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State and local governments lost at least $117 billion of expected revenue early in the pandemic, according to an Associated Press analysis, but many are now awash in record amounts of money, boosted partly by federal aid.
In response to the dramatic turnaround, governors, lawmakers and local officials have proposed a surge in spending as well as a new wave of tax cuts, including one under consideration in Iowa.
“The ultimate effect of the pandemic was a net positive,” said Stephen Parker, assistant city manager for the Los Angeles suburb of Upland, a city of 79,000 that reported an estimated loss of nearly $6.1 million in 2020 but where sales tax revenues now soar. "Isn’t that unbelievable? It’s just crazy to think of that.”
The pandemic relief law championed by Democrats and signed by President Joe Biden last March included $350 billion in aid to states and local governments. The Treasury Department required states, counties and larger cities to file reports last year detailing their initial plans for the money. Those governments also were asked to estimate their losses for 2020 by comparing actual revenue to expected revenue under a Treasury formula.
Though revenue figures were left blank by nearly one-quarter of the roughly 3,700 governments that filed reports, the data nonetheless provides the most comprehensive picture yet of the financial strain on governments during the pandemic’s first year.
More than two-thirds of state and local governments reported at least some losses, ranging from a few thousand dollars in some rural counties to more than $12 billion for the state of Texas, according to the AP’s analysis. The total was $117.5 billion.
The Treasury Department last October declined an AP request to release the revenue-loss data under the federal Freedom of Information Act, saying it would be publicly available later. It recently posted the data on its website. The next reports are due Monday for some governments and April 30 for others.
The department used lost revenue to determine how much flexibility to give governments in spending the aid. Under guidelines issued last May, governments that showed a loss were free to spend an equal amount on almost any government services — including roads and other projects not otherwise allowed under the rules. A final rule released earlier this month expanded that flexibility by allowing governments to claim up to $10 million of revenue losses, even if actual losses were less.
According to a tracker kept by U.S. Rep. Cindy Axne, a Democrat representing the 3rd congressional district of Iowa, four rounds of federal coronavirus aid have pumped $16.58 billion into the state for a wide variety of grants.
Specifically for Biden’s American Rescue Plan, many counties and cities in Iowa are in the process of allocating those funds now. The funds include over $44 million for Linn County and over $29 million for Johnson County, as well as over $28 million for Cedar Rapids and over $18 million for Iowa City.
Federal assistance, however, was not the only factor that helped governments bounce back. Financial analysts also cite inflation, which pushed up prices and bolstered sales tax collections. Many consumers also had more to spend because of the stimulus checks. And an early pandemic rise in unemployment spared many higher earners, who shifted to working from home while continuing to pay income taxes.
In many places, the revenue rebound exceeded pre-pandemic levels. Total state tax revenues from last April through November rose 20 percent compared to the same period in 2019, according to an Urban Institute report released earlier this month.
For governments that already were financially strained, the pandemic deepened their losses but also resulted in a cash windfall.
The Hudson River Valley city of Poughkeepsie was rated by the New York comptroller as the state’s most financially stressed community in 2020. With a pre-pandemic deficit around $7 million and no reserves, the city quickly cut spending, sold property, froze hiring and instituted an early retirement program “in a desperate effort to close the gap” when the pandemic began, City Administrator Marc Nelson said.
The city reported a 2020 revenue loss of nearly $4.5 million under the Treasury Department’s formula. but now it's getting more than $20 million from the American Rescue Plan. Though the relief money cannot be used to wipe out the deficit, the city plans to make major improvements to parks and swimming pools, including a complete rebuild of a rundown bathhouse that has been relying on portable toilets.
"These are things that would not have been within the city’s ability to take on were it not for the COVID relief money,” Nelson said.
Though they're spending the federal aid, some Republican officials insist it was unnecessary in light of the rapidly rebounding tax revenues.
Missouri reported an estimated $900 million loss for 2020 but ended its 2021 fiscal year with a record cash balance. Republican Gov. Mike Parson recently proposed a $47 billion budget that is up nearly one-third over the current year because of surging federal and state revenues. He wants to spend more on infrastructure and public employee salaries while also saving more.
In Iowa — which joined in a lawsuit against the Biden administration over a caveat saying that the American Rescue Plan money couldn’t be used as an excuse to cut state taxes — is entertaining three different Republican plans in the Iowa Legislature for cutting taxes.
“This is a major victory for the State of Iowa and Iowa taxpayers,” said a statement last fall from Republican Gov. Kim Reynolds after a federal judge sided with the states over the unclear guidance. “The Biden Administration was trying to punish fiscally responsible states like Iowa, which has a record budget surplus, and that’s why we took legal action. With this ruling, Biden’s Administration can’t keep us from cutting taxes and I look forward to doing just that.”