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States Face Multiyear Revenue Decline, NASBO Says

Posted on Sep. 11, 2020

The COVID-19 pandemic has caused most states to end the fiscal year with a decline in general funds for the first time since the Great Recession, according to the National Association of State Budget Officers (NASBO).

Before the crisis, states were projecting average general fund revenue growth of 3 percent for fiscal 2020; however, preliminary data shows revenues instead decreased by 3 percent, leading to a 6 percent shortfall on average, according to NASBO Executive Director Shelby Kerns.

“This initial decline is only the beginning of what is projected to be a multi-year revenue challenge facing states with the potential to dampen the economic recovery,” Kerns said in a September 8 blog post. “As states continue to experience high unemployment rates and lower consumption levels, the trends seen in the fourth quarter of fiscal 2020 are expected to further depress state revenues in fiscal 2021 and beyond.”

Because most states have balanced budget requirements, they have responded by cutting spending, using reserves, or adopting other one-time measures to address the shortfalls, Kerns said. 

Kerns also noted that some states ended fiscal 2020 with general fund revenues slightly up over the previous year but still had to make budget cuts or tap into reserves because they fell short of projected tax collections. 

Also, most states changed their tax filing and payment deadlines after federal deadlines were pushed back from April 15 to July 15, resulting in revenues from fiscal 2020 being pushed into fiscal 2021 in 19 states, according to Kerns

Of those 19 states, 17 were able to report “preliminary or estimated amounts for those deferrals,” Kerns continued, noting that accounting for those filings in 2020 means "revenue comparisons improve slightly" but are still troubling. “After adjusting fiscal 2020 revenues to include the deferred amounts, total general fund revenues declined 1.6 percent compared to fiscal 2019, with personal income taxes declining 1.1 percent and corporate income taxes declining 6.8 percent,” she said. 

“Deeper cuts will be necessary in fiscal 2021 and 2022 as budget gaps grow wider due to an expected continued decline in revenues and rising expenditure pressures from the public health crisis, economic downturn, inflation, and population growth,” she continued. 

Kerns said her analysis doesn't show the full picture of revenue losses facing states, because it looks only at general fund revenues and doesn't account for other hard-hit revenue sources, such as gas taxes and other program user fees that are "typically less vulnerable to the economic cycle."

Brian Sigritz, director of state fiscal studies for NASBO, told Tax Notes September 9 that state revenues were still growing in fiscal 2020 and state tax returns filed this year were based on the 2019 economy.

“We do expect things to get worse before they get better, and we are expecting greater revenue shortfalls in fiscal 2021,” Sigritz said.

NASBO has urged Congress and President Trump for direct federal aid to states, in addition to what was provided in the federal Coronavirus Aid, Relief, and Economic Security Act. State and local aid has been a major sticking point in negotiations over the next federal economic aid package.

Sigritz said additional federal aid would likely help mitigate cuts to K–12 education, public safety, healthcare, and infrastructure.

Without the additional aid, Kerns said, “states will be forced to make deeper cuts to services and spending, as well as turn to tax increases, creating a drag on economic growth at a time when the nation’s economy is attempting to recover.”

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