Covid-19 continues to exert strong downward pressure on state and municipal budgets and expenditures. The Biden administration is proposing significant, if unique, budget relief that may suit them this year but won’t solve their long-term budget problems. What about your own fiscal policy? Can they raise or lower taxes? Should they?
When the pandemic hit last spring, the economy collapsed. GDP in the second quarter (April-June) fell to -31. 4 percent on an annualized basis, but then recovered (driven by federal spending), emerging to 33. 4 percent in the third quarter. The Conference Board expects the overall annual drop in GDP in 2020 to be -3. 5 percent, more than the -2. 5 percent drop in the Great Recession of 2009 and the first annual drop since the 1946 adjustment to a war economy.
All states have lost revenue. Federal spending is largely to blame for preventing an ongoing disaster. In 2020, Covid-related spending was estimated at “more than 13% of GDP in 2020,” with the addition of $900 billion in December, which would add more stimulus in early 2021. The additional $1. 9 billion proposed through the Biden administration would further help the economy. , but this is not the case. It is not transparent for Congress to approve such a huge amount.
But many states are faring better than expected given the speed and magnitude of the spring’s economic decline. Depending on its business composition, tax systems, and past savings in emergency funds, government revenues have taken a hit during the immediate decline and the next. expansion of the economy.
The pandemic has hit some industries harder than others, and states that rely on the hardest-hit ones are experiencing gigantic drops in profits. Tourism-dependent states like Nevada, Hawaii, and Florida, with their gigantic recreational and hospitality sectors, are experiencing significant job losses, business closures, and profit losses. The same goes for states that rely heavily on profits from extractive industries (oil, fuel, and coal), as demands slow and the costs of those products fall. They also face a longer-term challenge, as renewable energy resources are less expensive and competitively priced compared to high-carbon fuels.
Finally, some states like California and New York get help through their more progressive tax codes, adding taxes on the source of income and capital gains for the wealthy. The pandemic recession is hitting staff with lower revenue streams hardest, while wealthier taxpayers have generally returned to their jobs and benefited from emerging inventory pricing, generating more revenue streams than initially expected.
But they still want income. Budget experts at the Urban Institute tell us that while states have achieved “better-than-expected tax benefits,” the “actual benefit losses experienced in states are profound and widespread, if universal. ” And state and local governments are waiting for the Biden administration’s relief plan to pass, with the billions promised to fight Covid-19 and also to make up for lost benefits.
They also recall that fiscal aid was the main sticking point last December, and Republicans excluded it from the final package. So they are not sure that Washington, even under the control of the Democrats, will provide them with enough help. And this leads some to raise taxes.
Economists generally disapprove of the idea of raising taxes in the event of a recession. We would prefer more spending, adding deficit spending, to create jobs and stimulate economic activity. Tax increases can occur when the economy is growing.
But some that aim for tax increases may not hurt the economy as a whole much, especially if they come from the very wealthy, who don’t spend all of their income. The profits generated can be spent on jobs and systems for those in need, where the money will be spent and the assistance will stimulate the economy. Forbes contributor Joseph Thorndike explained it well last November.
Last September, New Jersey extended its more sensible tax rate for sources of earnings of 10. 75% to sources of earnings above $1 million; Previously, it only happened when winnings exceeded five million. Democratic Gov. Phil Murphy made construction acceptable by offering a portion of the proceeds discounts of up to $500 to parents earning less than $150,000. Murphy said: Anybody who makes a million dollars or more, we’re asking them to pay a few cents more, and we’re going to put every single penny of that penny into the middle class. »
But wouldn’t it be possible for higher taxes to drive millionaires out of the state, Florida, or other low-tax countries? In fact, there isn’t much evidence for this. As I noted last September, a 2014 study from Stanford University found “low migration due to million-dollar taxes. ”
Texas and Florida don’t have a source of income taxes, unlike California and New York, so wealthy executives can be influenced in part through tax rates. (There is evidence that wealthy people move, or at least replace their cloak, at the end of their careers, to state estate taxes. )
Advocates in New York State are calling for a small money transaction tax to help close budget gaps (the state already has a tax, but reimburses 100 percent of it, so there is no profit or cost to taxpayers). Nashville, Seattle and Washington D. C. They passed modest tax increases last year.
But politicians are reluctant to raise taxes, so most expect more federal aid. As I wrote recently, a one-time injection of budget wouldn’t possibly solve their long-term profit problems, but anti-tax policy makes federal aid more preferable.
It’s notable that a few states (including Arkansas, Montana, Mississippi, and West Virginia) are contemplating cutting taxes even as their budgets shrink. Proponents cite the debunked theory that tax cuts would revitalize their economies. But tax cuts are more likely to deteriorate their budgets and reduce critical investments in education, infrastructure and jobs that could hurt their economies.
Biden and the Democrats may simply provide long-term assistance to states through measures such as federalizing Medicaid or resuming our fragmented and inefficient unemployment insurance system. But such measures would be debatable and costly. Biden’s current priorities are to prevent the pandemic and keep the economy afloat, and then replace, expand and fix Obamacare.
So watch and see what kind of state and municipal aid is passed in Congress. If they are generous enough, states will stand firm and hope that a vaccinated population and control of the virus will bring economic recovery later this year. But if Washington — really the GOP — blocks good enough federal aid for cities and states, they’ll have to impose tax increases. Their budgetary messes leave them no choice.