Congress Must Act to Prevent State Budget Cuts from Dragging Economy Further Down

By Jason Bailey
April 20, 2020

Kentucky has taken necessary and appropriate actions to protect health and save lives during the COVID-19 pandemic. As we also address the economic fallout from the crisis, we must do more to prevent harm to Kentucky’s public investments from cratering tax receipts and rising public costs. Without much larger federal financial assistance, the state will be forced to make dramatic budget cuts that will hurt communities and slow an eventual economic recovery.

A recent Goldman Sachs forecast predicted that U. S. gross domestic product will shrink 34% in the second quarter of the year, which translates to over 250,000 jobs lost in Kentucky by the summer and a state unemployment rate of 16% — a level unprecedented in modern times. Actual early numbers are worse than that — the state has processed 395,410 unemployment claims in just the last 4 weeks.

Kentucky’s resources were already tight before the virus, but the bottom will drop from revenues in the coming months. As the state budget director has noted, the fall in spending and wages associated with the pandemic will drastically reduce sales and income tax receipts, which make up 77% of our General Fund. Along with revenue declines, expenditures will increase as state agencies directly combat COVID-19 and as more people qualify for Medicaid due to the loss of jobs and income. Medicaid will also be a major payer of COVID-19 treatment costs since it covers 1.3 million Kentuckians already, many of whom are at risk of serious illness from the disease.

Kentucky is especially unprepared for the shortfall that is coming, in part due to a paltry rainy day fund. As a share of the budget, the fund today holds only 10% of what the median state had set aside back in 2018. According to an economic “stress testing” analysis by Moody’s Analytics, Kentucky ranks 48th among states when it comes to rainy day fund preparedness.

Adding to our risk is an unwillingness to raise meaningful new state revenue this legislative session, with the final tax bill that passed generating only $5 million. In contrast, during the Great Recession the General Assembly raised tobacco and alcohol taxes by over $150 million to help cushion the blow. The state is also phasing in tax cuts from 2018 and 2019 for banks and corporations — cuts that already meant the worst revenue growth projections in 25 years.

While federal policymakers have provided some fiscal relief to state and local governments, Kentucky and other states need much more in order to avoid spending cuts that will harm families, destabilize communities and deepen the recession. The new forecasts suggest the economic loss from the COVID-19 crisis will likely be worse than the lowest point in the Great Recession. Experts at the Center on Budget and Policy Priorities agree with the National Governors Association that states need another round of aid at least three times larger than was provided in the recent federal relief bills.

Additional aid must also be designed to continue automatically until the economy shows evidence it has recovered. We don’t know how long social distancing will remain necessary. It’s likely that even when restrictions are lifted, the economy will remain weak as some businesses are unable to reopen, Kentuckians face debts that were deferred during the crisis and uncertainty about the virus persists.

We must learn a lesson from history. During the Great Recession, the federal government provided over $3 billion to Kentucky’s budget — much more than what coronavirus assistance has brought in today’s dollars — yet that aid was inadequate and ended too early. The resulting state budget cuts hampered economic recovery for years.

There are clear tools the federal government can use to avoid the same mistake, including another sizeable increase in the federal match for Medicaid costs and flexible grants to states.

Unlike the federal government, states can’t print money and they face constraints from balanced budget requirements. The ball is in Congress’ court.

Our well-being now and prospects for recovery in the future depend on its actions.

This column was posted in The Kentucky New Era on April 16, 2020 and The State Journal on April 22, 2020.