

Scrutinizing the data on economic recovery is important, Mr. Crosby stressed, recommending that states scrutinize data from executive budget offices and legislative fiscal offices. For example, delayed filing deadlines will be helpful to tax payers for the first quarter of FY2021; however, by July 15, people may still not be able to pay their delayed tax bills, Mr. Crosby warned.

Make Temporary Tax Changes, If Necessary

Wait for economic recovery before removing or suspending taxes, Mr. Crosby advised.  Make targeted tax increases where required, such as surcharges on high-income taxpayers that can be applied as credit to future years’ taxes.

Be Patient and Prudent

Take prudent measures and minimize cash outlays, Mr. Crosby concluded. If necessary, borrow wisely and inexpensively. Don’t take any drastic actions, but wait and see how the economy recovers through July until Labor Day and through the election season. Be prepared to have special legislative sessions after the elections and before the New Year to assess where your state is in recovery.

If you are a member of Senate Presidents’ Forum and would like a copy of Joe Crosby’s slides from his June 3 presentation, please contact us.

Speaker Biography

Joe Crosby

Joe Crosby is the Chairman and CEO of MultiState, a state and local government relations company. He is involved in all aspects of the firm’s efforts to help clients resolve the challenges they face in the state and local government arena, with a concentration on providing strategic counsel, identifying and deploying political assets, and advancing tax policy objectives.

Joe Crosby’s full bio

​Past Meeting