State Finances

Introduction

A woman receives the Moderna COVID-19 vaccine in February at a site run by the San Bernardino, Calif., Public Health Department. States and localities are grappling with increased pandemic-related expenses despite declining tax revenues. (Getty Images/Los Angeles Times/Irfan Khan)

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Overview

When 2020 began, California was sitting pretty in financial terms. Thanks to a strong economy, the state was collecting much more in taxes than it expected and projecting a budget surplus of $5.6 billion.

Then the COVID-19 pandemic struck. As in other states, the economy suddenly faltered. Between March and May, California's tax collections plummeted by 42 percent, compared to the same period in 2019. The state soon faced a shortfall heading into its 2021 budget year of $54.3 billion. (The fiscal year there and in most states runs from July 1 to June 30.)1

A security guard stands outside a shopping center in Los Angeles that was closed last March due to the COVID-19 lockdown. As businesses were forced to shutter to prevent the spread of the virus, state revenues plummeted, mainly due to the loss of sales taxes. (Getty Images/SOPA Images/LightRocket/Stanton Sharpe)

California was not alone. No state was immune to the budget pain caused by the pandemic, with nearly every revenue source — such as taxes on sales, income and gasoline — taking big hits. State budget officials were predicting that their revenues would drop anywhere from 20 to 40 percent, resulting in shortfalls of roughly $500 billion over the next three years. Some analysts said states were facing their worst cash crunch since the Great Depression, with cities and counties also in dire shape.2

As a result, state and local governments shed 1.4 million jobs in the past year — double the 750,000 jobs lost during the 2007-09 Great Recession. About half the lost jobs were in education, but no function of government, even police or health care, has been immune.

“I don't think people understand the depth of our budget crisis,” says Della Au Belatti, the Democratic leader of the Hawaii House, noting that the budget the governor recently presented to the legislature “contemplates four years of furloughs and program cuts.”

Although many state budgets have partially rebounded, thanks to improvements in the economy and the stock market, they remain shaky and could take years to fully recover, as happened after the Great Recession. “If there isn't additional federal aid, we will see additional layoffs, and that will be a drag on the economy at a time when the economy is trying to recover,” says Brian Sigritz, director of state fiscal studies at the National Association of State Budget Officers.

Congress provided $150 billion worth of aid to state and local governments last March as part of a coronavirus relief bill, but has yet to send further assistance, despite the support of congressional Democrats and some Republicans. President Biden wants to provide $350 billion to states and localities in his $1.9 trillion coronavirus and economic relief package. The House is expected to pass its version by the end of February.

But many Republicans in Congress are skeptical that more help is needed. State revenues, after their sudden fall, have staged something of a comeback. Sales tax collections have rebounded, and states have been able to collect revenues on skyrocketing online purchases. And, despite continued high unemployment overall, most office workers have been able to continue working remotely.

Economists are now talking about a so-called K-shaped recovery, in which some people's economic fortunes have recovered — as has the stock market — while others' continue to tank. The downturn has had its deepest and most lasting effect on poorly paid service workers, but many states are still collecting taxes from higher-paid white collar workers.

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For example, California has a highly progressive state tax code, relying heavily on taxing capital gains (the profits made from the sale of an asset such as stocks) and the income of high-income individuals. Because revenues continued to come in from higher-paid Californians who remained employed during the pandemic, by January, when Democratic Gov. Gavin Newsom proposed a new budget, the state was actually anticipating a surplus of $15 billion in fiscal 2021-22.3

“We're in this very odd situation because of the intense dichotomy that the pandemic has brought in terms of economic effects,” says Chris Hoene, executive director of the California Budget & Policy Center, a Sacramento watchdog group. “Our progressive tax system is yielding unexpectedly strong revenues because people at the very top of the income spectrum and corporations are thriving and, if anything, doing better than they were before. All of that is happening [as] the majority of residents in the state are experiencing some form of economic hardship due to the pandemic, either lost jobs or hours, or businesses that can't be open.”

Conversely, states that do not levy income taxes, such as Florida and Texas, have not recovered as fast. “It's a really complicated picture right now,” says Dan White, director of public finance research at Moody's Analytics, a financial research firm in West Chester, Pa., “There's a lot of nuance and a lot of idiosyncrasies from one state to the other.”

Nationwide, state revenues fell 5.3 percent between April and September, compared with the same period in 2019. While that presents real challenges for states, it is not the calamity predicted last spring as the pandemic recession hit, experts say.

Last May, the liberal Center on Budget and Policy Priorities had forecast that states faced a $765 billion budget gap over three years. It has since cut that estimate by more than half. Other forecasters say the shortfall will be less than $200 billion.4

“Back in March and April, everybody thought that states were going to go off the cliff like Thelma and Louise,” says David Brunori, a public policy professor at George Washington University, referring to the ending in the 1991 feminist road trip movie. “Since then, the outlook has improved. Several states have presented budgets without tax increases, which tells me that things aren't as bad as we thought they were.”

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Throughout the pandemic, Republicans from former President Donald Trump on down have complained that Democrats are pushing for a “blue state bailout,” arguing that more prudent GOP-led states do not need federal assistance. But public finance experts say the picture is more complicated, with funding shortfalls driven more by state economies and tax structures.

Some states that rely heavily on oil and gas extraction or tourism — demand for which is down dramatically — still face double-digit declines in revenue.

On the other hand, while income tax collections have held up better than sales taxes during the pandemic, states that depend heavily on income taxes could face a jolt in April when taxpayers file their 2020 state returns, reflecting a year of high unemployment, says White. And, even where revenues have climbed back, states face additional expenses due to the greater demand for pandemic-related programs, such as unemployment insurance, Medicaid and housing assistance.

“California is now back pretty much where it would have been if there had been no pandemic, in terms of revenues,” Hoene says. “But the reality is there's still a pandemic, with huge needs in emergency assistance, childcare and investment in schools, in addition to meeting the public health demands.” California, which had weathered the early stages of the pandemic fairly well, became the epicenter of an enormous wintertime spike, especially in Southern California, which saw a huge upsurge in cases, hospitalizations and deaths.5

Nationwide, the arc of economic recovery remains uncertain. Despite vaccinations, the nation faces continuing health challenges, due to heavy coronavirus caseloads and the spread of new variants, which pose a potential threat to revenues. “Going into 2020, just about every state was looking at a budget where they could count on some revenue growth,” says Patrick Murphy, vice president of public finance at Arnold Ventures, a philanthropic foundation. “In 2021, very few states are going to have that situation.”

Meanwhile, local governments also face enormous challenges. Any city large enough to have a central business district is worried about when — and if — people will return to work in person in large numbers. Cities are losing taxes on downtown sales, dining, parking, entertainment, tourism and hotel occupancy, and commercial real estate values could plummet, threatening property tax revenues. (See Short Feature.)

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“Hotels and other tourism taxes are our third largest source of revenue as a city,” says Chris Cate, a member of the San Diego City Council. “We have seen huge reductions in those sources of revenue.”

As states and cities grapple with ongoing budget problems, here are some of the questions officials are debating:

Should Congress provide more aid to states?

On Jan. 14, Biden released his nearly $2 trillion American Rescue Plan to stimulate the economy and fight the pandemic. After taking office, he explained why he was requesting $350 billion in federal assistance for state and local governments.

“Police officers, firefighters, first responders, nurses are all at the risk of losing their jobs,” Biden said. “The American Rescue Plan will provide emergency funding to keep these essential workers on the job and maintain essential services.”6

State and local officials have been clamoring for federal aid throughout the pandemic. It is common for the federal government to provide aid to lower levels of government during recessions, since the U.S. Treasury can borrow money easily and Washington can run deficits, while states and localities by law are generally required to balance their budgets every year.

Last March's federal stimulus package, known as the Cares Act, included $150 billion in relief for states and local governments with populations over 500,000. But since then, there has been no direct aid for states and localities. In May, the House passed a second massive pandemic relief bill, known as the Heroes Act, which included nearly $1 trillion in state and local aid, but the Senate refused to consider the measure.

Several Republican senators, including then-Majority Leader Mitch McConnell of Kentucky, called the measure an unnecessary and excessive bailout for poorly managed states, especially those run by Democrats. McConnell even suggested that states struggling financially should declare bankruptcy, which is not a legal option for most states.7

Hundreds of out-of-work residents wait for help with their unemployment claims in June 2020 in Frankfort, Ky. Even as tax revenues fell last year, states faced greater pandemic-related demand for programs such as unemployment insurance. (Getty Images/John Sommers II)

Unrestricted aid to states and localities was also missing from the $908 billion package Congress enacted in December, although it did include more than $100 billion for education and vaccine distribution, money that states would otherwise have had to spend.8

“Let me be clear about one thing: The Senate Democratic majority will make sure the next COVID package will include aid for states, but direct aid as well for local and municipal governments,” the new Senate Majority Leader, Chuck Schumer, D-N.Y., told the U.S. Conference of Mayors in January.

But Biden's package continues to face GOP opposition. “For months, Democrats have been trying to get Congress to bail out wasteful, liberal states for their decades of mismanagement and excesses, and for months, I've been fighting to protect taxpayer dollars and make sure that doesn't happen,” said Sen. Rick Scott, R-Fla.9

Scott is a former governor of Florida, which does not have a personal income tax and relies heavily on tourism. As a result, its revenues dropped by more than 9 percent from March through December last year, along with other Republican-led, so-called red states such as Texas, which also has no personal income tax. By comparison, the revenue drop was less in Democratic-led “blue” states such as California and New York.10

Last summer, more than 200 state legislators signed a letter opposing the idea of federal aid, saying it would punish responsible states and reward those that had been spendthrifts.11

“My concern is that Illinois and New Jersey and Connecticut get their way and put 50 years of bad fiscal policy on the backs of my constituents and my kids,” says Republican state Rep. John Macco, who chairs the Wisconsin Assembly's Ways and Means Committee.

In fact, studies show that several blue states, such as New York, New Jersey and Massachusetts, send far more tax money to Washington than they receive in federal spending.12 As “donor states,” they help subsidize lower-tax red states that receive considerable federal financial help on an ongoing basis, says Kim Rueben, director of the state and local finance initiative at the Urban Institute. (See Graph.)

Moreover, Rueben says, “It isn't necessarily blue states that would benefit the most from a stimulus package. It would also help states across the political spectrum.”

States across the board have been hurt financially by the pandemic, regardless of their partisan leadership. Although congressional Republicans largely oppose aid, many GOP governors and mayors are eager for help. “I don't know of any city that hasn't been affected negatively,” said Oklahoma City Mayor David Holt, a Republican. “Some may be worse off than others. But we have all had to make cuts.”13

As a group, states came into the pandemic with a record amount of money — $72 billion — in their reserve accounts, known as rainy-day funds, according to the National Association of State Budget Officers. That compared with $31 billion in fiscal 2007, at the start of the Great Recession.14

“As a whole, states had savings going into this that were at a record,” says Tracy Gordon, a senior fellow at the Tax Policy Center, a joint public finance project run by the Urban Institute and the Brookings Institution, two Washington think tanks. “I just don't know how you look at the effects of COVID and say that has anything to do with states being [adequately] prepared.”

Economists who support aid also point out that state and local governments are major employers and normally spend heavily in areas such as infrastructure, which would help the economy recover. State and local governments shed twice as many jobs during the pandemic than during the 2007-09 recession, when their slow recovery from that downturn was a drag on the larger economy.

“The biggest reason for federal aid is how important state and local governments are to the national economy,” says Ronald Fisher, an economist at Michigan State University. “In normal times, state and local governments employ about 20 million workers, or about one in seven.”

State budget shortfalls have shrunk but not disappeared since last spring, which is why Biden's state and local aid package is roughly one-third the amount proposed in the Heroes Act last May. The fact that state revenues have rebounded more quickly than expected — even though most states are still struggling and face increased expenses related to the pandemic — makes additional aid a harder sell in Congress, Gordon says.

“There's a muddy picture, and that leads to uncertainty and inertia,” she says. “Unfortunately, that's part of the declining appetite for state and local fiscal relief.”

Are red states better managed than blue states?

In the final weeks of 2020, technology companies Oracle and Hewlett Packard, along with Elon Musk, the CEO of Tesla and SpaceX, all announced they were moving from California to Texas.

Republicans often argue that the low-tax, low-regulation model generally pursued in red states, such as Texas, are attracting wealthy corporations from Democratic-run blue states such as California, which tend to have higher levels of taxation and regulation.

The companies' migration to Texas “has put an exclamation point on the need for states to think about their competitive environments,” says Jonathan Williams, vice president of the conservative American Legislative Exchange Council (ALEC), which brings together like-minded state legislators and private companies to craft legislation.

In addition, he adds, “Individuals are also considering voting with their feet and moving to states without income taxes and lower tax burdens, whether for jobs and opportunities or retirement.” Indeed, between 2010 and 2019, nearly 700,000 people moved from the Golden State to the Lone Star State, and in the past decade, Texas, Florida and other Republican-led states have experienced double-digit population growth rates, while heavily Democratic states in the Northeast saw growth, at best, in the low single digits.15

Republicans cite such corporate and individual migration as a sign that red states are better managed than blue states. In fact, ALEC and Laffer Associates, a conservative consulting firm, last October declared Texas Gov. Greg Abbott the nation's best governor based on tax policy, overall state spending levels, handling of COVID-19 funds, union regulations, health and welfare spending, school choice and other education policies.16 Their top rankings were dominated by Republicans.

“What do 9 of the top 10 states with the lowest unemployment numbers all have in common? All (led) by Republican Governors,” Dave Rexrode, executive director of the Republican Governors Association, tweeted on Feb. 17.17

Although people frequently move for job opportunities, population shifts also occur for other reasons: Northerners have been moving to warmer Southern climates for decades and many disaster-weary Californians have sought to escape the recurring wildfires, heat waves, drought, mudslides and rising seas that have plagued that state in recent years.18

The lobby of the Excalibur Hotel & Casino in Las Vegas was nearly empty last June due to the drop in tourism during the coronavirus pandemic. States that rely heavily on tourism taxes have experienced double-digit declines in revenue. (Getty Images/Ethan Miller)

And while red states brag about job creation and population gains, the strongest economic growth over the past decade has occurred in Democratic-dominated cities, such as Boston, New York, San Francisco and Seattle.19 And California, Massachusetts and New York — all predominantly Democratic — have long gobbled up the lion's share of venture capital, topping 80 percent in some years. This trend continued in 2020, when Florida and Texas attracted only 2 and 3 percent, respectively.20

A study of state finances over a 30-year period by three scholars at the Urban-Brookings Tax Policy Center found that “neither tax revenues nor top income tax rates bear stable relationships to economic growth or employment across states and over time.”21

While some companies may be tempted by lower tax rates, experts say others may care more about the quality of infrastructure and having a well-educated workforce — factors that require government investment. “There are red states that are managed very well, and there are blue states that are not managed very well, and vice versa,” says White, the Moody's Analytics director.

Studies have found that blue states, which invest more in areas such as health, education and infrastructure, rank higher in terms of human development — such as average personal income and health outcomes — and economic growth. Since the Great Recession, blue states have enjoyed 3.5 percent higher economic growth rates overall than red states, according to a study from Vanderbilt University and Santa Clara University.22

“If you value health care for your residents, California is doing better,” says Murphy, the Arnold Ventures vice president. If you do not value such programs, he says, the Texas model of lower taxation and state expenditures might be more attractive, but it can lead to other problems regarding investment in infrastructure and public services.

Texas, for instance, came in for blistering criticism this month when much of its power grid failed in the face of deadly, record-cold winter storms, leaving many Texans without heat or water for days. When the national power grid was established in the 1930s, Texas refused to join, mostly to avoid federal regulations.23 Since then, Texas has only lightly policed its utilities. Regulators have only ever issued three fines, totaling $25,000, for inadequate weather planning, despite similar extreme-weather blackouts in 1989 and 2011.24

Texas also has the nation's highest rate of residents without health insurance, has twice the national average in child poverty and had an unemployment rate in December of 7.2 percent, compared to the 6.5 percent national rate.25

“If you go back and look at Greg Abbott's State of the State speech a few weeks ago, the general tone was that the pandemic was a challenge, but it's been met, and Texas is open for business, and the Texas model is still thriving. This [infrastructure collapse] is problematic for [that] message,” says James Henson, director of the Texas Politics Project at the University of Texas. “It's one thing from a strictly dollars and cents perspective to balance social indicators with tax burdens and growth. It's another thing when you're looking at unreliable infrastructure.”

But blue states such as California have their own problems. California has several of the nation's most expensive real estate markets, with a statewide median home price of $700,000. Both the state and local governments resist policies that would make homebuilding easier. As a result, when housing costs are included, California has the nation's highest poverty rate, a factor that contributes to the fact that 130,000 more people per year move out of the state than move in. Among those who are left, California has the nation's worst problems with income inequality.26

Critics of blue-state policies also point out that many Democratic-run states are caught in a spending trap. Their workforces tend to be more unionized, often leading to higher salaries and pension costs. (See Short Feature.) And blue states are more likely to create new programs that impose new costs, say critics.

“The problem in the blue states is their relatively high tax burdens tend to lead to more spending and it becomes kind of a cycle,” says Brunori, the GWU law professor. “It becomes systematic in some states that they're going to have bigger governments.”

Although some blue states, notably California, boosted their rainy-day funds after the Great Recession so they were in better shape when the pandemic struck, White says, other Democratic-led states — such as Illinois, Connecticut and New Jersey — failed to build up cash reserves during good times. “Generally, what we've seen during this recession is red states [had] put away more money and were better able to handle a downturn,” he says.

Although marked differences exist between how red and blue states are managed, there are limits to how far either party can push things. Spending is limited by the fact that states have balanced-budget requirements, while cuts to schools, roads and other programs run into resistance.

Despite recent GOP dominance of most state governments, “Republicans have had surprisingly little impact on the size and scope of government,” largely because citizens often push back against cuts to popular programs such as education, says Michigan State University political scientist Matt Grossmann. “States still spend a bit more money each year, with the median state doubling its budget since 1994.”

The limits to the tax-cutting approach were demonstrated dramatically in Kansas in recent years. In what he called a “real live experiment” about the benefits of deep tax cuts, Sam Brownback, the state's Republican governor at the time, slashed business and personal income taxes in 2012 and 2013, promising it would spark business development and economic growth. But the cuts failed to provide the promised economic boost and left programs such as education badly underfunded, generating public protests.

In 2017, the GOP-controlled legislature rolled back most of the tax cuts, over Brownback's veto. After the rollback, the financial television network CNBC moved Kansas up from 35th to 19th in its Top States for Business ranking.27

Should states raise taxes to balance their budgets?

Minnesota faces a projected shortfall of $1.3 billion over the next two years. On Jan. 27, Democratic Gov. Tim Walz released a budget that would increase taxes on capital gains and incomes above $1 million, raising $1.6 billion to help cover the shortfall. Walz said the increases are needed to allow greater spending in areas such as education and health care and to provide a tax break for couples earning less than $40,000.

Teachers and students protest outside a school in Bloomington, Ind., in 2019, demanding that the state legislature boost funding for education. In many states, education spending never returned to prerecession levels after the 2007-09 Great Recession. (Getty Images/SOPA Images/LightRocket/Jeremy Hogan)

“This is a budget that reflects Minnesota's sense that those who COVID hit the hardest we need to help,” Walz said. “It asks folks to pay their fair share.” Democrats in other states, such as New York and Washington, are considering similar measures.28

Walz's proposal instantly drew criticism from Republicans who control the state Senate and who called for spending cuts instead.

Their differences reflect a central debate occurring in states. Every state, except Vermont, has a constitutional or statutory requirement to balance its annual budget. With most states facing shortfalls due to declining revenues, lawmakers must decide whether to raise taxes, cut spending or pursue a combination of those options.

“Without additional federal aid, states will have to look at additional budget cuts,” says Sigritz, of the National Association of State Budget Officers. “Those cuts will be more severe.”

Typically, revenues fall during recessions just as states face greater demand for services such as Medicaid, unemployment and other social services. “You've got this stable to rising demand that state governments are facing, and then you've got these roller coaster revenue sources,” says Donald Boyd, co-director of the Project on State and Local Government Finance at the University at Albany. “When there's a recession, there aren't any fewer kids. When there's a recession, people don't get out of nursing homes. All those costs go on. Some of those costs even increase.”

Thus, Walz will not be the only governor considering tax increases, predicts Moody's Analytics' White. “My read is that tax increases are going to be pretty prevalent as a result of this,” he says. “Most legislators want to be able to get through this without further major cuts or furloughs.”

But even supporters of raising taxes concede it is a tough sell politically, particularly when many individuals and businesses are struggling. Raising taxes while the economic picture is still uncertain would be counterproductive, says Williams, the ALEC vice president.

“Some of the states are going to have a lot of tax increases because they don't want to go through the arduous process of fixing their budgets” by cutting spending, Williams says. “In others, you'll hear that this is exactly the wrong time to raise taxes, especially with the economy so fragile.”

Maryland's Republican Gov. Larry Hogan vetoed two tax-increase measures at the height of the lockdowns last spring, arguing, “With our state in the midst of a global pandemic and economic crash and just beginning on our road to recovery, it would be unconscionable to raise taxes and fees now.”29

Tom Wolf, the Democratic governor of Pennsylvania, proposed a significant tax increase on top earners in February to help fund tax cuts for lower-income individuals and increase education funding. Wolf said his proposal, along with a minimum wage increase, would help those most affected by the pandemic.

But his package is considered a non-starter in the Republican-controlled legislature. “The budget he is presenting is completely unsustainable, totally irresponsible, and absolutely crippling to the state's economy,” said Jake Corman, the state Senate's president pro tempore. “Now is not the time to ask Pennsylvanians to send more of their hard-earned dollars to Harrisburg.”30

Blue states are finding it more challenging politically to raise their taxes, since a federal tax cut package enacted in 2017 capped the amount of state and local income taxes that could be deducted from federal income taxes. Some observers expect many states will avoid raising broad-based taxes, such as sales and income taxes. Half the states now tax digital products, such as e-books, video streaming and downloadable software, and other states may follow suit.

“For the 25 states that don't currently tax digital goods online, that's low-hanging fruit,” Brunori says.

States also likely will raise or impose so-called sin taxes — levies on unhealthy, discretionary items such as alcohol and tobacco — along with relatively new sources of revenue such as legalized marijuana and sports betting. Last year, Colorado and Oregon increased cigarette taxes, while Colorado, Georgia and Oregon imposed new taxes on vaping products.31

“They're going to do all the stuff they can to get revenue at the margins,” says Scott Pattison, deputy executive director of the Multistate Tax Commission, an intergovernmental state tax agency. “I just don't think we're going to see any major general tax increases.”

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Background

Budget Growth and Limitations

Until the 20th century, formal government budgeting did not exist. Mayors and governors did not produce budgets that covered the entire executive branch. Instead, individual agencies spent money without centralized oversight, often leading to corruption and graft.

“Without the slightest exaggeration, the city governments of the United States are the worst in Christendom — the most expensive, the most inefficient and the most corrupt,” Cornell University President Andrew White complained in 1890.32

By the late 19th century, modernizing the budgeting process became a priority for Progressive Era politicians seeking to clamp down on abuse. In 1899, the National Municipal League recommended uniform accounting methods for cities and proposed giving mayors control of budget preparation. By 1904, 80 cities had adopted such procedures.33 In 1902, Ohio mandated uniform accounting for cities and was soon followed by other states. By the mid-1920s, most major cities had formal budget systems in place. States later followed suit.34

Workers complete a section of the Kansas Turnpike, which became part of interstate highway system, outside Topeka in 1955. The federal government has long provided money and direction for states to carry out much of its domestic agenda. The interstate system was built and maintained by the states, with the federal government picking up about 90 percent of the tab. (Getty Images/Bettmann/Contributor)

At the federal level, the long-term pattern has been growth in spending due to war or other crises, followed by periods of decline (although not back to pre-crisis levels). By contrast, state and local spending has fluctuated less, rising steadily without significant periods of decline.35 Currently, states collectively spend more than $3 trillion annually.

A long period of post-World War II economic growth helped fill state coffers. State and local revenues grew by 7.7 percent between 1960 and 2015, despite falling as a share of the overall economy during the Great Recession and its aftermath.36

Rising tax bills led to a “taxpayer revolt” during the 1970s. Most famously, California voters in 1978 approved Prop. 13, which severely limited property tax increases. The proposition tied property values to their last purchase price — not current market value — and limited property tax increases to 1 percent a year. It also required that state tax increases be approved by two-thirds of the legislature and local tax increases by two-thirds of voters.37 Voters in numerous other states subsequently adopted property-tax limits.

In 1982 Colorado voters passed perhaps the nation's most restrictive tax measure, the Taxpayer Bill of Rights, which limited annual revenue growth, using a formula based on inflation and population growth. If revenues grow faster, money above the limit must be returned to taxpayers unless voters approve spending increases.

Critics say Prop. 13 and the Taxpayers Bill of Rights have distortionary effects. For example, someone in California might pay a property tax bill that is 10 times more than a neighbor who bought an identical house next door 30 years ago. But efforts at repealing or revamping tax-limitation laws have generally gone nowhere. More than 40 states now restrict the authority of their local governments to raise taxes.38

Opponents of such laws have long complained that they have starved government programs. The evidence is mixed. In California, property taxes now make up a smaller share of local government revenues, but the state has made up for most of the loss by increasing sales, hotel and utility taxes.39 Colorado, on the other hand, remains roughly in the middle of the pack among states in terms of spending and taxpayer debt burdens.40

Despite the urge to cut taxes, states face consistently rising costs in areas such as health care and education, and multiple states have lost lawsuits challenging the adequacy of school funding levels. A series of rulings from the Kansas Supreme Court, for example, prompted education spending increases of about $1 billion annually, which was part of the reason legislators felt compelled to overturn Brownback's tax cut. The court finally determined that the state's education spending was adequate in 2019, after the legislature added $90 million more per year.41

Federal Funding

The federal government has long relied on state and local governments to carry out much of its domestic agenda in areas such as education, policing, welfare, food assistance and transportation. Washington provides direction and funding for such programs, which state and local governments then put into operation. For example, the Federal-Aid Highway Act of 1956 authorized construction of the interstate highway system, to be built and maintained by state departments of transportation with the federal government generally picking up 90 percent of the tab.42

Businessman Howard Jarvis led the effort to enact California's Proposition 13, a 1978 initiative that severely limited property tax increases. Numerous other states subsequently enacted similar measures. (Getty Images/Sygma/Tony Korody)

The number of such federal-state partnerships increased in the 1960s with President Lyndon B. Johnson's expansion of domestic programs, known as the Great Society. Those included the Head Start prekindergarten education program, public housing, federal aid to higher education and school lunch and breakfast programs. Medicaid, by far the largest federal-state program ever created, was established by the same 1965 law that created Medicare.43

Medicare, which provides health insurance to the elderly regardless of income, is a strictly federally funded program. Medicaid, which provides health insurance for low-income and disabled individuals and pays for long-term care, is a joint federal-state program. States determine Medicaid eligibility (such as establishing maximum income levels to qualify for coverage), while the federal government picks up about 60 percent of the cost.44

Typically, most federal money sent to the states is earmarked for specific programs, and states must follow federal guidelines and policy goals to qualify. In 1972, however, under the Nixon administration, the federal government began a program known as general revenue sharing, in which state and local governments received funds they could use at their own discretion. The law was extended three times, but after 1983 only local governments qualified. The program was eliminated in 1986.45

Republican President Ronald Reagan opposed general revenue sharing, in keeping with his larger agenda of seeking cuts in domestic spending. Combined with other federal spending cuts, the end of revenue sharing created hardships for many local governments. “The elimination of the program of general revenue sharing … after several years of significant cuts in other federal aid, has prompted layoffs, curtailment of police protection and other services, and higher taxes and user fees in thousands of counties, cities and villages,” The New York Times reported in 1987.46

In a program known as the New Federalism, Reagan sought to shift more responsibility for domestic programs to the states. He consolidated many individual federal grant programs into block grants. Overall funding levels were cut, but states were given more flexibility and authority to choose which programs to continue funding.47

One of Reagan's goals was not achieved. He wanted to shift all responsibility for food stamps and welfare programs to the states.48 But governors strongly opposed the move, balking even when the administration proposed a trade, with states running welfare and the federal government assuming full ownership of Medicaid. Later generations of governors have regretted that stance, since welfare spending has remained flat, while Medicaid has grown, now consuming nearly 30 percent of state spending.49

In the 1990s, Democratic President Bill Clinton, a former Arkansas governor, also sought to rebalance federal-state responsibilities. In 1995, he signed a bill that sought to curb so-called unfunded mandates — programs the federal government required states to carry out without adequately funding them.

Nevertheless, Congress has continued to enact laws that have cost states, cities and counties substantial amounts of money, such as the No Child Left Behind Act of 2002, which mandated annual standardized tests in elementary and secondary school, and the Real ID law requiring stronger security in driver's licenses and government identification. Still, the pace of mandates has slowed considerably. Prior to the prohibition of unfunded mandates, the federal government sometimes imposed hundreds of mandates a year. In 1993, the National Association of Counties said its members spent 12 percent of locally generated revenues complying with federal mandates.50

The Clinton administration also provided waivers allowing states such as Wisconsin to revamp their approach to welfare. Rather than providing cash assistance indefinitely, the programs limited how long a recipient could receive benefits and required recipients to work or attend school or training. Those state experiments formed the basis of the 1996 federal welfare reform law.51

More Health, Less SALT

Washington and the states have forged close partnerships when dealing with disasters and threats to public safety. In the aftermath of the Sept. 11, 2001, terrorist attacks, New York City created a counterterrorism bureau, establishing close relationships with the FBI and providing a model for other large cities. Since then, states, cities and counties have been receiving security-related grants from the Department of Homeland Security.

The 2001 terrorist attacks also triggered a recession, stressing state budgets as revenues plunged and demand for services rose. In 2003, Congress passed a stimulus package that cut federal income and capital gains taxes and provided $20 billion to state and local governments; half of that sum was earmarked for direct assistance programs, such as job training.52

Shortly after Democratic President Barack Obama took office in 2009, Congress passed an $800 billion stimulus plan known as the American Recovery and Reinvestment Act in response to the Great Recession and the financial crisis.53 The law provided $192 billion to states and localities for a wide array of programs, including highway construction, educational improvements and environmental projects. The measure included $54 billion to help states stabilize their budgets.54

The Obama administration prodded states to spend the money quickly to help jump-start the economy and — to guard against waste — demanded increased transparency about how the money was spent. The oversight effort was headed by then-Vice President Biden, who spoke weekly with governors and mayors, questioning them about the spending and helping them deal with federal agencies.

“As part of his duty, Joe will keep an eye on how precious tax dollars are being spent,” Obama said. “To you, he's Mr. Vice President. But around the White House we call him ‘the sheriff,’ because if you're misusing taxpayer dollars, you'll have to answer to him.”55

Several Republican governors balked at various stimulus programs, worried that even though the federal government was putting up all or most of the money they would be locked into spending obligations after the federal funds ran out. Republican Gov. Mark Sanford of South Carolina, for example, wanted to turn down $700 million in education funding, meant to prevent teacher layoffs, arguing that the one-time windfall would prevent the state from making its own cuts. South Carolina's Republican-dominated Legislature, however, demanded that Sanford accept the funds.56

Many governors worried about facing a “fiscal cliff” once the federal funding ended. States cut their workforces, slashed aid to local governments and reduced support for higher education, leading to increases in tuition and an explosion in student debt.57 State and local budget problems created a drag on the larger economy, leading some to wonder whether the Great Recession had truly ended.58

Overall, it took about six years for total state tax revenues to return to prerecession levels.59 Some states, however, had not fully recovered before the pandemic struck. Some programs continue to suffer: Support for higher education, for instance, remained $6.6 billion below 2008 levels a decade later, when adjusted for inflation.60

State-level Republicans have consistently pushed back against another Obama-era law, the Affordable Care Act (ACA) of 2010. A central part of the law's effort to increase access to health insurance was a major expansion of Medicaid, with Congress setting a floor for determining eligibility at 138 percent of the federal poverty line. Under the law, also known as Obamacare, the federal government would pay 100 percent of the cost of providing coverage to newly eligible Medicaid recipients for three years, from 2014 to 2016, with the federal share gradually dropping to 90 percent in 2020.61

If states refused, the law threatened to cut off their funding for traditional Medicaid programs. A group of states challenged the law's constitutionality. In 2012, the U.S. Supreme Court upheld the overall law but ruled that its threat to Medicaid funding was unconstitutionally coercive. The ruling in effect made Medicaid expansion optional for states.62 Most have concluded that its generous funding for increased coverage is too good to pass up, but a dozen Republican-dominated states in the South and Midwest have refused to expand Medicaid.63

Voters in several states have approved Medicaid expansion, most recently in Missouri last August.64 In November, the Supreme Court heard a case challenging the ACA's constitutionality brought by Texas, joined by 17 Republican attorneys general and the Trump administration.65 The court is expected to rule by June.

Trump was largely unsuccessful in his efforts to get the ACA repealed. His signature legislative achievement, however, had a significant affect on states. His 2017 tax cut law capped at $10,000 the amount of state and local taxes (known as SALT) that can be deducted from federal income taxes.66 States with high income and property taxes, such as New York and New Jersey, have chafed at the cap, since it raises the relative cost of the taxes their residents must pay.

The Heroes Act, passed by House Democrats last May, would have suspended that cap for two years.67 Some progressives oppose eliminating the SALT cap, however, because doing so would primarily benefit wealthier taxpayers. Asked at her confirmation hearing in January whether she would favor restoring the tax break, Treasury Secretary Janet Yellen was noncommittal.

“The SALT deduction was eliminated only a few years ago, and before making a decision about what should be done looking forward, I think it's critical to study and evaluate what the impact has been on state and local governments on their ability to provide critical services,” Yellen said.68

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Current Situation

Better Than Forecast

Nearly a year into the pandemic, tax revenues remain down in all but a handful of states. According to the Federation of Tax Administrators, state revenues fell by $13 billion from March to December 2020, compared to the same period in 2019. And revenues are down $49 billion from where they were projected to be before the pandemic struck.

“The COVID crisis is a fiscal disaster for American states and localities,” says Michael Hendrix, director of state and local policy at the free-market Manhattan Institute in New York City.

But states are not facing the kind of Depression-level budget shortfalls predicted at the start of the pandemic. For one thing, early projections of plummeting tax collections turned out to be worse than the reality, so shortfalls were not as bad as expected.

Lucy Dadayan, who leads the Urban-Brookings Tax Policy Center's state tax and economic review project, bristles at those who celebrate that accomplishment. “It really bugs me when people say revenues are coming in ahead of the forecast,” she says. “Of course, revenues are coming in ahead of the forecasts, when COVID-19 was declared a pandemic. They were trying to forecast with zero information. They based their revenue forecast on the experience of the Great Recession, when revenues lagged forecasts by about 10 percent.”

President Biden delivers remarks Feb. 5 on the economy and the need for his $1.9 trillion coronavirus relief proposal. He wants $350 billion of that earmarked for replenishing state and local coffers, but Republicans are skeptical because state revenues appear to be rebounding. (Getty Images/Stefani Reynolds)

Professionals working remotely continue to pay taxes on incomes that are generally higher than the service workers who have lost their jobs. And the federal government provided more than $3 trillion in COVID-19 relief, including up to $600 per week per person in unemployment benefits. Although most of that money did not go directly to states, it boosted economic activity that, along with taxes on enhanced federal unemployment benefits, helped states' bottom lines.

“It's not that it's good, it's just a lot better than the worst we feared,” says Boyd, the University at Albany scholar.

However, he adds, as a result, states and localities have postponed “some of the really hard decisions” they will face if Congress does not provide them with direct relief. As noted earlier, Biden favors devoting $350 billion in state and local aid, which congressional Democrats appear to be pushing through over GOP opposition. The Senate is expected to clear the package by mid-March.

To get through this fiscal year, many states have used one-time tricks, such as shifting funds between accounts and delaying or canceling infrastructure projects. But such fixes cannot be repeated as states contemplate their budgets for fiscal 2022, which begins for most on July 1.

“If you look at budget actions taken to close 2020 budgets, a lot of them were one-time solutions, delaying the reckoning,” says Gordon, the Tax Policy Center senior fellow. “That's the logic of recessions. You do the easy things first, but then you have to get down to business in the next year of the crisis.”

Cuts vs. Taxes

If federal aid is not forthcoming, states either must cut spending or raise taxes. Legislators seem to grow more reluctant to raise taxes with each recession.

“If you go back and look historically, state and local governments did raise taxes to continue spending, and that had a countercyclical effect,” meaning the continued spending helped offset slowdowns in the broader economy, says Michigan State economist Fisher. “That's become less and less true over time.”

Fisher notes that in fiscal 2010, when the Great Recession was still hitting state budgets hard, 29 states raised taxes and other revenue, but by a small amount — $24 billion in total. For the most part, they balanced their budgets through spending cuts.

In many states, education spending never returned to prerecession levels. “Nearly a third of states never got back to the K-12 funding levels that they had before the recession, adjusting for inflation,” says Michael Leachman, vice president for state fiscal policy at the Center on Budget and Policy Priorities. “Heading into the pandemic, we had 77,000 fewer teachers and school workers than we did heading into the Great Recession, and about 1.5 million more kids in our schools.”

States also cut per capita spending on public health by 16 percent between 2010 and 2020, which left communities exposed when the pandemic struck.69

State spending cuts reduce services but can also hamper economic recovery. “State and local governments buy about $2 trillion worth of goods and services from the private sector every year,” Fisher says. “If they have to cut back further, it has a huge effect on the overall economy.”

In one sense, the pandemic was well-timed for states that have recently begun taxing online purchases. The Supreme Court ruled in 1992 that states could not tax sales made by companies that had no physical presence within their jurisdictions.70 As online sales grew, states have tried repeatedly to find ways to collect taxes on them but were blocked by courts.

Sensing the shifting climate, Amazon, the largest online retailer, agreed in 2017 to collect sales taxes.71 In 2018, the Supreme Court reversed itself, in a case known as South Dakota v. Wayfair, allowing states to collect taxes on most online sales. Of the 45 states that tax sales, all but two — Florida and Missouri — began to tax online sales before the pandemic hit.72

“Thank God for Wayfair in most states,” says Michael A. Pagano, director of the University of Illinois at Chicago's Government Finance Research Center. “If the mom-and-pop stores aren't selling that much, the cities and states aren't losing that much revenue, because of Wayfair.”

In some states, policymakers hope to take advantage of the stress caused by the pandemic to overhaul their tax codes. Most states impose a sales tax on goods but not services, such as those provided by doctors, lawyers and accountants. Taxing services has proven to be politically difficult, but some lawmakers believe that now is the time to have taxes capture a broader share of the economy. A consumption tax, coupled with cuts in corporate and personal income taxes, would provide an economic boost, says ALEC economist Williams.

Macco, the Wisconsin Ways and Means chair, said his state will try to modernize and overhaul its tax code “big time.” But “it needs to be revenue-neutral,” he insists, meaning any increases from one tax must be offset by cuts to others. “We can do that because our pie is getting bigger. In states like Wisconsin and well-run states like Utah and Tennessee and South Dakota, you will be able to have tax reform that is economically sensitive.”

To spur economic activity, the Republican governors of Mississippi and West Virginia have proposed eliminating personal income taxes altogether. “This is the time for an action that will turn heads all across the country and get money and people flowing in, and I believe that move is the elimination of the income tax,” Mississippi Gov. Tate Reeves said during his State of the State Address on Jan. 26. “It is a reward for our hard workers, and an incentive for others to invest here, to grow here, and to live here. We can transform our economy.”73

Replacing the lost tax dollars would be some feat. In West Virginia, personal income taxes represent 43 percent of state revenue.74 Debate about eliminating income taxes altogether will be a multiyear affair, Williams predicts.

Leachman, of the Center on Budget and Policy Priorities, says eliminating the income tax would be a grave mistake, expressing surprise that state leaders are considering it so soon after the failed “experiment” in Kansas.

“It didn't take long for the harm of those cuts to be apparent,” Leachman says. “You'd think that might be a warning, but it hasn't been.”

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Outlook

Continued Fallout

To a large extent, states' financial fortunes are outside their control over the near term. States are waiting for aid from Washington while remaining wary of the pandemic's effect on their economies and tax revenues. States largely depend on the outcome of the race between mass vaccinations and the spread of new variants of the coronavirus, says Sigritz of the National Association of State Budget Officers.

“People are talking about the fall of 2021 getting more normal,” he says. “Under that scenario, states will still see challenges in 2022, and 2023 could still be a challenging year.”

For cities, the situation is even more uncertain. No one knows what percentage of workers will continue working remotely. Empty offices would have a profound effect on commercial property values and income for downtown restaurants and services. If a substantial fraction of the workforce switches permanently to working remotely, or only coming into the office part of the week, that would have a major impact on central-city economies. (See Short Feature.)

“In the longer run, I feel like we're probably going to see fewer people commuting in,” says the Urban Institute's Rueben. “For some central cities, that can have a big effect.”

Cities with entertainment districts filled with theaters, restaurants and shops, as well as convention centers or stadiums, wonder when — and if — tourism and mass gatherings will return.

“We do expect things to be a little bit more normal again eventually, but I don't think we're going to return to the same level that we saw in 2018 and 2019 in terms of people going to concerts and sporting events,” says Kevin Pawlos, budget director for the city of Pittsburgh. “I do think there will be more people who are cautious about the situations they put themselves in, in terms of large gatherings.”

Where people work will have tax implications that have yet to be sorted out. “Colorado just passed a rule basically saying that family leave was going to be covered by the payroll tax. What does that mean if you're not physically there?” Rueben says. “If you're a company that's based somewhere but your employees are not there, do they have to pay this tax, and do they get the benefit?”

Individual incomes are generally taxed based on where people live, not where they work, but some states and localities charge so-called commuter taxes on the income of nonresidents. If companies no longer require employees to come into the office, the future of those commuter taxes would be in doubt. Last April, because of the pandemic, Massachusetts decided to tax income earned by nonresidents who telecommute to companies located in Massachusetts. New Hampshire has filed a lawsuit challenging the maneuver, arguing that Massachusetts cannot collect taxes from individuals who are neither living nor physically working in the state.75

“Where are you taxed — that's going to be a huge issue,” says Brunori, the George Washington University professor.

Perhaps, as happened after the Great Recession, states will revamp their tax codes to address weaknesses that became apparent due to the pandemic. For instance, they may seek to lower rates but impose taxes on a broader array of services.

“A few years from now, we'll be pointing to a handful of places that basically looked to modernize across the board,” says Murphy, the Arnold Ventures vice president. “They take a look at their tax structure and say this is a 1950s tax structure, and we need to update it. Then other states will be asking why they're not struggling through the next recession.”

Most public finance experts doubt that state governments will adopt broad overhauls, since they are so politically difficult to pull off. Any changes in the tax code would likely mean someone ends up paying more, even if most people are paying less.

“There's nothing harder to do than to tax professional services at the state level,” Brunori says. “There have been 30 serious attempts in the past 20 years. You're trying to tax the most powerful people in the economy — doctors and lawyers and accountants. They fight that like it's Armageddon, and they will continue to fight it.”

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Pro/Con

Should Congress provide more aid to states?

Pro Michael Leachman Vice President, State Fiscal Policy, Center on Budget and Policy Priorities. Written for CQ Researcher, February 2021 Many states, localities, tribal nations and U.S. territories continue to struggle with lower revenues and sharply higher costs due to the COVID-19 pandemic and the deep economic downturn that it caused. Unless the federal government provides more aid, these governments will find it hard to rehire the many workers they have laid off and avoid further cuts, slowing the economy's recovery. Contrary to some claims, both blue and red states face similar fiscal challenges. States and localities shed 1.3 million jobs since last February, with job losses in every state. While most jobs were lost last spring, layoffs have continued in recent months. In the last four months, states and localities laid off another 100,000 people. Some states have also cut funding for services deeply. Georgia, for instance, slashed K-12 school funding by nearly $1 billion last year. While an improved revenue picture is leading the state to buy back some 60 percent of those cuts, they remain deeply harmful. Revenues remain down in most states compared to pre-COVID projections, in some cases by large amounts. Especially hard hit are states reliant on tourism or whose revenues depend on natural resource extraction (since energy prices fell) as well as tribal nations, which tend to depend heavily on tourism and casinos. Most cities and counties also face serious financial challenges. A National League of Cities survey found the average city's revenues are down 13 percent. Meanwhile, costs have soared as states and localities work to fight the virus and help people and businesses struggling with extraordinary hardship. To be sure, state and local revenue losses have been less extreme than they might have been, largely because the recession's economic pain has been especially concentrated among lower-income households and communities of color. Income and consumption by the well-to-do have been relatively unaffected, reducing the recession's impact on state revenues. But states still face major problems. Many residents are struggling with hunger, face impending evictions or are enduring other forms of extreme hardship. Millions of children have effectively lost a year of schooling. To address those challenges, states will need substantial revenue over an extended period of time. The country's recovery from the Great Recession was significantly slowed because state and local finances were weak, in part because the federal government provided too little support and ended it too soon. Let's not make that same mistake again.

Con Jonathan Williams and Lee Schalk Executive Vice President, Policy, and Chief Economist and Senior Director, Center for State Fiscal Reform, American Legislative Exchange Council. Written for CQ Researcher, February 2021 States have received billions in federal aid via the $2 trillion Cares Act, and the Federal Reserve authorized up to $500 billion in loans to state and local governments via the Municipal Liquidity Facility. Additional federal bailouts would erode state sovereignty, create incentives for fiscal irresponsibility and reward fiscally reckless states at the expense of responsible ones. Federal bailouts will also lead to higher state taxes. Eric Fruits, a Portland State University economist, found that every $1 states receive from the federal government costs state and local taxpayers $0.82 in increased taxes and fees, on average, because the “strings” attached to federal funds push state spending higher. In 2009, for instance, the “maintenance of effort” provisions in the 2009 American Recovery and Reinvestment Act, which required states to continue running some programs, proved far costlier than expected. Although some state and local governments face pandemic-related shortfalls in the near term, especially within their unemployment insurance trust funds, their revenue collections and total spending have been rising steadily for decades. Even after adjusting for increases in population and inflation, state and local spending has grown by nearly 90 percent over the past 40 years. Hundreds of billions of dollars in additional federal aid would let states continue that cycle of spending and send the wrong message to states that have practiced fiscal discipline. Florida, which does not have a personal income tax, spends just $2,327 per resident. On the other hand, New York spends $5,231 per resident and has requested $60 billion in federal bailout funds. If New York only spent at Florida's level per resident, the Empire State could save $56.7 billion each year. Unfortunately, too many elected officials would rather have taxpayers submit to a tax increase rather than undertake the hard work of prioritizing expenditures. In 2002, Washington state demonstrated genuine fiscal discipline by successfully closing a $2.5 billion budget gap without raising taxes under the leadership of Democratic Gov. Gary Locke and a bipartisan group of legislators. They did this by identifying the core functions of government and ranking agency and program spending needs from top to bottom until they spent available revenue. Fiscal discipline is not easy, but it is necessary. Our national debt could soon surpass a previously unthinkable $30 trillion, and a federal bailout of the 50 states would have disastrous results for U.S. taxpayers.

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Short Features

Pandemic Pummels City Budgets

San Diego officials received a rude shock as the year began. In November, the city's revenues were projected to fall short of expenses by $86 million, out of an operating budget of $1.5 billion. By January, the deficit had ballooned to $154 million, with hotel taxes and other tourism revenue plummeting due to the coronavirus pandemic.

“The budget projections are grim,” City Councilman Chris Cate said after Mayor Todd Gloria told city agencies to prepare for sizable spending cuts.1

San Diego's problems are not unique. Local governments around the country are seeing revenues decline because of the pandemic, even as demand for services has increased. According to a National League of Cities survey released in December, average municipal revenues fell 21 percent during the first eight months of the pandemic, while overall expenses, including for things such as personal protective equipment and technology to allow city workers to work remotely, rose by 17 percent.2

“The local picture is dire in California and nationally,” says Chris Hoene, executive director of the California Budget & Policy Center, a nonpartisan watchdog group in Sacramento, the state capital. “Our local governments, where small businesses are shut down or are closing, are certainly experiencing the direct effect of losing sales tax revenue.”

John Bruggen, budget director for Hamilton County, Ohio, which includes Cincinnati, says, “We're now holding our breath. Our lodging tax is down almost 50 percent, and our parking revenue is down almost 50 percent.”

Even places long considered recession-proof are suffering. For instance, college towns have taken serious hits after schools switched to predominantly online classes and fewer people were on campus to spend money or use local utilities. And cities that depend heavily on tourism, such as Las Vegas, New Orleans and Orlando, Fla., continue to suffer.

A paramedic administers a COVID-19 test to a patient in White Plains, N.Y., during a home wellness check in December. Even as the need for such services increases, local governments are facing declining revenues. (Getty Images/John Moore)

Not all localities are in the same boat. Some cities and counties that rely heavily on property taxes, which generally have remained stable due to the healthy housing market, are not suffering as much.

“The pandemic isn't going to be as destructive to high-income suburban communities that don't have much of a commercial base,” says Michael A. Pagano, director of the Government Finance Research Center at the University of Illinois, Chicago. “Their property taxes are going to remain strong because those people are going to be working.”

But cities with large central business districts are wondering what sort of long-term challenges they may face due to changing work, spending and dining habits. No one knows how many people who are working remotely during the pandemic will continue to do so permanently or might reduce their office appearances to once or twice a week. If millions more people end up working remotely, that will mean office vacancies, falling commercial property values and plummeting property taxes, according to Michael Wallace, an economic development expert with the National League of Cities. In New York City, commercial property sales dropped by nearly half last year.3

Cities such as New York, St. Louis and Louisville, Ky., collect commuter taxes — taxes imposed on the wages of nonresidents who work in those cities. If suburban residents are not coming downtown for work, that revenue source could dry up. In Philadelphia, receipts from such taxes have fallen $200 million below budgeted expectations this fiscal year.4

Although relatively few cities collect commuter taxes, all municipalities must worry about the extent to which the pandemic will reshape commuting patterns. If people continue to work remotely, that will affect where they eat out, get haircuts or spend money on other services.

“Some things are here to stay, and remote work will be one of them,” says Michael Hendrix, director of state and local policy at the conservative Manhattan Institute. “We have tax systems based on certain forms of behavior. If those change, it will reverberate for years to come, and we're not prepared for it yet.”

— Alan Greenblatt

[1] David Garrick, “San Diego scrambling to close $154M deficit, sharply up from $86M estimate in November,” San Diego Union-Tribune, Jan. 21, 2021, https://tinyurl.com/y34jzc57.

[2] “New Survey Data Quantifies Pandemic's Impact on Cities: Municipal Revenues Down Twenty-One Percent While Expenses Increase Seventeen Percent,” National League of Cities, Dec. 1, 2020, https://tinyurl.com/y6kmzj3c.

[3] Matthew Haag and Dana Rubinstein, “Midtown Is Reeling. Should Its Offices Become Apartments?” The New York Times, Dec. 11, 2020, https://tinyurl.com/y2sbsu7e.

[4] Christian Hetrick and Laura McCrystal, “The pandemic took a big bite out of Philly's tax base. What happens if suburbanites keep working from home?” The Philadelphia Inquirer, Jan. 24, 2021, https://tinyurl.com/y5jvelax.

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States Struggle to Fund Pension Plans

Colorado's pension plans for state employees have been underfunded for years, meaning the state has not set aside enough money to pay all the benefits promised to its workers and retirees.

Public school teachers and their supporters demonstrate outside the Kentucky State Capitol in Frankfort in 2018, demanding that Republican Gov. Matt Bevin veto a bill overhauling their pension plan. Bevin signed the GOP-crafted measure, which removed a guaranteed defined-benefit pension for new teachers. (Getty Images/Bill Pugliano)

In 2018, the state attempted to solve the problem by limiting retirees' cost-of-living adjustments under certain circumstances and making substantial supplementary payments — equal to about 2 percent of the state payroll — to the pension system. The new law was designed to fully fund state pensions within 30 years.5

But lawmakers got sidetracked last spring, when they decided to skip a $225 million supplemental pension payment due to severe budget pressures caused by the coronavirus pandemic.6

Even without a pandemic, pension funding is a serious problem for most states and many localities around the country. Although states have collectively doubled their contributions to pension plans over the past decade — a period when many were earning healthy returns on stock market investments — those plans were still underfunded by $1.24 trillion in 2018, the most recent year for which figures are available, according to the Pew Charitable Trusts.7

“After a decade-long bull run in the market, [pension plan] solvency hasn't changed much,” says Leonard Gilroy, senior managing director of the pension integrity project at the Reason Foundation, a libertarian think tank. “In a lot of places, there's been a lost decade in pensions.”

Pension plans, which rely on investments to accumulate cash over time, dodged a bullet last year. The stock market plummeted at the start of the pandemic, but has since recovered, with some indices around record highs. Still, rather than the annual return on investment of about 7 percent that most pension systems count on, they earned just over 1 percent in 2020, according to Donald Boyd, co-director of the University at Albany's Project on State and Local Government Finance.

Such projections have often been too optimistic, especially during a period when interest rates have remained historically low, reducing the rate of return on bonds and other investments. Also, as was the case in Colorado, many states have skipped pension payments due to more immediate budget pressures. As a result, pension plans in states such as Connecticut, Illinois, Kentucky and New Jersey are funded at less than 40 percent of their total obligations.

“Governments made promises for which they have not set aside enough money,” Boyd says. “They're probably going to have to honor those promises, either because of law or politics or both, and it's going to be expensive.”

Under federal law, states are obligated to pay the full amounts promised to employees. States traditionally have offered so-called defined-benefit pensions, which pay retirees a certain amount, regardless of economic circumstances. Such pensions have become rare in the private sector.

Governments typically offered pensions and other generous benefits to attract and retain a stable workforce. And lawmakers have often increased those pension benefits in lieu of (or in addition to) pay raises, because pension costs are less immediate. They do not have to worry about a 35-year-old worker collecting a pension for decades.

But with the aging of the massive Baby Boom Generation, the costs of pensions and other benefits, such as retiree health insurance, have come due. Some states have tried to reduce pension costs by moving new employees from defined-benefit plans to 401(k)-style plans, which offer defined contributions (a certain percentage of salary set aside each year) but no guarantee of future benefits. Such efforts have encountered heavy resistance from public-sector unions, however.

Even so, these changes generally apply only to new hires. So, while states might save money in the long run, they still face pension fund deficits.

That could be a particular problem in the coming years, says Dan White, director of government consulting and fiscal policy research at Moody's Analytics, a risk management firm. More than 1 million state and local government jobs have been shed over the past year. Those positions might not all be filled for years to come, creating a mismatch, he says, with fewer younger employees paying into pension systems.

Some states are trying to chip away at these problems. The budget proposed by California's Democratic Gov. Gavin Newsom in January, for example, calls for $6.5 billion in supplemental payments into pension systems over the next three years.8 But given budget pressures, other states are considering cutting or even skipping their annual pension payments this year, with a few exploring the idea of borrowing money in order to make payments.

“There are a handful of states with pensions really close to being insolvent within the next 10 to 15 years,” White says. “If, as a result of this recession, legislators decide to short payments, that brings up insolvency that much faster. It moves them from 10 to 15 years to five years.”

— Alan Greenblatt

[5] James Comtois, “Colorado governor signs pension reform bill into law,” Pensions & Investments, June 5, 2018, https://tinyurl.com/yyzz7e73.

[6] Brian Eason, “To balance budget, Colorado lawmakers add to PERA's long-term debt and backtrack from landmark deal,” The Colorado Sun, May 20, 2020, https://tinyurl.com/yyllq38k.

[7] Greg Mennis, “The State Pension Funding Gap: 2018,” Pew Charitable Trusts, June 11, 2020, https://tinyurl.com/yxzywnj7.

[8] “Governor Newsom Proposes 2021-22 State Budget,” Office of California Gov. Gavin Newsom, Jan. 8, 2021, https://tinyurl.com/y2xq3hyj.

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Bibliography

Books

Grossmann, Matt , Red State Blues: How the Conservative Revolution Stalled in the States , Cambridge University Press, 2019. A Michigan State University political scientist argues that although Republicans have controlled a majority of states since the 2010 elections, they have failed to cut spending significantly due to public demand for schools, roads and other programs.

Lee, Robert D. Jr., Ronald W. Johnson and Phillip G. Joyce , Public Budgeting Systems , 10th ed., Jones & Bartlett Learning, 2021. This finance textbook offers an overview of federal and state budgets by exploring taxes, economic effects and spending oversight.

Articles

Beam, Adam , “California governor's budget booms despite pandemic problems,” The Associated Press, Jan. 7, 2021, https://tinyurl.com/y2cdd4h7. Democratic Gov. Gavin Newsom proposes the largest budget in California history, with the state running a $15 billion surplus because, Newsom says, “folks at the top are doing pretty damn well.”

Farmer, Liz , “Budget Deficits And Massive Government Layoffs Stalled The Last Economic Recovery. But This Time Could Be Different,” Forbes, Jan. 27, 2021, https://tinyurl.com/y6fyg97e. State and local governments have laid off twice as many workers during the pandemic as in the 2007-09 recession, but surveys indicate that the current layoffs have slowed.

Greenblatt, Alan , “The Supreme Court Decision That Saved States Billions,” Governing, Jan. 22, 2021, https://tinyurl.com/nqkwlo7a. The Supreme Court's South Dakota v. Wayfair decision allowed states to collect sales taxes on online purchases, reducing the budgetary impact of people buying more goods remotely.

Hetrick, Christian, and Laura McCrystal , “The pandemic took a big bite out of Philly's tax base. What happens if suburbanites keep working from home?” The Philadelphia Inquirer, Jan. 24, 2021, https://tinyurl.com/y5jvelax. Philadelphia collects a commuter tax on nonresidents working in the city, a model that is threatened by the shift to remote work.

Jacoby, Jeff , “Why New Hampshire is suing Massachusetts,” The Boston Globe, Jan. 16, 2021, https://tinyurl.com/euz7oer7. After Massachusetts decided to collect income taxes on out-of-state remote workers employed by Massachusetts companies, New Hampshire sued to block the practice.

Pulliam, Christopher, and Richard V. Reeves , “The SALT tax deduction is a handout to the rich. It should be eliminated not expanded,” Brookings Institution, Sept. 4, 2020, https://tinyurl.com/y4bbjxsv. Two Brookings researchers say if congressional Democrats repeal a cap on state and local tax deductions it would mostly benefit wealthy taxpayers.

Strain, Michael R. , “Both Parties Should Embrace This Stimulus Bill,” Bloomberg Opinion, Dec. 8, 2020, https://tinyurl.com/830yvlgi. Even the best-prepared states could not have been ready for the pandemic, argues the director of economic policy studies at the conservative American Enterprise Institute, who says withholding federal aid would only weaken the economy.

Williams, Jonathan, and Lee Schalk , “State Lawmakers Against State Bailouts,” Newsweek, June 19, 2020, https://tinyurl.com/3e9enc2c. Two officials with the conservative American Legislative Exchange Council say hundreds of state legislators oppose a federal bailout, which they argue would reward imprudent states at the expense of fiscally responsible ones.

Reports and Studies

“Fiscal Survey of States: Fall 2020,” National Association of State Budget Officers, Dec. 23, 2020, https://tinyurl.com/2hv2bocm. Following nine consecutive years of growth, state revenues fell in 2020, leading to spending cuts of 1.1 percent compared to the previous year and 5.5 percent compared to governors' requests. Deeper cuts are expected in 2021.

Gale, William G., Aaron Krupkin and Kim Rueben , “The Relationship Between Taxes and Growth at the State Level: New Evidence,” National Tax Journal, December 2015, https://tinyurl.com/y5of2zx4. Over a 30-year period, states that lowered their taxes did not experience faster economic growth than states with higher tax rates.

Leachman, Michael, and Elizabeth McNichol , “Pandemic's Impact on State Revenues Less Than Earlier Expected But Still Severe,” Center on Budget and Policy Priorities, Oct. 30, 2020, https://tinyurl.com/3jh4rrpb. Revenue shortfalls due to the coronavirus pandemic have been less severe than were earlier forecasted, but states still face huge shortages.

Mennis, Greg , “The State Pension Funding Gap: 2018,” Pew Charitable Trusts, June 11, 2020, https://tinyurl.com/yxzywnj7. Despite a long run of rising stock prices, state pensions remain more than $1 trillion short of full funding, with states on average having only 71 percent of the assets they need to fulfill promised benefits.

Schultz, Laura, and Michelle Cummings , “Giving or Getting? New York's Balance of Payments with the Federal Government,” Rockefeller Institute of Government, Jan. 8, 2019, https://tinyurl.com/y5649m9d. So-called donor states — such as New York, New Jersey and Massachusetts — send far more money to Washington than they get back in federal spending. Red states in the South and Midwest tend to get back more in federal benefits than they contribute in taxes.

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The Next Step

Cities

D'Onofrio, Michael , “Saddled with $450M budget gap, Philly faces ‘really painful decisions’ on its fiscal future,” Pennsylvania Capital-Star, Feb. 18, 2021, https://tinyurl.com/k6kgh1ag. Philadelphia faces a projected $450 million budget shortfall, and its budget director is considering options that include raising taxes, selling assets, deferring costs and reducing services — despite rising food insecurity and homicides at a 30-year high last year.

Schmidt, Heidi , “4Star Politics: Feeling a chill as debate over the city's budget heats up,” Fox 4KC, Feb. 17, 2021, https://tinyurl.com/nmwu9lca. After reaching deep into its reserves during the pandemic, Kansas City, Mo., plans to make more budget reductions in the coming fiscal year, including cuts to the police department.

Zanhiser, David , “To get through its budget crisis, L.A. could postpone paying some of its bills,” Los Angeles Times, Feb. 5, 2021, https://tinyurl.com/i7swxl9v. Los Angeles may defer contractual payments until the next fiscal year as it searches to find $77.5 million in cuts or additional revenue to balance its budget.

Federal Aid

Hartman, Mitchell , “State and local governments could get $350 billion in pandemic aid,” Marketplace, Feb. 18, 2021, https://tinyurl.com/1n57vr5f. Some economists think the federal government should provide aid to states to help them rehire public workers and create more jobs.

Martin, Gary , “Nevada could more than triple federal aid under new relief bill,” Pahrump Valley Times, Feb. 18, 2021, https://tinyurl.com/42he14sv. The COVID relief bill proposed by President Biden would triple federal aid to Nevada, in part due to money added for economic development in tourism-reliant cities such as Las Vegas.

Scholtes, Jennifer , et al., “Democrats shift Congress into top speed on Covid aid, but it may still be too slow for many,” Politico, Feb. 19, 2021, https://tinyurl.com/13jgx6go. Disagreements among congressional Democrats over a minimum wage hike, as well as parliamentary hurdles, could slow the passage of a COVID relief bill that includes aid for states.

Pensions

Siedle, Edward , “Your State Pension Is Unknowingly Shorting Stocks Like GameStop All The Time,” Forbes, Jan. 30, 2021, https://tinyurl.com/3ye9826j. All state pension funds engage in high-risk strategies, including “shorting” stocks (betting that the share price will fall), and state officials have no idea what stocks are shorted by external managers at any given time.

Spielman, Fran , “Lightfoot urges Pritzker to veto firefighters pension bill,” Chicago Sun Times, Feb. 18, 2021, https://tinyurl.com/u87sp4rs. Chicago Mayor Lori Lightfoot urged Illinois Gov. J.B. Pritzker to veto a bill that would increase pensions for thousands of Chicago firefighters but may also require a future property tax hike.

Vasilinda, Mike , “Bill would get rid of Florida's state pension plan,” News 4 JAX, Feb. 4, 2021, https://tinyurl.com/twzk73l3. A measure that would force all Florida state employees into a 401(k)-type retirement plan, instead of a pension, has cleared its first legislative hurdle.

Taxes

Frank, Robert , “Jeff Bezos would owe $2 billion a year in state taxes if Washington passes wealth tax,” CNBC, Feb. 8, 2021, https://tinyurl.com/y4uhs42h. Washington state legislators are proposing a 1 percent tax on nontangible financial assets worth more than $1 billion, which they expect would raise $2.5 billion a year in revenue.

Norimine, Hayat , “Who pays the highest tax rate in Idaho? Someone making $11,761 a year in taxable income,” Idaho Statesman, Feb. 17, 2021, https://tinyurl.com/54te4jyz. A new Idaho bill would cut state income and sales tax rates, but a competing measure would exempt groceries from the sales tax.

Porter, Stella , “Legislature votes to waive state taxes on PPP loans as local business, bank discuss impact,” WEAU, Feb. 16, 2021, https://tinyurl.com/2m9r9hd8. The Wisconsin state legislature voted to waive state taxes on federal Paycheck Protection Program loans for businesses, a move favored by restaurant owners.

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Contacts

American Legislative Exchange Council
2900 Crystal Drive, 6th Floor, Arlington, VA 22202
703-373-0933
alec.org
Works with a quarter of the nation's legislators and private companies to craft model conservative state legislation.

Center on Budget and Policy Priorities
1275 First St., N.E., Suite 1200, Washington, DC 20002
202-408-1080
cbpp.org
A liberal think tank that researches budgets and policies to help shape state and federal programs aimed at reducing poverty and inequality.

National Association of State Budget Officers
444 N. Capitol St., N.W., Suite 642, Washington, DC 20001
202-624-5382
nasbo.org
An organization of state budget and finance officers that provides research and education about budget options.

National Conference of State Legislatures
7700 E. First Place, Denver, CO 80230
303-364-7700
ncsl.org
A professional organization for legislators that tracks policy proposals, shares organizational strategies and promotes state interests in Washington.

National League of Cities
660 N. Capitol St., N.W., Washington, DC 20001
877-827-2385
nlc.org
Represents 2,500 cities and towns, sharing policy ideas and practices and advancing their interests at the federal level.

Rockefeller Institute of Government
411 State St., Albany, NY 12203
518-445-4150
rockinst.org
Analyzes policy to help guide policymakers at all levels of government.

Tax Foundation
1325 G St., N.W., Suite 950, Washington, DC 20005
202-464-6200
taxfoundation.org
An independent research group that studies and analyzes tax policies and their effects at the federal and state levels.

Tax Policy Center
500 L'Enfant Plaza, S.W., Washington, DC 20024
202-833-7200
taxpolicycenter.org
A joint project of the Urban Institute and the Brookings Institution that researches taxes, budgets and social policy.

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Footnotes

[1] “California faces a staggering $54 billion budget deficit due to economic devastation from coronavirus,” CNBC, May 7, 2020, https://tinyurl.com/C35rczro2.

[2] Heather Gillers and Gunjan Banerji, “U.S. States Face Biggest Cash Crisis Since the Great Depression,” The Wall Street Journal, Oct. 28, 2020, https://tinyurl.com/y6s22oxa.

[3] Adam Beam, “California governor's budget booms despite pandemic problems,” The Associated Press, Jan. 8, 2021, https://tinyurl.com/y2cdd4h7.

[4] Michael Leachman, “Projected State Shortfalls Grow as Economic Forecasts Worsen,” Center on Budget and Policy Priorities, May 20, 2020, https://tinyurl.com/y9zvdmup; Charles Lane, “States don't need a $350 billion federal rescue,” WVNews, Feb. 9, 2021, https://tinyurl.com/3w7x79cm.

[5] Soumya Karlamangla and Rong-Gong Lin II, “How the ‘California miracle’ dissolved into a winter coronavirus nightmare,” Los Angeles Times, Jan. 22, 2021, https://tinyurl.com/6fmui85h.

[6] “Remarks by President Biden on the American Rescue Plan and Signing of Executive Orders,” The White House, Jan. 22, 2021, https://tinyurl.com/y5zko2gf.

[7] Carl Hulse, “McConnell Says States Should Consider Bankruptcy, Rebuffing Calls for Aid,” The New York Times, April 22, 2020, https://tinyurl.com/yagvvsx9; Louis Jacobson, “Can states file for bankruptcy? Should they? What you need to know,” Politifact, April 24, 2020, https://tinyurl.com/2rkzr2qe.

[8] Matt Stieb and Charlotte Klein, “What Is in the $900 Billion Second Stimulus Package?” New York, Dec. 22, 2020, https://tinyurl.com/y3jf8gmh.

[9] “Sen. Rick Scott Blasts Biden-Schumer Plan for $2 Billion Bailout for New York,” Office of Sen. Rick Scott, Jan. 15, 2021, https://tinyurl.com/y3ynuzaf.

[10] Liz Farmer, “Red State Budgets Are Suffering the Most in This Recession,” Forbes, Feb. 18, 2021, https://tinyurl.com/389cje9u.

[11] “State Leaders Say ‘No Thanks’ to Federal Bailout,” American Legislative Exchange Council, July 28, 2020, https://tinyurl.com/y9ua2l7h.

[12] Laura Schultz and Michelle Cummings, “Giving or Getting? New York's Balance of Payments with the Federal Government,” Rockefeller Institute of Government, Jan. 8, 2019, https://tinyurl.com/y5649m9d.

[13] Griff Witte, “Biden is winning Republican support for his $1.9 trillion coronavirus relief plan. Just not in Washington,” The Washington Post, Feb. 14, 2021, https://tinyurl.com/5g9z46pv.

[14] “The Fiscal Survey of States, Fall 2019,” National Association of State Budget Officers, Dec. 17, 2019, https://tinyurl.com/y6goj8tu.

[15] Dom DiFurio, “Elon Musk's relocation follows 687,000 other Californians who've moved to Texas in last decade,” Dallas Morning News, Dec. 9, 2020, https://tinyurl.com/y66qz5hm; Robert Gebeloff, “Why Your State Is Growing or Stalling or Shrinking,” The New York Times, Jan. 9, 2020, https://tinyurl.com/ttbug9z.

[16] Arthur B. Laffer et al., “Laffer-ALEC Report on Economic Freedom: Grading America's 50 Governors,” American Legislative Exchange Council, Oct. 20, 2020, https://tinyurl.com/3rmhugny.

[17] Dave Rexrode, Twitter, Feb. 17, 2021, https://tinyurl.com/1ikf9idf.

[18] Abrahm Lustgarten, “How climate migration will reshape America,” The New York Times, Sept. 15, 2020, https://tinyurl.com/1milcruo; Joel Mathis, “The climate refugees are here. They're Americans,” The Week, Sept. 14, 2020, https://tinyurl.com/12831ww1.

[19] For background, see Alan Greenblatt, “Economic Clustering,” CQ Researcher, Aug. 21, 2020, https://tinyurl.com/yyunqcso.

[20] “MoneyTree Report Q4 2020,” PwC, Jan. 4, 2021, https://tinyurl.com/y4zkx6e6; Cristobal Young, Twitter post, Jan. 29, 2021, https://tinyurl.com/2k4ghp4a.

[21] William G. Gale, Aaron Krupkin and Kim Rueben, “The Relationship Between Taxes and Growth at the State Level: New Evidence,” National Tax Journal, December 2015, https://tinyurl.com/y5of2zx4.

[22] David C. Parsley and Helen Popper, “Risk Sharing in a Politically Divided Union,” Vanderbilt Owen Graduate School of Management Research Paper, Nov. 16, 2020, https://tinyurl.com/v9uabzrq; Joachim Klement, “Red States, Blue States: Two Economies, One Nation,” CFA Institute blog post, undated, https://tinyurl.com/1t9ppbcc.

[23] Will Englund, “The Texas grid got crushed because its operators didn't see the need to prepare for cold weather,” The Washington Post, Feb. 16, 2021, https://tinyurl.com/gxmv7kkq.

[24] Lauren McGaughey and Holly K. Hacker, “Texas tells power plants to be winter-ready, but how to prepare is up to them,” Dallas Morning News, Feb. 19, 2021, https://tinyurl.com/142xqsaw; Catherine Rampell, “Opinion: Republicans fearmonger about regulation, but deregulation is what left Texas in the dark,” The Washington Post, Feb. 22, 2021, https://tinyurl.com/8gjky2bw.

[25] Horus Alas, “Massachusetts Is Best State for Health Care Coverage, Study Shows,” U.S. News & World Report, Oct. 7, 2020, https://tinyurl.com/3z4vk47m; Kalyn Norwood, “Texas is one of the worst states in the U.S. for child welfare, report says,” KVUE-ABC, June 17, 2019, https://tinyurl.com/3697rg2p; “2019 Kids Count Data Book: State Trends in Child Well-Being,” The Annie E. Casey Foundation, 2019, https://tinyurl.com/100rmx4t; and “Texas Unemployment Rate Falls to 7.2 Percent,” Texas Workforce Commission, Jan. 22, 2021, https://tinyurl.com/1x3ts55s.

[26] Ezra Klein, “California Is Making Liberals Squirm,” The New York Times, Feb. 11, 2021, https://tinyurl.com/1kjvudud.

[27] Max Ehrenfreund, “Kansas Republicans raise taxes, ending their GOP governor's ‘real live experiment’ in conservative policy,” The Washington Post, June 7, 2017, https://tinyurl.com/y8x49co6; Scott Cohn, “The comeback state of 2019: Kansas economy rebounds from tax-cutting disaster,” CNBC, July 10, 2019, https://tinyurl.com/7srgv5kt.

[28] Jessie Van Berkel and Briana Bierschbach, “Gov. Tim Walz's $52.4 billion budget raises taxes on wealthiest Minnesotans,” Minneapolis Star Tribune, Jan. 27, 2021, https://tinyurl.com/y2ofbg6q; Karen Langley, “Tax Hikes for High Earners Are on the Table in Some States,” The Wall Street Journal, Feb. 24, 2021, https://tinyurl.com/bvkr2bhy.

[29] “Taxing Digital Goods and Services: Recent Shifts and Trends,” Sales Tax Institute, Oct. 16, 2020, https://tinyurl.com/y4mhgtld.

[30] Angela Couloumbis and Cynthia Fernandez, “Wolf asks for tax increase on Pa.'s top earners amid pandemic; GOP pans proposal as ‘irresponsible,’” The Philadelphia Inquirer, Feb. 3, 2021, https://tinyurl.com/yqfj6mkm.

[31] Katherine Loughead, “State Tax Changes Effective January 1, 2021,” Tax Foundation, Jan. 5, 2021, https://tinyurl.com/1rnevmjh.

[32] Richard C. Schragger, “The Attack on American Cities,” Texas Law Review, Vol. 96, Issue 6, https://tinyurl.com/38xe6c2n.

[33] John L. Mikesell and Daniel R. Mullins, eds., The Evolution of Public Finance and Budgeting: A Quarter Century of Developments (2006), p. 24.

[34] Robert D. Lee Jr., Ronald W. Johnson and Phillip G. Joyce, Public Budgeting Systems, 10th ed. (2021), p. 8.

[35] Ibid.

[36] Elliott Dubin and Trevor Ahouse, “Trends in State and Local Finances: 1960 to 2015,” Journal of Multistate Taxation and Incentives, November-December 2016, https://tinyurl.com/yyyv6af4.

[37] Chris Nichols, “Proposition 13: The Birth Of California's Taxpayer Revolt,” KPBS, Oct. 25, 2018, https://tinyurl.com/y67guzmy.

[38] Nicole DuPuis et al., “City Rights in an Era of Preemption: A State-by-State Analysis, 2018 Update,” National League of Cities, February 2018, https://tinyurl.com/yyt9v7l2.

[39] “Common Claims About Proposition 13,” California Legislative Analyst's Office, Sept. 19, 2016, https://tinyurl.com/4w7aetyh.

[40] Liz Farmer, “Taxpayers Have Their Own Bill of Rights in Colorado. But Who Benefits?” Governing, October 2017, https://tinyurl.com/y3wt5v7p.

[41] “Kansas Supreme Court Signs Off on Increased Education Spending,” The Associated Press, June 14, 2019, https://tinyurl.com/br6wh44a.

[42] “Interstate Highway System: The Myths,” Federal Highway Administration, Nov. 20, 2019, https://tinyurl.com/nclfhpo; “Fixing America's Surface Transportation Act or ‘Fast Act,’” Federal Highway Administration, Fact Sheet, https://tinyurl.com/c8gk2hh3.

[43] “CMS' program history,” Centers for Medicare and Medicaid Services, Jan. 13, 2020, https://tinyurl.com/yyg25723.

[44] Robin Rudowitz, Kendal Orgera and Elizabeth Hinton, “Medicaid Financing: The Basics,” Kaiser Family Foundation, March 21, 2019, https://tinyurl.com/yxbstuyy.

[45] “General Revenue Sharing: Background and Analysis,” Congressional Research Service, Jan. 9, 2009, https://tinyurl.com/y3ya5fgz.

[46] Lindsey Gruson, “End of Federal Revenue Sharing Creating Financial Crises in Many Cities,” The New York Times, Jan. 31, 1987, https://tinyurl.com/y44lfxf9.

[47] Kenneth Finegold, Laura Wherry and Stephanie Schardin, “Block Grants: Historical Overview and Lessons Learned,” Urban Institute, April 21, 2004, https://tinyurl.com/y2s8m4pb.

[48] B. Drummond Ayres Jr., “Reagan Plans Welfare Shift to States,” The New York Times, Aug. 14, 1981, https://tinyurl.com/yyxuug3k.

[49] “Medicaid Expenditures as a Percent of Total State Expenditures by Fund,” Kaiser Family Foundation, 2018, https://tinyurl.com/yygxnqcm.

[50] Alan Greenblatt, “The Law Preventing Congress from Sending States the Coronavirus Bill,” Governing, Aug. 27, 2020, https://tinyurl.com/y24nu3v7.

[51] Dirk Johnson, “Wisconsin Acts to End Welfare Entirely,” The New York Times, April 26, 1996, https://tinyurl.com/y3c48qhu.

[52] Grant A. Driessen, “State and Local Fiscal Conditions and Economic Shocks,” Congressional Research Service, June 10, 2020, https://tinyurl.com/y5c2xwpo.

[53] Michael Grunwald, The New New Deal (2012), p. 10.

[54] Driessen, op. cit.

[55] Asma Khalid, “Great Recession Recovery Effort Shaped a Key Part of Biden's Record,” NPR, April 12, 2020, https://tinyurl.com/yxtakz2l.

[56] Grunwald, op. cit., p. 288.

[57] “Student Debt and the Class of 2019,” The Institute for College Access & Success, October 2020, https://tinyurl.com/y2qeppgs.

[58] Liz Farmer, “Budget Deficits And Massive Governments Layoffs Stalled The Last Economic Recovery. But This Time Could Be Different,” Forbes, Jan. 27, 2021, https://tinyurl.com/y6fyg97e.

[59] “‘Lost Decade’ Casts a Post-Recession Shadow on State Finances,” Pew Charitable Trusts, June 4, 2019, https://tinyurl.com/y3d5hf4b.

[60] Michael Mitchell, Michael Leachman and Matt Saenz, “State Higher Education Funding Cuts Have Pushed Costs to Students, Worsened Inequality,” Center on Budget and Policy Priorities, Oct. 24, 2019, https://tinyurl.com/yvagbk98.

[61] Susan L. Hayes et al., “The Fiscal Case for Medicaid Expansion,” The Commonwealth Fund, Feb. 15, 2019, https://tinyurl.com/y3sxqoul.

[62] “A Guide to the Supreme Court's Decision on the ACA's Medicaid Expansion,” Kaiser Family Foundation, Aug. 1, 2012, https://tinyurl.com/y4dbjklc.

[63] “Status of State Medicaid Expansion Decisions: Interactive Map,” Kaiser Family Foundation, Feb. 12, 2021, https://tinyurl.com/y9gseqv5.

[64] Alex Smith, “Missouri Voters Approve Medicaid Expansion Despite Resistance From Republican Leaders,” NPR, Aug. 5, 2020, https://tinyurl.com/yxnou83o.

[65] Phil Galewitz, “Red States' Case Against ACA Hinges on Whether They Were Actually Harmed by the Law,” Kaiser Health News, Nov. 16, 2020, https://tinyurl.com/y63743rz.

[66] Christopher Pulliam and Richard V. Reeves, “The SALT tax deduction is a handout to the rich. It should be eliminated not expanded,” The Brookings Institution, Sept. 4, 2020, https://tinyurl.com/y4bbjxsv.

[67] Darla Mercado, “House Democrats' stimulus bill rolls back $10,000 SALT cap for 2 years,” CNBC, May 12, 2020, https://tinyurl.com/y7bg9boz.

[68] Tyler Van Dyke, “Yellen pledges to ‘study and evaluate’ Democratic plans to lift cap on SALT deduction, a break for wealthier taxpayers,” Washington Examiner, Jan. 19, 2021, https://tinyurl.com/y52uvr7u.

[69] Lauren Weber, Laura Ungar and Michelle R. Smith, “Hollowed-Out Public Health System Faces More Cuts Amid Virus,” Kaiser Health News, July 1, 2020, https://tinyurl.com/yb3ltwwx.

[70] Chris Atkins, “Important Tax Cases: Quill Corp. v. North Dakota and the Physical Presence Rule for Sales Tax Collection,” Tax Foundation, July 19, 2005, https://tinyurl.com/4rkntfv8.

[71] Kelly Phillips Erb, “Tax-Free No More: Amazon To Begin Collecting Sales Tax Nationwide On April 1,” Forbes, May 27, 2017, https://tinyurl.com/9wvbcm95.

[72] Alan Greenblatt, “The Supreme Court Decision That Saved States Billions,” Governing, Jan. 22, 2021, https://tinyurl.com/nqkwlo7a.

[73] Cash Matlock, “Gov. Reeves calls for elimination of income tax in Mississippi,” WCBI, Jan. 26, 2021, https://tinyurl.com/y3q4jb8t.

[74] Brad McElhinny, “W.Va. officials want to cut the income tax, but it's a big budget challenge,” MetroNews, Jan. 17, 2021, https://tinyurl.com/yw6jvv5z.

[75] Jeff Jacoby, “Why New Hampshire is suing Massachusetts,” The Boston Globe, Jan. 16, 2021, https://tinyurl.com/euz7oer7.

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About the Author

Alan Greenblatt is a staff writer at Governing magazine. Previously he covered politics and government for NPR and CQ Weekly, where he won the National Press Club's Sandy Hume Award for political journalism. He graduated from San Francisco State University in 1986 and received a master's degree in English literature from the University of Virginia in 1988. His CQ Researcher reports include “The Public Health System” and “Reparations for Slavery.”

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