Albin Lohr-Jones/Sipa USA via AP Images
New York Gov. Andrew Cuomo during a press conference at the Javits Center in Manhattan, March 30, 2020. Cuomo has mandated steep budget cuts to make up for a projected $10 billion shortfall in tax revenue in the state.
In the wake of the coronavirus pandemic, deficit hawks in Washington have discarded even the pretense of concern (and it was always a pretense) about limiting government spending. There is currently an unprecedented consensus that Congress must drastically increase safety-net spending, a commitment that has resulted in expanded unemployment insurance, direct cash assistance, and a $2.2 trillion rescue package with another one on the way—all in just a few weeks.
But those on the left who would celebrate an apparent victory in the long fight to move beyond austerity government should divert their attention to the forthcoming crisis in statehouses around the country. Unlike the federal government, many states are required to balance budgets, which means that they will not be able to spend their way to normalcy as the virus continues to wreck the economy. At the outset of the last recession, Republicans used their strangleholds on state legislatures to slash funding for higher education and infrastructure, depriving roads and universities of badly needed resources. Unless progressives reverse the trend this fall, the same cuts will happen all over again, ushering in a new and dangerous era of state-level austerity.
With the exception of Vermont, every state has some sort of balanced-budget requirement, a law that prohibits any gap between tax revenue and government spending. State governments can sell bonds to float debt, but these must be approved by legislatures and in some cases voters, and their usefulness depends on state bond ratings and investor appetites. If a state government receives less in tax money than it wants to spend on infrastructure and social services, it can usually only do one of two things: raise taxes or cut spending. These requirements have become more common (and more stringent) over the past few decades, as Republicans have gained a stronger presence in state government, increasing the number of statehouses they control from 11 in 1978 to 26 as of 2018.
Research has shown that balanced-budget requirements make state governments far more vulnerable to the booms and busts of the business cycle, tying the operation of crucial agencies and services to the health of the national economy. Furthermore, states that face spending deficits are far more likely to cut spending than they are to increase taxes, perhaps because the latter tends to be less popular with voters.
Balanced-budget requirements make state governments far more vulnerable to the booms and busts of the business cycle, tying the operation of crucial agencies and services to the health of the national economy.
The experience of the last two economic downturns has borne out this research. After the minor recession in 2001, states cut spending for services like food stamps and child care and took three years on average to return them to pre-recession levels. In the aftermath of the 2008 crash, the cuts were even worse: 29 states cut services to the elderly, 34 cut spending on K-12 education, and 43 cut funding to colleges and universities. On average, state spending was slashed by $100 per person, and up to $300 per person in states like Minnesota. GOP gains of hundreds of state legislative seats in 2010 and beyond reinforced this austerity drive.
These funding cuts had real consequences. They deprived low-income families of access to health care, child care, and healthy food, and further delayed the repair and construction of critical physical infrastructure like roads and bridges. Among the most dramatic impacts were felt by teachers and public schools and public universities, which have seen more than a decade of wage stagnation, resulting in teachers’ strikes last year in West Virginia, Arizona, Colorado, and more. These state-level cuts also had a deleterious effect on the national economy: Research from the Hutchins Center suggests that these cuts lowered GDP growth by about 1.2 percent between 2009 and 2012.
It took until last year for tax revenue in many states to return to pre-2008 levels, and now the economy seems headed for another deep downturn from the coronavirus pandemic. On a brighter note, many states have established or expanded rainy-day funds, stockpiling money in advance. The average content of these funds is now more than twice as high as it was in 2008, and states like California and Texas have enough money saved up to run the government for months with no revenue. But there’s no telling how severe or protracted the coming crisis will be, and with some economists predicting unemployment rates of up to 30 or 40 percent, it’s a safe bet that many states will have some very difficult math ahead of them.
Simple math would indicate the scope of the problem. In 2019, state and local governments spent $3.25 trillion, according to Govtech. A 30 percent drop in gross domestic product, which many analysts have predicted, would lead to a roughly $1 trillion shortfall. The CARES Act, Congress’s survival package passed in March, provided $150 billion for state and local governments, covering just 15 percent of the potential funding hole.
It took until last year for tax revenue in many states to return to pre-2008 levels, and now the economy seems headed for another deep downturn from the coronavirus pandemic.
This crisis is already playing out in places like New York and Kentucky, which were in the midst of budget negotiations when the economic contraction began. Even in New York, where Democrats have unified control of state government, the consequences have been dire. Gov. Andrew Cuomo took almost unilateral control of budget negotiations last week, making up for a projected $10 billion shortfall in tax revenue with steep cuts to Medicaid and the school system. In making these cuts, Cuomo overruled left-of-center legislators who had proposed raising taxes or taking the long-delayed step of legalizing marijuana, using the revenues from legal pot to soften the shock of the virus.
In Kentucky, meanwhile, lawmakers passed a one-year budget last week with no new spending, attempting to account for a projected loss of more than $300 million in tax revenue. At the outset of the negotiations, Republican legislators had said that “we have to have some very difficult conversations in coming hours and coming days,” and in the end lawmakers cast aside newly elected Democratic Gov. Andy Beshear’s proposed pay raises for teachers and education workers, many of whom have not received salary increases in more than a decade.
Since states also send billions of dollars of aid to city and county governments every year, this revenue shortfall will soon flow downward to those localities, many of which have been starved for funding since the last recession. New York City Mayor Bill de Blasio, for instance, said this week that the city government would also have to make steep cuts to spending due to a drop in state aid and local revenue. Cook County (which encompasses Chicago) Board President Toni Preckwinkle said she expected a “profound impact” on the county’s health system. Chicago and Cook County can expect a huge drop in local tax revenue from liquor and cigarette sales, and the state government will not be able to help them: Illinois had only $4 million in its rainy-day fund as of earlier this year, the least of any state in the nation.
Even in Democratic states like New York and newly blue Virginia, it’s by no means certain that legislators will have the courage or the ability to find a way around cuts. What is certain, however, is that Republicans will not take those steps. The last economic downturn gave newly empowered conservatives an excuse to cut the public services they have long maligned. An Urban Institute report found that in the aftermath of the last recession, Republicans exclusively cut spending to make up for budget deficits, never raising taxes and in some cases even lowering them amid the downturn.
The New York and Kentucky budgets, written and passed in the early throes of the pandemic, may not be reliable indicators of how states will respond in the years to come. It’s possible that the long-term impact of the virus will change state politics as it has changed federal politics, opening the door to more progressive taxation or more creative measures like the legalization of pot. Congress also has the power to step in with more fiscal support on top of the $150 billion in the CARES Act. That could forestall another decade of austerity and slow growth.
Just as advantageous for the left, though, would be a concerted effort to gain a larger foothold in statehouses where these difficult budget conversations will take place. A strong showing in down-ballot races this November could shift the window of political possibility in many states, allowing for more creative measures to generate revenue or at least preventing Republicans from making draconian cuts. Democrats were caught flat-footed after the last recession, and the GOP’s vise grip on state governments over the last decade has had disastrous consequences for public employees and low-income people. This time around, the left can’t afford to lose.
