Since the Federal government has been mostly out of action during the pandemic states and cities have taken the lead in protecting their citizens. Unfortunately, this has already led to budget shortfalls, especially in states like Illinois and California that were already struggling. States cannot issue their own currencies and many states are not allowed to issue debt forever or keep their state budgets balanced. This has created a situation where certain states may have to make some uncomfortable cuts unless Congress takes action.

Covid-19 Isn’t Cheap

In the previous $4 Trillion of stimulus, only $150 billion was allocated for states and cities to help them offset the costs of the pandemic. That’s only $3 Billion per state if distributed evenly. Much of the costs have to do with acquiring equipment for hospitals, paying healthcare workers, and setting up temporary hospitals. States are often buying PPE, testing equipment, and much more on the open market at inflated rates. Hospital systems are already collapsing under financial pressures as well. States are offsetting some of the cost but the money just isn’t where it should be. This comes at a time when sales tax and income tax revenues are falling with the economy mostly closed until it is safe to go out. Opening up the economy is no sure bet either, many businesses will never be able to come back online and that means that for states and cities, those sources of revenue are gone forever. Even regular collection of license plate fees aren’t being collected because state offices are closed. For cities, the situation is even more dire. Sales taxes make up the vast majority of city budgets alongside property taxes and with businesses closed or operating more slowly, that money simply isn’t getting to city coffers.

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State Budget Shortfalls

Unlike the federal government who can issue debt, print money, and spend at a deficit, states cannot. Many states even have balanced budget amendments to their constitutions that prevent this. This means that many states are spending money that is meant to go to other projects or budget items. This means that states will have to cancel programs, projects, and other areas of their budgets in order to make up for the shortfall. In normal times, states could raise revenue to even tell the police to write more citations (a common tactic during the Recession) but right now with the whole economy locked down, those old tricks just won’t work. States are already slashing budgets. In Washington, Governor Jay Inslee slashed $235 million in spending. This will have a direct effect on the economy moving forward. When the government stops spending, jobs both in the public and private sector dries up. Larger cities may be able to take up the slack but mid-sized cities will be deeply affected. In Dayton, Ohio, they are already looking at 2008 levels of cuts. This will extend the economic shock of Covid-19.

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Washington Gridlock

Right now, Congress is working on a larger aid package for states. However, there is already disagreement along partisan lines between the House and Senate. Republicans want to create a way for states to go bankrupt so that the debts they have incurred can be negotiated downward. This has long-term effects. If states don’t pay their bills, businesses could hesitate when doing business with state governments in the future. President Trump’s decision to let the states take the lead on this virus has created supply problems and financial problems. If the Federal government won’t take the lead on testing, equipment, or hospital funding then at least it could compensate the governments who have taken charge. President Trump has announced that there will be no more money until issues like immigration and other pet policies he has wanted action on are passed and put in place. Despite that, cities and states need money right now and they don’t have time to wait on Washington gridlock.

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Crisis in Your Town

What this means for regular people is that cuts to basic city services may be on the table for the foreseeable future until tax revenues increase to pre-Covid levels. Police, fire, garbage, and other services may be restricted to scaled back. Public health services will also be on the chopping block as well as necessary infrastructure projects. This effects every community and the crisis will only grow as the pandemic lingers on.