When President Donald Trump abruptly halted negotiations over a coronavirus relief bill this week, he also threw state finances into disarray.
For months, governors of both parties have asked Congress to follow up a March relief package with another one that would protect the economy and help states deliver services during the pandemic.
But Trump slammed the brakes on that process shortly after coming back to the White House from his hospitalization for a COVID-19 infection. Aid to state governments was one of the sticking points that divided Republicans and Democrats in Congress, but it was only part of the discussions that also included enhanced unemployment benefits, bailouts for the airline industry, relief for small businesses and dozens of other priorities.
Still, the president blamed the standoff entirely on the divide over state aid.
“[U.S. House Speaker] Nancy Pelosi is asking for $2.4 Trillion Dollars to bailout poorly run, high crime, Democrat States, money that is in no way related to COVID-19. We made a very generous offer of $1.6 Trillion Dollars and, as usual, she is not negotiating in good faith,” Trump wrote, referring to the overall size of the rescue package.
“I am rejecting their …request, and looking to the future of our Country. I have instructed my representatives to stop negotiating until after the election when, immediately after I win, we will pass a major Stimulus Bill that focuses on hardworking Americans and Small Business,” he added.
Stock market indices tumbled after Trump sent the tweets, and the president has since called for Congress to pass smaller, industry-specific relief bills. Pelosi dismissed the idea of an airline-specific package Thursday, saying it would have to be part of a bigger deal that included aid to state governments. Trump is supposedly pushing for a broader deal again.
But with less than a month until the election, the prospects of striking a compromise seem to dwindle every day. Many lawmakers are preoccupied with their own reelection campaigns, and senators are gearing up for a Supreme Court nomination fight.
The topsy-turvy developments in Washington, though, make it even more difficult for state officials to navigate already difficult financial circumstances.
The problem isn’t just about direct aid that many states are hoping for. It’s also about the condition of the national economy if Congress doesn’t pass another relief measure. If people aren’t working, they won’t pay state income taxes. If they’re cutting back spending, they will also be spending less on sales taxes. With less tax money coming in, states will have to cut back on current spending to keep their budgets balanced.
“States are going to be looking at more significant reductions than they would have with another aid package,” said Brian Sigritz, the director of state fiscal studies at the National Association of State Budget Officers (NASBO). Even if federal aid had materialized, NASBO anticipated that many states would have implemented spending cuts during this fiscal year.
“Now it will just be that cuts will have to be more severe for most states,” Sigritz said. “They’ll now be looking at other ways to balance their budgets. First and foremost will likely be spending reductions and personnel actions.”
Since the pandemic began, almost every state has taken steps to reduce funding, whether by enacting immediate cuts across the board or directing agencies to make plans for widespread reductions. State employees are already feeling some of the effects: Michigan’s employees were forced to take furlough days, while Wyoming laid off more than 200 people. Several states delayed planned pay hikes for teachers, according
to the National Conference of State Legislatures.
To make up for lost revenue, New Jersey expanded its highest-income tax bracket to cover millionaires, not just those making more than $5 million. California is considering a similar move. In Illinois, voters will decide whether to approve a constitutional amendment that was proposed before the pandemic that would let lawmakers impose a graduated income tax.
Meanwhile, five states have relied on borrowing to help weather the crisis: California, Hawaii, Illinois, New Jersey and New York. Many of those borrowing plans were contingencies in case direct federal aid did not come through.
The National Governors Association (NGA) has been trying to convince federal lawmakers that helping out state governments would be good for the economy as a whole.
“Every major economist, regardless of party or ideological bent, came to the same conclusion after the 2007-09 financial crisis: The lack of support for state and local governments slowed the nation’s economic growth for more than a decade,” Gov. Andrew Cuomo of New York and Gov. Asa Hutchinson of Arkansas, NGA’s chair and vice chair, respectively, said in a recent statement.
“As we begin to recover and rebuild from the COVID-19 crisis, we can’t afford to repeat the mistakes of the past — we know now that there can be no national recovery if state and local governments aren’t solvent,” they added.
Michigan Gov. Gretchen Whitmer, a Democrat, also argued last month that states are having to pick up the bill for federal actions during the crisis.
“The president’s continued efforts to push additional costs onto states, most recently by cutting federal funds to National Guard units in most states and limiting the settings where the Federal Emergency Management Agency (FEMA) will help states pay for masks and disinfecting supplies, is making matters worse,” she wrote in a September piece
“The president should work with Congress on a stimulus bill that includes $500 billion in flexible aid to states so they can continue their pandemic response efforts and avoid drastic cuts to services that will only worsen the economic slowdown and prolong the recovery,” Whitmer added.
Another Democrat, Illinois Gov. JB Pritzker, said this week that Congress would not be able to avoid the issue of state aid for long.
“Every state is going to need support from the federal government, even though the president has apparently thrown the talks into disarray now that he’s on a cocktail of steroids coming out of the hospital,” Pritzker said
. “We are going to need this kind of support, and I do believe that – whoever wins the election – the Congress or the president are going to have to step up to the plate.”
(Not every governor is on board with the need for state aid. Oklahoma Gov. Kevin Stitt, a Republican, said
in August that he wanted to focus on spending existing federal aid before asking for more.)
Sigritz, from the budget officers association, said that, despite Trump’s characterization, the stress on states will come regardless of whether Democrats or Republicans are in control of state government.
“It’s definitely not a red or blue state thing… We’re seeing all states impacted, although they’re not all impacted evenly. How hard states are getting hit depends on how their economies are structured and how their revenue streams are structured,” he said.
Tourism- and oil-dependent states saw their revenues affected earlier on, he explained, while other states felt the impact later. States that depend more heavily on sales taxes felt the initial jolt, while states that rely more on income taxes may not feel the brunt of the slowdown until people file their income tax returns in the spring. “That’s why we’re expecting Fiscal Year 2021 to be worse for states on the revenue side than Fiscal Year 2020 was,” Sigritz said.