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INSIGHTi
State and Local Fiscal Conditions and COVID-
19: Lessons from the Great Recession and
Current Projections

Updated July 8, 2020
Federal assistance to state and local governments has been a central part of the fiscal policy discussion
surrounding the COVID-19 pandemic. Economic downturns tend to depress the tax bases of federal, state,
and local governments, and may also increase demands for certain spending programs. Unlike at the
federal level, however, most states and localities have statutory requirements to balance their budgets
every one or two years. Absent other measures, these balanced budget requirements can necessitate tax
rate increases or spending cuts that could exacerbate economic distress.
Evidence from the Great Recession
The Great Recession, which lasted from December 2007 to June 2009 as measured by the National
Bureau of Economic Research (NBER), was considered the largest U.S. economic shock since the Great
Depression, as significant disruption in the housing and financial markets generated adverse conditions
throughout the economy. At its peak, quarterly real gross domestic product (GDP) declined by 8.4% (in
the second quarter of 2008), and federal deficits averaged 9.0% of GDP from FY2009 through FY2011,
their largest values since World War II.
Trends in revenues, the portion of the budget typical y most affected by recessions, may offer some
perspective on the Great Recession’s effect on state and local budgets. Figure 1 shows the actual state
and local own-source revenues in FY2008-FY2010 relative to levels consistent with FY2004-FY2007
growth trends. Relative to FY2004-FY2007 revenue trends, the cumulative combined state and local
revenue gap from FY2008 to FY2010 was $838 bil ion.
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Figure 1. Actual and Projected State and Local Own-Source Revenues, 2004-2010

Source: U.S. Census Bureau, Annual Survey of State & Local Finances, 2004-2010.
Notes: State and local revenues are own-source revenues, which exclude transfers from other governments. Shaded area
indicates recession as measured by the NBER.
Cumulative declines in revenues from trend levels were larger for state governments ($520 bil ion, 62%
of the total) than for local governments ($319 bil ion, 38% of the total). This effect was partly due to
larger state budgets prior to the Great Recession. But it was also due to declines in consumption taxes—a
major source of revenue for many states—that are more sensitive to economic downturns. That local
revenues were steadier despite a greater reliance on property taxes (46% of own-source revenues in
FY2004-FY2010, versus 1% for states) during a recession with especial y high housing market disruption
tends to suggest a relative insensitivity of property taxes to business cycle effects.
Projections of Effects from COVID-19
Projections of the economic effects associated with the COVID-19 crisis have suggested declines in
activity larger than the experience in the Great Recession: the Congressional Budget Office projected that
real GDP would decline by 11% in the second quarter of FY2020. Business closures and social distancing
measures are expected to have particularly strong effects on retail businesses, restaurants, and other types
of service consumption.
The Federation of Tax Administrators has estimated near-term effects on state revenues through the
remainder of the fiscal year (general y ending June 30, 2020). This study estimated a decline in state
revenues of $152 bil ion between April and June. Some of that shortfal is from delayed payments due to
late tax filing. Adjusting for the shortfal would yield a decline of $91 bil ion from April through July. The
largest source of revenue shortfal s from April through June is from individual income taxes ($83 bil ion),
followed by $38 bil ion in sales tax revenue, $24 bil ion in corporate revenue, and $5 bil ion in motor fuel
taxes. The study estimates states have about $90 bil ion in rainy day funds.
Moody’s Analytics has estimated shortfal s for states through FY2021 (ending June 30, 2021) from
revenue declines and increased Medicaid payments of $158 bil ion to $203 bil ion, depending on the
severity of the recession. These amounts are estimated to be 17.9% to 23.0% of general fund budgets,
with the majority (14.8% to 19.5% of general fund budgets) due to revenue shortfal s. This study also


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indicates that states with the largest shortfal s are those with volatile sources of revenue (severance taxes
on oil or very progressive income taxes) or with industries that are most affected (tourism, finance, and
energy). The states with the largest relative shortfal s (i.e., as a share of their general budgets) are Alaska,
Louisiana, and North Dakota. States are general y wel prepared for a normal setback with rainy day
funds, but most do not have sufficient reserves to address a crisis of the current magnitude. States with the
largest relative shortfal s net of reserves are Louisiana, New Jersey, and New York. States wil also
increase direct spending due to the demands of COVID-19 (estimated at $150 bil ion in the analysis),
offset by funds from already enacted federal legislation—$35 bil ion from the Families First Coronavirus
Response Act (P.L. 116-127) and $110 bil ion from the Coronavirus Aid, Relief, and Economic Security
(CARES) Act (P.L. 116-136).
The Center on Budget Policies and Priorities has estimated effects for states through the following fiscal
year (FY2022). It estimates total costs at $500 bil ion, with $360 bil ion remaining after rainy day funds
and federal aid are taken into account, but not including additional costs states wil incur from combatting
COVID-19. It also asserts that local governments (who receive about a third of funds from state
governments), territories, and tribes wil need assistance.
The National League of Cities has projected a revenue shortfal of $134 bil ion for 2020 and $360 bil ion
for 2020-2022 for local governments.
The Upjohn Institute projects a revenue shortfal for the second quarter of $127 bil ion for state
governments and $62 bil ion for local governments; through 2021, these amounts are $644 bil ion and
$315 bil ion.
The Urban Institute has estimated a revenue loss for the states of $200 bil ion through FY2021 (general y
ending on June 30, 2021).
Recent Federal Activity
The federal government has already enacted some measures to address state and local fiscal conditions.
The Coronavirus Relief Fund, established by the CARES Act, enacted on March 27, 2020, provided $150
bil ion in direct federal payments to state and local governments, with roughly 20% distributed to large
local governments and the remaining 80% disbursed at the discretion of state governments. The CARES
Act also created a Municipal Lending Facility that can provide up to $500 bil ion in direct financing for
state and local debt, though access is restricted to large localities and states and such debt is often not
included in operating budgets. Among the active legislative proposals that would provide further direct
state and local assistance, the HEROES Act (H.R. 6800), which passed the House on May 15, would
direct a total of $915 bil ion in payments within one year of enactment ($540 bil ion to states, territories,
and tribes, and $375 bil ion to localities).
Author Information

Grant A. Driessen
Jane G. Gravelle
Analyst in Public Finance
Senior Specialist in Economic Policy





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