Economic Policy

Brief #106

State and Local Jurisdictions Need Federal Aid to Be Viable

Rosalind Gottfried        

January 25, 2021


State and local government budgets provide the bread and butter of fiscal life and, because of the pandemic costs, require a federal infusion of aid to accomplish maintenance of essential servicesState and local governments provide major funding for infrastructure, services, and education.  They outspend the federal government on goods and services and account for 15% of the GDP.  They contribute more than 90% of the moneys for education and 80% of transportation spending.  State Medicaid costs have been on the rise, especially in Republican states that did not take advantage of federal extensions of benefits to states. State and local entities employ more people than domestic manufacturing and and  have lost 1.3 million jobs since March, representing the smallest workforce since 2001.  These are budgetary elements which impact the availability of goods and services which contribute to quality of life, such as police, fire, and waste services.

Fiscal shortfalls are projected at 172-308 billion dollars through July 2022 and are expected to reach 450 billion dollars in three years.  This is after considering the utilization of state rainy day funds ranging from 72-119 billion dollars (estimates vary by sources).  The situation has been deteriorating with the lengthening pandemic shut downs and is more severe in localities that have not fully recovered from the Great Recession.

Revenue has been reduced as a result of the pandemic related unemployment, shuttered businesses, and healthcare expenses.  Tax revenues from March to October were down by 4.1% from the previous year, with corporate tax down 6.7%; sales tax down 3.8%; and personal income tax down 2.7%.  Some states fared better than others due to high income workers earning at home and to stock market earnings.  In the second quarter of 2020, State and local spending was down 6%, the biggest drop since 1952.  In the third quarter, spending dropped by an additional 4%.



Generally, the two approaches to budget constraints are to cut spending and/or increase revenues.  In the Great recession both strategies were utilized.  In today’s pandemic neither of these scenarios seems feasible since there is still high unemployment and measures to help low and middle income people hold onto more fluidity are antithetical to raising taxes.

State and local budgets have two aspects.  The first is the operating budget which pays out for salaries, services, and maintenance needs such as minor infrastructure repairs and is funded by annual revenues.  The second is the Capital Budget which invests in major projects and is largely funded by long term mechanisms such as bonds.  Local budgets can be supported by chapter 9 bankruptcy laws not available to the states.  States, by law must operate with balanced budgets (except in Vermont).   As states work through their revenue shortfalls and accrued rainy day funds they are facing deep cuts in services which they can ill afford.  The federal government must step in if the quality life is not to sink more dramatically that is has in the past ten months, especially in the areas of education and health care.

In the CARES act of the early pandemic, state and localities received an infusion of 150 billion dollars, and the persisting conditions are promising to create ever larger budgetary gaps.  Biden’s current stimulus plan includes an infusion of 350 billion dollars for states and localities and 400 billion in pandemic relief which includes money to schools.  It would seem there is not time like the present to pass this plan.

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