On Thursday, President Biden signed the country’s third COVID-19 stimulus package into law. Included in the massive $1.9 trillion American Rescue Plan Act are wide-ranging new measures that range from child tax credits to unemployment benefits, from stimulus checks to assistance for school reopenings. Also included is $350 billion for state and local governments. While the past year has not been as brutal on their finances as first forecast—a point Republicans made in opposing the measure—state and local governments have been stretched to the limit by the pandemic. We spoke with Linda Bilmes, the Daniel Patrick Moynihan Senior Lecturer in Public Policy and a leading expert on budgetary and public finance, about the finances of America’s state and local governments, how they can benefit from the stimulus package, and what they’re likely to do with the money.
Q: How have state and local government finances fared over the last year?
At the start of the pandemic, things looked grim for state and local governments. Moody’s Analytics estimated that the total budget shortfall facing states for fiscal years 2020-22 would reach $434 billion, which would have amounted to the worst cash crisis since the Great Depression. To deal with this, state and local governments cut basic services, laid off or furloughed 1.4 million employees, and deferred capital improvement projects.
However, the impact of the pandemic on local finances has turned out to be uneven across the country, depending on the structure and condition of the local economies. Some states fared better than others. For 28 states, especially those that rely heavily on sales taxes, tourism, and oil and gas, revenues declined steeply between April to December 2020 compared with the same period in 2019. But elsewhere the fiscal situation was less dire than predicted. Even as the pandemic hurt low-wage workers, high earners continued to work remotely and pay taxes. And the stock market rally boosted incomes and capital gains. Consequently, 22 states saw tax revenues increase during the same period, some generating a budget surplus. California, for example, is now predicting a $26 billion surplus for budget year 2020-21, according to an estimate by the California Legislative Analyst’s Office.
States also benefited from $150 billion in federal assistance provided in last year’s CARES Act, the first stimulus package, and fede