Home FinanceBusiness Why Some States Are Seeing Higher Revenue Than Expected Amid Job Losses

Why Some States Are Seeing Higher Revenue Than Expected Amid Job Losses

by admin

As Congress has spent the last few weeks debating aid to state and local governments, a number of states have announced surprising news: Their finances no longer look quite as bad as they had feared in the uncertain early days of the pandemic.

States are still broadly hurting from the economic crisis. But California now expects a one-time windfall this fiscal year. Wisconsin said it might still be able to sock away some revenue in its rainy day fund. Maryland nudged up its projected revenues, for the second time this fall. And Minnesota now forecasts a surplus.

This good news reflects in part the dire economic expectations of six months ago; even modest numbers look good now compared with the worst fears written into state budgets in the spring. And state officials say they’ll still need federal help, as they expect the pandemic’s effects to drag on for years and to batter local governments. Federal help, after all, is part of what has buoyed them so far.

The states with rosier forecasts also complicate the political fight in Washington over state aid, which is likely to get pushed into the new year after lawmakers dropped the aid from a year-end stimulus deal nearing completion. Republicans have characterized state aid as a bailout for profligate blue states. But many states that are looking better now have among the most progressive tax structures in the country, and that is part of what has rescued them this year.

This recession, distinct from many before it, has piled its worst effects on low-wage workers. That means that state budgets that rely the most on wealthier residents to fund government haven’t been hurt as much by an economic crisis that left the well-off largely unscathed.

“We have a recession for low-wage earners, and we have just a weird situation for everyone else,” said Peter Franchot, the comptroller for Maryland, which announced last week a $64 million increase in estimated revenues this budget year, compared with September estimates (which were up $1.4 billion from May).

Forecasters and state officials say they didn’t see this coming back in May and June, when they drafted budgets imagining a severe downturn that might look more like the Great Recession — with broad layoffs among manufacturing workers, with a slumping stock market, with economic pain spreading into white-collar offices and middle-class subdivisions.

In typical recessions, when unemployment rises steeply, state revenues fall steeply, too. But the relationship between the two has been much weaker this year. Effectively, the inequality inherent in the Covid recession has insulated many states from worse fiscal effects.

But that doesn’t mean that everything is fine.

“Despite the progressive tax structure, despite the wealth that we have in Maryland, despite the fact that we’re back within a safe harbor of tax revenue collection, the suffering is just completely unacceptable,” said Mr. Franchot, who has called for Maryland to enact its own stimulus apart from Congress.

In California, which has a progressive income tax, state revenues collected this year through October were down only modestly from that same timeline in 2019. Texas, which has no state income tax and what is considered among the least equitable tax systems in the country, has been in a more precarious position.

While Texas does not rely on taxes from the volatile energy sector to finance its base budget, decreased oil and gas production and lower prices have also contributed to the drop in overall tax revenue.

Florida and Nevada, which rely heavily on tourism (which has been harmed by the pandemic), also have no income tax. And Florida is among the few states that never moved to capture sales taxes on online transactions after a 2018 Supreme Court decision expanded that power for states. (In Texas, the ability to tax e-commerce has been a salve in this moment, adding about $1.3 billion in the last year.)

From the start of the pandemic in March through October, tax revenues in 38 states were down 5 percent or less from the same period the year before, according to data from the Urban Institute. When states gave far graver projections in the spring, they didn’t have past experiences to draw on and tried to be conservative in their estimates, said Lucy Dadayan, a senior research associate with the Urban-Brookings Tax Policy Center.

“To be fair, they didn’t have any information,” Ms. Dadayan said. “Yes, the revenues are stronger than compared to initial forecasts prepared right after the pandemic in the spring. But that doesn’t mean revenues are performing well.”

Across all of these states, federal stimulus has played a significant role. It’s not that the crisis was exaggerated; it’s that the federal aid really worked.

Stimulus checks and extra unemployment dollars increased the consumption of laid-off workers, which in turn bolstered sales tax revenues. Most states also collect income tax on unemployment benefits. And all this federal support lessened the burden on states to provide a safety net to struggling families, even as federal dollars helped cover many state Covid expenses.

States that rely on higher-income taxpayers have been helped by other unexpected ways this recession has differed from past ones. Consumption has shifted from services, which are hard to consume in person in a pandemic, to goods, which are taxed much more heavily (you pay taxes when you buy a lawn mower, for example, but typically don’t pay taxes if you pay someone to mow your lawn).

In California, forecasters in March never expected the stock market to soar as it has. That has increased capital gains, which are taxed as regular income in the state. And a series of lucrative I.P.O.s — another unexpected mid-recession trend — has added to state revenue, too.

From August through October, collections from California’s personal income, sales and corporate taxes were up 9 percent over the same window last year, according to the California Legislative Analyst’s Office. That’s a reflection of how well the well-off have fared this year. But the resulting budget windfall also exists because the state planned a budget in June for dire times.

“This is really a temporary situation,” said Gabriel Petek, the state’s legislative analyst, who prepared the latest fiscal outlook. The budget effects of this downturn have just been pushed into coming years, he said, when the state expects deficits that could further strain services.

“There’s been a little bit of a narrative that has emerged that the state is doing well fiscally, and it’s true that our revenue picture is better than we thought,” Mr. Petek said. “But really the only reason we’re in a better fiscal position is this one-time difference between what we’re collecting this year and what we assumed in the budget we’d collect.”

California, like other states, still doesn’t know how bad the pandemic’s winter surge will be. In the near term, states won’t be able to draw again on one-time pots like rainy day funds. Eventually, when the public health emergency ends, the federal government will cut extra payments to states to cover Medicaid. And local governments will continue to struggle, as they rely on even less stable revenue sources like parking fees, user fees on public transit, and hotel taxes.

States still face both sides of the pandemic’s built-in inequality — the affluent residents who’ve been sitting tight, buying stocks and new cars, but also the low-wage workers who are struggling.

“Even states that have a lot of rich people often have a lot of low-income people as well,” said Tracy Gordon, a senior fellow with the Tax Policy Center. State and local governments will ultimately be responsible for the safety net, she added, “and they’re not built to absorb that risk.”

Source link

Related Articles

Leave a Comment

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More