Duane Morris Government Strategies

A Full-Service Lobbying Firm, with a National Network of Professionals, Navigating Clients through the Legislative Process, in Every State Capital

A Look at States Grappling with Budget Shortfalls in the Face of COVID-19

Digital Illustration by Alana Burman

by: Ryan J. Stevens

As the COVID-19 pandemic continues to impact all facets of everyday life, state budgets are no different.  With businesses closing and states implementing stay at home orders over the last few months, tax revenues have been dwindling for states.  With more individuals applying for unemployment compensation, that means less income tax revenue for states as well.  Further, with the federal government and states extending tax filing deadlines from April 15 to July 15, fewer taxes are being collected as some states finish the current fiscal year.

The pandemic has created uncertainty in how states are going to balance budgets with lower revenues than expected.  How badly has COVID-19 impacted the fiscal situation of states across the country?  How will states handle budget shortfalls?  Will states cut spending, increase taxes, or tap into Rainy Day Funds?

Maryland

The Comptroller of Maryland, Peter Franchot, released a report on April 10 outlining the fiscal impact that COVID-19 is having on the state.  Franchot projected a current shortfall at $2.8 billion for the final quarter of FY 2020, which ends on June 30.

Another May report lowered the impact from $2.8 billion to somewhere between $925 million and $1.1 billion.  However, the budget deficit could grow to $4 billion by 2022.

The April report highlighted the issue of unemployment in Maryland.  The week before the report was released, over 108,000 people filed new unemployment claims, a staggering 5,200% increase over the 2,090 claims filed the first week of March.  The Bureau of Revenue Estimates Director, Andrew Schaufele, stated that this would cause a 22% reduction of withholding, which could represent a monthly loss of $185 million.  The updated May report indicated that Maryland saw a growth in withholding for April, which helped lower the shortfall from the original $2.8 billion.

The Comptroller also noted in April that closing businesses resulted in the state losing 59% of sales taxes in a full month, which equates to $250 million.  Governor Larry Hogan’s emergency order to close most businesses immediately impacted sales tax revenues, which account for 25% of the entire general fund.  COVID-19  has also reduced other revenue streams, including corporate income taxes, reduced lottery sales, and reductions in court fees.

How will Maryland handle its budget deficit?  While the state will see about $4.9 billion from the CARES Act, it will not be allowed to be used for budgetary purposes.  The state had previously passed more than 650 pieces of legislation during the 2020 session and the Governor indicated opposition to signing any bills that require increased spending.

COVID-19 impacted a piece of significant reform: House Bill 1300 – the Blueprint for Maryland’s future legislation – which Governor Hogan vetoed along with dozens of other bills.  The bill was a broad education reform plan that would have increased state and local education funding on an annual basis by nearly $3.4 billion over the next decade.  In a veto letter, the Governor referenced the State Board of Revenue’s estimates that the state will lose nearly $1 billion in income tax revenue in three months due to COVID-19, which represents a 50% decrease in revenue.  In the letter, the Governor highlighted the implementation of a budget freeze, the instruction of all agencies to stop discretionary purchases to anything unrelated to COVID-19, the imposition of a hiring freeze, and the direction of the Department of Budget and Management to propose options and recommendations for budget cuts in each state agency.

Could Maryland tap into its Rainy Day Fund in addition to budgetary cuts?  Governor Hogan indicated that the state would tap into it, and perhaps even spend all of it during the current crisis.  There is currently $1.18 billion in the fund that is available to use.

New York

New York previously faced a $6 billion budget deficit before passing a $178 billion plan in early April.  That deficit was before COVID-19.  Now, the state faces even more dire financial circumstances.

Governor Andrew Cuomo expects a $13 billion budget shortfall resulting from lost tax revenue and called on Congress to give $61 billion in federal aid to New York to cover the shortfall expected from 2021-2024.  New York currently has $2.5 billion in its Rainy Day Fund after adding $250 million last year.  Even if the state dips into or spends all of it, the state will not come close to covering the projected deficit.

Governor Cuomo released the FY 2021 Enacted Budget Financial Plan, which calls for $8.18 billion in reductions of aid to localities (includes School Aid, Medicaid/Health, Higher Education, Social Services, Mental Hygiene, Transportation, etc.), $1.6 billion in state agency operations, and other savings including debt service costs of $293 million.  This all comes on the heels of revenue streams depleting for the state, which the report notes.  The report projects several revenue decreases: sales taxes at $2.4 billion, cigarette and tobacco tax collections at $64 million, motor fuel taxes at $58 million. The report also projects decreases in gambling taxes: $680 million in lottery and video lottery revenues and $63 million in gaming taxes.

How can New York look to raise revenue during the current crisis?  Some Democratic lawmakers have called for raising taxes on millionaires (which Governor Cuomo has opposed), among other measures.  One such measure, S. 8277, would establish a billionaire “mark to market” tax, taxing residents with $1 billion or more in net assets and directs the revenue into a worker bailout fund.  The sponsor of the bill has claimed this could raise $5 billion annually.

Other measures include legalizing adult-use marijuana and mobile sports betting. Governor Cuomo has included legalizing marijuana in the budget proposal for two years in a row.  The budget projects legalization to raise $300 million annually when the market becomes fully developed.  However, the Governor included $20 million revenue from legalizing marijuana in the recent budget proposal (the final budget did not include legalization).  One bill in the New York legislature to address legalizing marijuana is S. 1527C, which would “establish a new office for the regulation of cannabis, to create a regulated and taxed cannabis industry in New York, and to provide for various social and economic justice initiatives.”

Michigan

Michigan’s fiscal year ends on September 30, at which point the Michigan Senate Fiscal Agency predicted a $2.6 billion budget deficit in a May 14 Economic Outlook and Budget Review report.  The report also estimated a $3.7 billion deficit for FY 2020-21.  Governor Whitmer had previously presented the FY 2020-21 budget proposal to the Michigan Legislature in early February.  The majority of the change for the current fiscal year is related to the COVID-19 pandemic, where revenues in March appeared to be on pace for the January estimate.

The same report also highlighted Michigan’s Rainy Day Fund, known as the Counter-Cyclical Budget and Economic Stabilization Fund (BSF).  The balance in the fund is limited to 15% of the total General Fund and School Aid Fund revenue, and any balance higher than that amount is required by law to be rebated back to taxpayers.  The Legislature can appropriate and transfer funds out of the BSF to stabilize the budget under certain circumstances.  According to the Senate Fiscal Agency report, the end balance of the BSF is expected to be $1.17 million for FY 2019-20 and $1.19 million in FY 2020-21.  Will the Legislature tap into these funds to help balance the budget?  The State Budget Director recently said that the state cannot rely on the BSF to solve the problem.

How else can Michigan help balance its books?  Governor Whitmer has already taken steps, including requiring thousands of state employees to take two days of furlough per pay period through July 25, to save the state upwards of $80 million.  Furthermore, Governor Whitmer recently called on the federal government to send more aid to the states, but legislative leaders responded that the Legislature needs to solve the problem rather than wait for Congress to act.  Some lawmakers in Michigan outright oppose additional federal funding, introducing H. Res. 0267, which urges Congress not to bail out states.

Georgia

A recent report by the Georgia Budget and Policy Institute (GBPI) examined the impacts of COVID-19 on the Georgia state budget.  The report states that the FY 2020 Georgia state budget deficit will likely exceed $1 billion.  Governor Brian Kemp previously signed a mid-year budget in March that funded the state through June. The GBPI predicted that in the next fiscal year, the budget deficit could exceed $3 billion.  The $27.5 billion mid-year budget that was approved by lawmakers in March did already include 4% spending reductions proposed by the Governor.

Lawmakers have reported that Georgia’s revenue shortfall could potentially be between 12%-15%.  Lawmakers began meeting online in early May, in an effort to determine how to address a 14% target of across the board state agency cuts.

Georgia has approximately $2.7 billion in its Revenue Shortfall Reserve Fund (Rainy Day Fund). Governor Kemp already used $100 million of that to aid the COVID-19 response. Will the state dip into the fund, or even use all of it, to cover the current $1 billion deficit or next year’s projected deficit?  Or will it seek other measures to raise revenue?

Before COVID-19, two audits released indicated discrepancies (inflating the impact of the credit on the economy and film companies receiving credits they did not earn) in the financial impact of Georgia’s film tax credit program, which gives a 20% tax incentive to companies that spend a minimum of half a million in the state.  As a result, the House of Representatives introduced and passed H.B. 1037.  This bill would require every production that claims credits to be audited, as well as imposing other measures to make sure the tax break rewards productions that are beneficial to the state.  Could Georgia look at this bill and other similar bills to limit credits to help raise revenue?  Before the General Assembly suspended its session, it began debate on new limits.

The GBPI previously reported that certain tax breaks passed by the General Assembly could be between $5.9 billion and $9.8 billion.  Could the General Assembly look to rein in these tax breaks to generate additional revenue?  Time will tell.

Tobacco is one other potential revenue generator.  Currently, Georgia’s tax on cigarettes is $0.37 per pack, which is the third-lowest in the entire country.  Raising the tax to $1.87, as advocated by the American Cancer Society’s Cancer Action Network, would generate $425 million a year in revenue for the state.  The Chair of the Georgia House Ways and Means Committee, Representative Brett Harrell, supports raising the tax to $0.62, which would generate $50 million a year.  Harrell would be willing to move legislation, doing so out of the committee.

How will the federal government respond?

What can the federal government do to aid states grappling with budget deficits?  The CARES Act, which passed Congress and signed into law in late March, allocated $150 billion in aid to state, local, and tribal governments.  Each state, as a result of the CARES Act, was allocated at least $1.25 billion in assistance.  However, the Treasury Department released guidelines indicating that the funds are not allowed to be used to fill revenue shortfalls.  Maryland Governor Larry Hogan, Chair of the National Governors Association (NGA), and New York Governor Andrew Cuomo, Vice-Chair of the NGA, have called on Congress to send states $500 billion in aid to assist with budget shortfalls specifically.  Will Congress comply?


Categories: Budget & Appropriations, Congress, Politics & Elections

Tags: , , , , , , , , , , ,