A pandemic is an expensive thing to weather. The COVID-19 crisis has already prompted a huge drop in state tax dollars, and seems likely to cost states hundreds of billions of dollars in lost revenue over the upcoming fiscal year. That’s pushed governors to come to the federal government, hat in hand, asking for a federal bailout. But while Democrats in Congress seem eager to oblige — a new stimulus package that narrowly passed the House on May 15 includes nearly $1 trillion for state, local and tribal governments — congressional Republicans and President Trump aren’t sold yet.
There’s a tinge of moral and political outrage to this debate. Trump has repeatedly suggested that blue-state governors mismanaged their finances and don’t deserve a bailout. Senate Majority Leader Mitch McConnell, meanwhile, made headlines last month when he suggested that states should simply file for bankruptcy if they run out of money.
But experts think that doing nothing could be even more costly in the long run than bailing the states out. Without a lifeline from the federal government, states would have no choice but to start slashing budgets and raising taxes.
Recessions are never easy on state finances, since states rely heavily on tax revenue — whether it’s income tax, sales tax or property tax — and all of those sources of income tend to fall when people lose their jobs or stop buying luxuries. And because states generally have to balance their budgets — unlike the federal government, they can’t go into massive debt during a financial downturn and promise to pay it back later — they have to make up that missing revenue in other ways. In the aftermath of the 2008 financial crisis, many states took a hatchet to higher education funding and reduced their spending on K-12 education, infrastructure, local governments and their own government workforce — and raised taxes.
And states had barely recovered from the last recession when the COVID-19 crisis arrived. The Great Recession technically ended in 2009, but according to an analysis by the Pew Charitable Trusts published last year, the slowness of the recovery meant that state tax revenues didn’t return to their pre-recession levels until 2013, adjusting for inflation — much longer than in the previous two recessions. Over this period, states lost an estimated $283 billion in tax revenue. “It was kind of like falling off a cliff and then walking up a ramp,” said Donald Boyd, co-director of the Project on State and Local Government Finance at the University of Albany.
This meant that even by the time state revenues had recovered, it took longer for dollars to start flowing toward education or infrastructure. States did put more money into their rainy day funds, which they can draw on during emergencies, in case another recession hit. But that prudent instinct left them with even less cash to spend on other things. By 2018, according to Pew, nearly half of the states were still spending less money than they were a decade earlier. State funding for higher education was down 13 percent, and state infrastructure spending as a share of GDP was at its lowest level in more than 50 years.