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Daily Tax Report: State

States Could Face $500 Billion Budget Shortfall, Analysis Finds (1)

May 7, 2020, 7:34 PMUpdated: May 7, 2020, 10:53 PM

States’ losses related to the Covid-19 crisis could reach $500 billion, an analysis by a University of Pennsylvania professor has found. California, meanwhile, has gone from a big surplus to a big deficit in record time. Here’s the latest on shifting state tax guidelines, deadlines, and policy to deal with the coronavirus pandemic. For Wednesday’s coverage click here. Here’s a state-by-state roadmap.

Congressional leaders still haven’t come up with a strategy for reimbursing states for losses due to the Covid-19 pandemic, but a team from the University of Pennsylvania has toted up the bill, hoping to advance negotiations for federal support.

The price tag comes to at least $500 billion for state and local revenue losses, unemployment claims and spiking demand for health services through fiscal year 2021, said Robert P. Inman, a professor of finance and economics at the Penn’s Wharton School.

The calculations, Inman emphasized Thursday, are “targeted” at the specific Covid-19 losses that will be incurred by states and municipalities over the next 12 months. He noted Senate Majority Leader Mitch McConnell (R-KY) has said the federal government won’t bail out states for earlier patterns of fiscal mismanagement.

“It’s not money to do any darn thing you would like to do; it’s targeted money for the revenue losses, the unemployment increases and health care expenses,” Inman said during a webinar sponsored by the Volcker Alliance and the Penn Institute for Urban Research. “We’re hopeful it might be the basis for a serious conversation within Congress.”

Inman said his analysis assumes a 20% drop in state income tax and sales tax revenues for the coming year, robbing the states of $275 billion. He estimated additional losses of $95 billion for university tuition payments, fees and miscellaneous taxes flowing to the states and $130 billion for pandemic-related unemployment benefits.

The price tag could go higher when health care costs are considered. Inman said Congress has already appropriated $65 billion to the states and a like amount might be necessary to cover the cost of spiking Medicaid expenditures.

Joe Torsella, Treasurer of the Commonwealth of Pennsylvania, said Congress must insure the states for their revenue losses because the emerging fiscal crisis is beyond any state’s capacity to manage without flexible support from the federal government.

“You can’t cut your way back to solvency,” Torsella said during the Volcker Alliance discussion.

Former Tennessee Gov. Bill Haslam (R) cautioned that any federal support for the states should be viewed as a short-term fix. He advised states to structure their 2021 budgets with an eye toward downstream revenue losses in 2022.

“My strong assumption is that next year’s budget will be difficult as well,” Haslam said.

Oklahoma Tax Receipts Plunge $500 Million

Oklahoma’s top finance official said Thursday that April’s gross tax receipts had fallen by more than half a billion dollars in a sign of the pandemic’s major impact on revenue.

“The state economy is clearly showing the repercussions of the novel coronavirus,” State Treasurer Randy McDaniel said in a release announcing April gross receipts totaling $1.08 billion, marking a drop of $502 million, or 32%, compared to a year ago.

Warning that historically low oil prices had yet to be factored into the revenue collection picture, the state treasurer said the pandemic’s impact was most evident in a 50% dip in gross income tax receipts owing to the postponed April 15 income tax filing deadline to July 15.

Combined sales and use tax collections also fell by nearly $45 million, or more than 9%, “indicating a pullback in consumption during April likely due to shelter-in-place policies,” McDaniel said.

California Budget Surplus Now a Memory

California is projecting a $54 billion budget deficit through June 2021 and said the unemployment rate will reach 18% this year as the pandemic and related shutdowns slam the economy of the most populous U.S. state.

The size of the shortfall, equivalent to roughly one third of the state’s annual spending, marks a rapid reversal. California in January was expecting to build up its rainy day fund to more than $18 billion and was considering new services, such as for children’s education and the homeless. Romy Varghese has the story.

(Adds section on Oklahoma revenue beginning in the 11th paragraph.)

To contact the reporters on this story: Michael J. Bologna in Chicago at mbologna@bloomberglaw.com; Paul Stinson in Austin, Texas at pstinson@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; David Jolly at djolly@bloombergtax.com

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