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States Are in a Quandary as Taxes Evaporate and Virus Spending Soars

The ballooning costs of the coronavirus pandemic have put an unexpected strain on the finances of states, which are hurriedly diverting funds from elsewhere to fight the outbreak even as the economic shutdown squeezes their main source of revenue — taxes.

States provide most of America’s public health, education and policing services, and a lot of its highways, mass transit systems and waterworks. Now, sales taxes — the biggest source of revenue for most states — have fallen off a cliff as business activity grinds to a halt and consumers stay home.

Personal income taxes, usually states’ second-biggest revenue source, started falling in March, when millions lost their paychecks and tax withholdings stopped. April usually brings a big slug of income-tax money, but this year the filing deadlines have been postponed until July.

“This is going to be horrific for state and local finances,” said Donald J. Boyd, the head of Boyd Research, an economics and fiscal consulting firm, whose clients include states and the federal government.

Many state and local governments have already taken extraordinary measures to protect residents and keep public services running. New York lawmakers gave Gov. Andrew M. Cuomo a one-year window to unilaterally cut spending if warranted, as the state faces a shortfall of at least $10 billion in tax revenue.

In Connecticut, Gov. Ned Lamont directed an extra $35 million to the state’s nursing homes so that they could pay retention bonuses, overtime and other incentives to keep workers on the job as the health crisis worsened. Oklahoma lawmakers authorized Gov. Kevin Stitt to tap into the state’s $1 billion rainy-day fund to make up a $415 million budget gap he attributed to delayed income-tax payments.

Even if states are able to stretch their finances temporarily — by trimming budgets, appropriating funds earmarked for other purposes or passing emergency legislation, as many have done — the economic recovery is expected to be slow. That means tax revenues from tourism, oil and gas drilling, conventions and other activities are probably not going to bounce back.

“We can’t spend what we don’t have,” Mr. Cuomo told the New York Legislature this month. The state is hoping to bridge its revenue gap through a mix of federal aid, loans and cuts.

Companies are unlikely to hire back the millions of workers they have laid off until they can restart normal operations, and some businesses may fold entirely. High unemployment, low consumer demand and a wave of personal bankruptcies are likely to push up the welfare-related expenses of states — on top of their pandemic-related bills.

“It will be very hard to pay for people in nursing homes, and to pay teachers to teach kids when school resumes, and to pay police,” Mr. Boyd said, naming three services that are financed in large part by the states and provided by local governments. States, along with the federal government, typically reimburse nursing homes for patient care through Medicaid and other programs.

The governors of seven Northeastern states, including New York, said this week that they would coordinate efforts to reopen their economies as the rate of daily infections dropped; the governors of three West Coast states made a similar pact. The governors have been reacting to President Trump’s statements on Monday that he had the ultimate power to decide when to relax stay-at-home orders and other restrictions that states have ordered to slow the spread of the virus.

Last week, the National Governors Association called on Congress to provide additional fiscal assistance to states to meet budget shortfalls arising from the crisis. “In the absence of unrestricted fiscal support of at least $500 billion from the federal government, states will have to confront the prospect of significant reductions to critically important services all across this country, hampering public health, the economic recovery, and — in turn — our collective effort to get people back to work,” the association’s chairman, Gov. Larry Hogan of Maryland, and vice chairman, Mr. Cuomo, said in a statement.

No two states are being affected the same way. Some of the most drastic tax revenue losses have occurred in states like Texas, Oklahoma, Alaska and Louisiana, which rely heavily on taxing oil and gas. Oklahoma based its initial budget projections on $55-a-barrel oil; lately, the price has been less than half that. The Texas Taxpayers and Research Association estimates that for every dollar decline in the price of oil, the state loses $85 million in revenue.

“The things we thought would keep us from hitting the edge of the fiscal cliff — oil prices rebounding, production coming up dramatically — those prospects look awfully dim right now,” Pat Pitney, the Alaska Legislature’s chief budget analyst, who was budget director to former Gov. Bill Walker, recently told the Alaska Public Media news site. “None of us knows the future. But the signs are way less optimistic than they were just a few short months ago.”

Other states, like Hawaii, Nevada, New York and New Jersey, depend heavily on bringing in huge numbers of people — sun worshipers, theatergoers, gamblers, conventioneers, sports fans — and taxing their hotel rooms, tickets, restaurant meals and alcohol.

The Congressional Budget Office studied pandemics in 2006, after a devastating viral outbreak in Asia, and warned that if a similar event happened here, “industries that require interpersonal contact” would be hit the hardest, losing 80 percent of their business for several months. And in fact, last month the New York City comptroller, Scott Stringer, reported an 80 percent decline in tourism-related industries.

“We’re facing the possibility of a prolonged recession — we need to save now before it’s too late,” Mr. Stringer said in a statement last month. He called on city agencies to trim $1.4 billion in their planned spending so the money could be redirected to help “the hotel, restaurant, social service and retail workers who are bearing the brunt of this crisis.”

States borrow money from the public markets by issuing bonds, but normally for specific projects, not to fund day-to-day operations. Last week, the Federal Reserve said it would buy up to $500 billion of short-term debt from the states, the District of Columbia, and the largest cities and counties. But the Fed made clear that the new debt purchasing program was to be used primarily for bridging over a few months of low revenue, with repayment due when normalcy returns. In a term sheet, the Fed said the states could also borrow to pay interest and principal on their existing debt, and to assist smaller localities. All borrowings must be repaid within two years.

Some policy analysts said the time frame was too short, given the bleak outlook.

Thomas H. Cochran, a senior fellow at the Northeast Midwest Institute, said it would be better if the Fed made loans that could eventually be forgiven, as long as the states could show they had used the money to keep public services at pre-pandemic levels after their revenue dried up. The institute studies urban and economic issues for an 18-state region.

Such loan repayment periods should last at least three years, Mr. Cochran said, recalling the time after the financial crisis of 2008. State and local revenues fell for two consecutive years — a first in postwar history — and did not rebound until 2016. This time could be worse.

In New Jersey, Fitch Ratings said its outlook on the state’s Casino Reinvestment Development Authority had turned negative because the casinos in Atlantic City were closed. (A negative outlook means a downgrade is possible over the medium term, so that investors who want to reduce their risk can consider selling; it can also make future borrowing more expensive.) New Jersey has been using tax revenue from casinos to repay certain bonds and to help financially troubled Atlantic City.

Other states, including California, Connecticut, Massachusetts and Colorado, as well as New York, have income-tax arrangements that target high incomes and capital gains. This approach makes their revenue volatile, like the markets.

Before the pandemic, Gov. J.B. Pritzker of Illinois had called for a graduated tax, a move away from the state’s current flat income tax with the goal of taxing high earners more. A referendum was scheduled for November.

Illinois urgently needs the additional revenue. Even before the pandemic, the state owed its vendors $7.8 billion, for hospitals, health insurance, higher education and consulting services, among other things. Governor Pritzker’s plan is supposed to help the state increase its tax collection, but given the recent market rout and the wobbly economy, there may not be so much high-end income to tax.

David Yaffe-Bellany contributed reporting.

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