State revenues not as bad as expected; federal debt headed off the charts

By: Emily Makings
12:00 pm
September 29, 2020

Washington isn’t the only state in which the recession’s impact to revenues is now expected to be not as bad as initially feared. Pew reports that Colorado, Michigan, and New Jersey are expecting higher revenues than previously forecast. Bloomberg adds California and Georgia to that list. According to Bloomberg,

The figures are an early sign that the worst economic collapse since World War II may not decimate governments’ revenues as badly as some feared, potentially reducing the scale of budget cuts and tax increases that would exert a drag on the nation’s recovery. It’s also providing comfort to investors in the $3.9 trillion municipal-bond market who had anticipated that Congress would come through with hundreds of billions of dollars in aid, a prospect that is seen as increasingly unlikely until at least after the November election.

“There is no impending existential fiscal crisis that states are facing,” said Ty Schoback, a senior municipal analyst at Columbia Threadneedle Investments. “That being said, we know from past recessions, states and locals experience a lagged effect on their tax revenues. So it’s not to say they’re in the clear as budget challenges will certainly persist.”

Additionally, Moody’s is now forecasting state shortfalls of $450 billion—down from an earlier estimate of $500 billion.

Meanwhile, the Congressional Budget Office (CBO) estimates that federal debt will jump to 98 percent of gross domestic product (GDP) at the end of 2020, driven by the pandemic response and recession. (Debt was 35 percent of GDP in 2007, 70 percent of GDP in 2012, and 79 percent of GDP in 2019.) By 2050, debt is estimated to reach 195 percent of GDP. The sobering chart below is from the CBO report. These numbers do not assume passage of another federal coronavirus relief bill.

Given the new debt estimates, Howard Gleckman of the Tax Policy Center (a joint venture of the Urban Institute and Brookings Institution) expects that “in the medium term, federal taxes are going to rise as the nation is forced to address an ever-growing national debt.” Such tax increases, if they come to pass, would be on top of already increasing state and local taxes in Washington.

Categories: Budget , Tax Policy.
Tags: COVID-19