Dear Editor,

Additional pandemic aid for state and local governments, at $350 billion, is the most contentious part of Biden’s $1.9 trillion relief bill. The original CARES Act already provided $150 billion to state and local governments. Colorado received $2.2 billion of that money. Note that we’re talking about direct aid to governments here, not the additional stimulus provided to hospitals, schools and colleges. With more data in hand, it is reasonable to now examine how combined direct aid of $500 billion correlates to the actual revenue impact of Covid-19.

Naturally, some folks object to any bail-out of state / local governments on principle. Many point to the fact that the damage was self-inflicted, and that state closure orders were often ineffective at halting transmission anyway. In the context of maximizing the impact of federal fiscal stimulus, however, one can’t deny that state and local governments are big players in the US economy. They account for roughly 13 percent of jobs. Also, state and local governments mostly have to balance their budgets; they can’t borrow to finance large deficits the way the federal government does. These realities underpin persistent lobbying for another round of government Covid relief by Democrats and left aligned media.

In the summer of 2020 advocates for more government relief issued dire forecasts to support their case. In July, the left aligned Center on Budget and Policy Priorities projected that state budgets would experience a cumulative shortfall of $555 billion over three fiscal years ($110 billion in 2020, $290 billion in 2021, $155 billion in 2022). This was for states only; it excluded local governments. The slightly more centrist Brookings Institution made a projection in September that included local governments. It showed a three-year shortfall of $467 billion ($155 billion, $167 billion, $145 billion).

These forecasts, and others, significantly overstated the impact of Covid restrictions on tax revenue. In February economists from JP Morgan and the right aligned American Enterprise Institute circulated studies showing that actual state and local tax revenues did not decline as much as anticipated, and in some cases actually increased. They compiled tax receipts for the five-quarter period ending in the second quarter of fiscal 2021. Notably, they don’t capture data from the fall when pandemic impacts were peaking.

This week the New York Times waded into the controversy over this data, acknowledging “by some measures, the states ended up collecting nearly as much revenue in 2020 as they did in 2019.” In addition to refuting some doomsday forecasts, the actual data also reveal a nuanced reality - the revenue impact varied greatly based on where each government gets its revenue from. Colorado, for example, saw tax revenues increase 5.7% compared to 2019, for the period April -December. Idaho was the biggest winner, with revenue up more than 10% year over year, while Alaska was down 42% and Hawaii down 17%. Though tourism-impacted, Colorado has a relatively balanced tax regime that includes income tax, sales tax, oil & gas and gaming revenues. Alaska, by contrast, was crushed when Covid collapsed oil prices, as was Texas (down 10.4%). Concentrated tourism dependency crushed Hawaii, while California’s revenue actually increased 1.4%, buoyed by taxes on a flood of tech IPO income.

Left aligned media continue to argue that jobs are on the line, particularly those of front line professionals like teachers, nurses and firefighters. This is only half correct. Bloomberg and the New York Times have both cited 1.3 million lost government jobs, and that education-sector employment is down by 650,000. Both statistics are a misnomer, as they consider employees who are furloughed (in many cases with pay) as permanent job eliminations. Additionally, these arguments ignore the fact that schools and hospitals receive(d) discrete allocations of funding in the CARES Act, the November relief bill, and the proposed $1.9 trillion Biden bill.

We can say with certainty that Covid’s impact (so far) on state and local tax revenues is less harmful than projected. We can also clearly conclude that divvying relief funds by population (as the CARES Act did) is not the best way to align relief with the greatest need. There is still a strong argument for direct aid to state / local governments, but it should be far, far less than $350 billion and more thoughtfully targeted.

Derek Ridgley
Peak to Peak