![]() While federal aid to state and local governments this year has exceeded projected revenue losses, that aid is only one-time, and state and local governments are expected to face shortfalls for many years. Including those fees to hospitals and higher education would bring these totals to $188 billion, $189 billion, and $167 billion. We project that state and local government revenues will decline $155 billion in 2020, $167 billion in 2021, and $145 billion in 2022-about 5.5 percent, 5.7 percent, and 4.7 percent, respectively-excluding the declines in fees to hospitals and higher education. On the other hand, declines in sales and other taxes and fees are larger than historical experience would suggest, because consumption has fallen so sharply and people are staying home-meaning that revenues from taxes and fees on hotels, tolls, airports, and motor fuel have plummeted. Declines in income tax revenues are likely to be smaller than projections based on historical experience because employment losses have been unusually concentrated on low-wage workers (who pay less income taxes than higher-wage workers), the stock market has held up so far (sustaining taxes on capital gains), and the federal government has increased and expanded unemployment insurance benefits and grants to business, which will shore up taxable income. How has COVID-19 affected state and local government finances?Īs in other economic downturns, the pandemic has reduced state and local revenues, but this time is different. State and local tax revenues represent about 9 percent of GDP.Īnd unlike the federal government, state and local governments generally have to balance their operating budgets they can’t borrow to finance large deficits. This Q&A examines the fiscal impact that COVID-19 has had on state and local governments and is drawn from “ Fiscal Effects of COVID-19,” presented at the Brookings Papers on Economic Activity on September 24, 2020. Employment by state and local governments represents about 13 percent of total employment in the U.S.-more than the federal government. State and local governments are significant players in the U.S. ![]()
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