State and Local Government Finances Are Better Than Expected

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State and local governments’ tax revenues have held up better than expected—one reason Republicans in Congress oppose including more aid to them in a coronavirus relief package. But governors and mayors say they still need help to tide them over until the pandemic is vanquished. “Cities are a huge economic engine. The sooner we’re able to recover, the better off our country is going to be,” Jeff Williams, mayor of Arlington, Texas, said in a Dec. 14 interview.

Last spring, Capital Economics predicted the economic devastation wrought by the coronavirus would mean a plunge in the tax receipts of state and local governments, causing budget shortfalls of $300 billion to $400 billion over two years. But deficits in the year ended June 30 were only about $30 billion above pre-pandemic projections, and deficits in the current year are likely to be in the same range, according to a Dec. 14 report by Capital Economics Senior U.S. Economist Andrew Hunter.

Income tax receipts have remained buoyant because job losses were concentrated among lower earners who don’t pay much income tax anyway, and the extra federal benefits that unemployed people received were taxable, Hunter wrote. True, states are spending more on Medicaid and other benefits, but “The upshot is that the overall budget shortfalls facing state & local governments look set to be smaller than most had previously feared,” he wrote.

“I think it's still a bit early to sound the all-clear, but yes, the hit isn't nearly as bad as feared through this initial stage of the pandemic and recovery,” Bloomberg Economics Economist Andrew Husby wrote in an email.

That’s one reason Senate Majority Leader Mitch McConnell has opposed including $160 billion in aid to state and local governments in the coronavirus relief package that has been stalled in Congress for months. On Dec. 14, a bipartisan group of lawmakers proposed breaking the impasse by splitting off the most contentious parts—including state and local aid. One bill for $748 billion includes items that Republicans and Democrats agree on, such as vaccine distribution funding and aid to small businesses. The other bill, which lacks bipartisan support, pairs the $160 billion in aid that Democrats want with a liability shield for businesses that Republicans want. That legislative maneuver appears to put the aid at risk of being voted down.

Even if state and local finances haven’t been as dire as predicted in the spring, they’ll worsen in coming months without a big slug of federal aid, says James Nash, a spokesman for the National Governors Association. “We’re headed back into another season of closures and increased unemployment,” Nash says. “I don’t think we’re out of the woods by any stretch of the imagination.”

Arlington, which sits between Dallas and Fort Worth and is home to the Dallas Cowboys’ AT&T Stadium, is bracing for a rough year, says Williams, the mayor. The city relies heavily on property tax receipts, which will fall when property valuations are reassessed in 2021 by Tarrant County, he says. “We’re pretty conservative. We will not be raising taxes. We will be cutting our services,” he says.

Williams is chair of the United States Conference of Mayors’ metro economies standing committee. He rejects the notion that mismanagement is the cause of cities’ fiscal problems—a view that has been expressed by McConnell and President Trump. ”I’m sure that there are some in that situation, but we have literally thousands of cities that are well run, and we don’t want to be lumped into this category,” he says. “This is a natural disaster, plain and simple, like a flood or a tornado, and this has gutted our economy unlike anything we’ve seen before.”

©2020 Bloomberg L.P.

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