State Revenues Held Up Better Than Expected in 2020 Despite the Pandemic

State revenues held up better than expected in 2020, despite the devastating economic shock brought on by the coronavirus, recent reports have found.

But there is great disparity among the states, with some like Washington and Idaho doing well and others like Wyoming and Alaska reeling from the loss of revenue tied to oil and gas extraction. Other states that are heavily dependent on tourism, such as Hawaii and Nevada, have also been hit hard.

Those are among the conclusions of a pair of recent studies, one by The Pew Charitable Trusts‘ state fiscal health initiative and the other by the Federal Reserve Bank of St. Louis, that looked at overall state revenues before and after the pandemic struck in early 2020.

The Fed study noted that the 2020 recession differed sharply from the prior two recessions in 2001 and 2007-2009 in that states did not suffer the prolonged job and income losses that characterized the earlier downturns.

“An abrupt rebound in household spending in the fourth quarter, in part from the federal aid to households and businesses, has helped mitigate such revenue losses so far,” said authors Charles Gascon, a regional economist, and Jesse LaBelle, a research associate at the bank. “In fact, nearly half of states reported increases in revenue through the fourth quarter of 2020.”

The states are in line for a boost from the recently passed American Rescue Plan, which includes $195 billion to be doled out according to need. States will be able to use the money for multiple purposes, including replacing lost revenue to fund general services.

“States will first be considering using the money to provide for immediate relief of the fiscal impacts of the pandemic,” says Charlie Francis, a senior consultant at Questica, which makes budgeting software for governments and other clients. “This could include offsetting revenue reductions to balance the budget and restoring state programs that were cut during the pandemic, like cuts to K-12 public schools and programs for children and adults with developmental disabilities, among others.”

Pew’s analysis found that 19 states projected revenue to fall in the current budget year ending June 30, 13 of which estimated losses for the second fiscal year running. Taking the current and prior fiscal years together, 23 states expect their estimated revenue to be lower than it would have been had the pandemic not hit. A dozen states expect to maintain positive revenue growth for fiscal years 2020 and 2021, not accounting for inflation, but at a lower rate than originally forecast.

“Generally, revenue losses have not been as dire as feared at the pandemic’s outset,” wrote Barb Rosewicz, project director for the Pew initiative. “Still, a national projection issued by Moody’s Analytics in February predicted aggregate state government general fund revenue could fall for three consecutive years–from fiscal 2020 through fiscal 2022–with a combined revenue loss of about $100 billion.”

Looking at individual states shows the pandemic was not an equal-opportunity event. Wyoming, for example, is projecting a 23% revenue drop in its two main general operating funds, on top of large losses in fiscal 2020. There were only six active oil and gas rigs operating in Wyoming at the end of the year compared with 30 during much of 2019, Pew noted. Similar revenue declines have occurred in Alaska and New Mexico.

Meanwhile, Hawaii in March forecast a nearly 3% dip in general fund tax revenue after a 6% decline the last fiscal year. Nevada also is projecting a drop in its general fund revenue following a 5% drop in fiscal 2020 with its casinos closed due to the pandemic.

Washington faces the opposite situation with revenue growth continuing this fiscal year. Combined with last year’s increases, the state now estimates its revenue will be up 12% from pre-pandemic levels. Strong retail sales and a sizzling real estate market have powered the rise.

Along with its shorter duration, economists also have noted the 2020 recession diverged sharply from the two prior recessions of 2001 and 2007-2009 in that it struck hardest for lower-wage earners and the services sector of the economy. Higher-income earners were able to transition quickly to remote work, and online sales took the place of brick-and-mortar purchases. That enabled states with a high preponderance of tech and professional workers to continue collecting sales and income taxes. “Employment and the U.S. stock market further recovered quicker than many economists expected,” Rosewicz wrote.

“Even before the latest coronavirus relief bill, states’ recent forecasts and national projections had scaled back the size of budget shortfalls predicted early in the pandemic,” she added. “The fiscal picture improved in part because earlier rounds of federal aid and expanded unemployment benefits helped prop up state economies and tax revenue.”

Questica’s Francis says the improving economy will buy states some time. “A strong economy will give states the ability to stabilize levels of service while using less state money and more federal money from the ARP for that stabilization,” he says. “This will buy them some time so they can use American Rescue Plan money to strategize around four key areas: immediate term impact relief, economic development investment, economic and social inequality investment, and accelerating programs already in place.”

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