Moody's Analytics Projects $434 Billion Tax Shortfall Across 50 US States
Impact of COVID-19 on Consumption and Income Taxes... Public Projects Like Social Security Unavoidably Disrupted
[Asia Economy Reporter Jeong Hyunjin] Due to the impact of the novel coronavirus infection (COVID-19), U.S. state governments are facing a cash depletion crisis. It is forecasted that the tax revenue shortfall over the next three years will exceed 492 trillion won, causing significant disruptions to public projects funded by taxes, such as social security services.
According to the Wall Street Journal (WSJ) and others on the 28th (local time), Moody's Analytics estimated that, assuming no additional stimulus measures are introduced, the total budget shortfall for all U.S. state governments will reach $434 billion (approximately 492.2 trillion won) by 2022. WSJ explained that this amount is greater than last year's K-12 (kindergarten through high school) education budget and more than twice the budget related to state government public transportation infrastructure.
The budget shortfall in state governments is largely due to a decrease in tax revenue. Moody's Analytics predicted that the average annual tax revenue of the 50 U.S. states will decrease by 13% over the next two years compared to last year. The only two previous occasions when state government tax revenue declined year-over-year were in 2001, during the 9/11 attacks and the IT bubble, and in 2008, during the global financial crisis. After the financial crisis, the tax revenue decline over two years was about 9%, indicating that the COVID-19 impact on tax revenue is even more severe.
The problem is serious considering that 60% of the total taxes collected by state governments come from consumption and income taxes. This reflects the sharp increase in unemployment and significant reduction in consumption due to COVID-19. Moreover, key industries in each state are not generating profits. In Texas, Oklahoma, and Alaska, the energy industry supports state finances but is struggling due to the oil price crash. Florida, Nevada, and Hawaii, which rely on tourism as a core industry, are inevitably facing prolonged damage. Illinois, which has long suffered chronic deficits, remains in financial distress despite federal government support.
As state government finances shrink, it is becoming difficult to operate various social security systems. WSJ reported that some state government employees have been laid off or had their salaries cut, and pensions for police officers, firefighters, teachers, and public officials are also under financial pressure. According to the U.S. Bureau of Labor Statistics, state government jobs in September totaled 4.9 million, a 5% decrease from February. This is the lowest since the 2008 financial crisis. Due to state budget cuts, jobs in small local governments also decreased by 6% during the same period.
As the situation worsens, state governments are hoping for stimulus support currently being discussed in Congress. Voices urging swift action are growing as discussions stall. While there is a method to use recession contingency funds as was done when tax revenues declined in 2008, the prevailing view is that these funds will be far from sufficient. House Speaker Nancy Pelosi and the White House have yet to reach consensus on a stimulus package that includes support for state and local governments. Elizabeth Maher Muoio, New Jersey State Treasurer, said, "There is no practical model for a crisis of this magnitude," adding, "Without additional financial support, the next two years will be very difficult."
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