Red State Budgets Are Suffering The Most In This Recession

More Republican-led states are still dealing with big revenue losses thanks to the coronavirus-driven recession, even as the rest of the nation makes up ground.

Of those states suffering at least a 3% drop in revenue since the start of the pandemic in March 2020, two-thirds (eight in 12) are red states. Alaska, Florida, North Dakota and Texas are seeing some of the worst revenue losses of 9% or higher over the comparable period in 2019, according to the latest data from the Urban Institute.

Percent Change in State Tax Revenues Since the Start of COVID-19

March-December 2020 vs March-December 2019, percent change

Across the 47 states from which the institute has full data, total state tax revenues were down by $14 billion in the first ten months of the pandemic (between March and December 2020) compared to the same period a year earlier. That’s an average drop of 1.8% and is largely driven by declines in sales tax revenue.

Personal income tax revenue is now nearly flat compared with last year while sales tax revenue is down an average of 2.4%. Declines in income tax revenue were not as steep as initially forecast last spring largely because many of those who temporarily or permanently lost their jobs due to the pandemic are low-wage earners.

“Meanwhile,” the institute’s Lucy Dadayan notes in the analysis, “high earners continued to work remotely and remit tax payments or had income tax withheld with each paycheck, particularly in states with progressive income tax rates like California.”

In fact, 21 states mainly in the southeast, west and mountain west are seeing slightly higher tax revenue in the 2020 pandemic period compared with 2019. While that increase does not make up for the natural economic growth that states were projecting for 2020 before the recession hit, it’s much better than was feared.

Most state budgets start their fiscal year in July so these revenue figures in actuality have been spread out over two fiscal years. Still, a separate analysis by the Kroll Bond Rating Agency noted that state revenue losses for fiscal 2020 were originally estimated to total around $185 billion — but actually ended up being down by a total of $22 billion. What’s more, state revenue losses originally forecast over fiscal 2021 (the current budget year) and fiscal 2022 on a combined basis have now been reduced by nearly 50%.

Another factor helping budgets was the CARES Act passed in March 2020, which included direct aid for public health, schools and for other coronavirus-related expenditures. The $900 billion relief fill passed in December extends the deadline for governments to use those CARES Act funds through 2021, and there was additional aid included for things like public health, transportation and education expenses.

Currently, Congress is debating President Biden’s American Rescue Plan which includes $350 billion in direct aid to state and local governments.

Dadayan said that states must still address revenue shortfalls and increased spending needs caused by the pandemic in the coming months, including those directly related to public health. “While COVID vaccines are already rolling out,” she wrote, “there have been delays in distribution and it will take a long time for business activity to return to pre-pandemic levels, with some activities and industries facing a very slow recovery.”