analyzing state budgets

Fiscal Condition of States Not as Grim During Pandemic as Expected

March 11 marked the one-year anniversary of the pandemic in the United States. It also marked the starting point of most governors imposing business restrictions on non-essential services within their individual states. The economic slowdown initially raised concerns that state revenue projections would not be reached. 

There was concern that the economic slowdown would strain state budgets and create revenue shortfalls in maintaining a balanced budget. Governors and state legislatures took action to restructure their budgets to address the pandemic’s demands for additional health services and reduce expenditures in some areas, such as higher education. Many states also utilized their “rainy day” funds to make up for revenue loses.

Projected revenues from specific sectors of the economy, such as tourism, hospitality, restaurants and the entertainment industry, were certainly down because of business restrictions. However, the gravity of the virus’s impact on overall state revenues did not materialize in many states. The percentage of state revenues in a majority of states actually increased in 2020 as compared to the previous year, according to the Reason Foundation. For example, the state of California ended 2020 with a $15 billion surplus.

Higher state revenues are partially due to many states enacting legislation over the last few years for the collection of state and local sales taxes on internet transactions based on the U.S. Supreme Court’s decision in the Wayfair case. The Supreme Court ruled that a company no longer needed to have a physical presence within a state in order to collect that state’s sales tax. Online sales dramatically shifted in 2020 as malls and retail stores either closed or opened with limited capacity. In addition, many families are working from home, and spending less in stores and restaurants. This has led to increased disposable income to make online purchases.

The fiscal condition of the states will be further bolstered by the recent passage of President Joe Biden’s $1.9 trillion American Rescue Plan Act of 2021. The act provides $350 billion in additional relief to state, tribal and local governments. Specifically, state governments and the District of Columbia will receive $195.3 billion to cover expenditures incurred by December 31, 2024.

The additional federal relief will be a windfall for many states. For example, the Commonwealth of Virginia reported a $730 million revenue surplus over the course of last year. On top of this, the state will now receive an additional $3.8 billion in federal relief. The governor and state legislature should face fewer challenges in the next budget cycle with the additional funding. Every state will receive some relief from the federal government.

Although state revenues may have been better than expected during the pandemic’s economic slowdown, the same cannot necessarily be said for local governments, which have a heavy reliance on property taxes. Unlike the states, property taxes account for 30% of general revenue for local governments. 

The New York Times recently reported on the local budgetary concerns caused by empty offices buildings and their property valuations. The temporary dip in office building valuations means less property tax revenues for local governments. Local governments did receive $130 billion in federal relief from the American Rescue Plan that will be distributed through Community Development Block Grants and other government programs. These funds will assist local governments in addressing lost revenue from property taxes and other sources.

Activity within city corridors will return as business restrictions are eased and the economy is gradually reopened in 2021. Office and other commercial real estate valuations will recover and strengthen as well. As this occurs, it will be important for NAIOP and its chapters to monitor local efforts that attempt to place greater reliance on commercial property taxes to provide additional revenue to fund services.

While all levels of government have been impacted by the COVID-19 pandemic, state revenues did not decline as much as had been projected, leading to revenue surpluses. There may be fewer challenges than previously thought in passing balanced state budgets for fiscal year 2022.

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