States have spent cautiously for the past ten years, building up high reserves. This fruits of this prudence have been swept away by the pandemic
of the fiscal year—July 1st in most states—is usually about as exciting as a 501 tax filing and as unpredictable as a Saudi weather forecast . Not this time. State tax revenues collapsed in April, falling on average by half, according to the Urban Institute, a think-tank. Demands on spending soared because the states are responsible for much of America’s spending on public health, unemployment and policing.
Revenues have fallen so fast that some states do not even know by how much. Of those that have reported estimates, Louisiana saw tax revenues drop by 43% in April compared with April 2019 . New York’s were down by two-thirds and California’s income-tax receipts plunged 85%. Revenues in April were doubly depressed because the federal government, with states following suit, moved tax-filing day from April to July, causing uncertainty about when income tax will be paid.
Lucy Dadayan of the Urban Institute estimates that the gap will be around $75bn in fiscal 2020 and $125bn in fiscal 2021. The Centre on Budget and Policy Priorities , another think-tank, reckons it will be even higher: $120bn in the current fiscal year, $315bn in fiscal 2021 and $180bn in 2022, a grand total of $615bn, which is six months of current spending.
These cuts will be mitigated by states’ financial reserves and by federal help. The rule that states must balance budgets has made them fiscally conservative. Most used the 2010s to build up reserves. According to the Pew Charitable Trusts, a nonpartisan think-tank, these reached $75bn in 2019, the highest ever, equal to 8% of spending . But that is just an eighth of’s forecast of the shortfall in 2020-22. The costs of the pandemic have swept away the benefits of caution.
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