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Moody's Says States Face $160B Tax Loss From COVID-19

By James Nani · April 28, 2020, 6:27 PM EDT

States could lose up to $160 billion in tax revenue in 2020 and 2021 because of the novel coronavirus pandemic, with recoveries dependent on state tax structures and the willingness to increase taxes, Moody's said Tuesday.

State tax revenue will likely decrease by about $160 billion for the 2019 to 2021 fiscal years, credit rating agency Moody's Investors Service said in a report. With measures to stop the spread of the coronavirus that causes COVID-19 hurting state economies across the country, the report said fiscal year 2021 tax revenue will fall short of 2019 collections by almost 15%.

Budgets will need significant changes, and without tax increases, revenue likely won't return to 2019 levels until 2024, Moody's said.

The specific effect on each state will depend on its economy and tax revenue structure, Moody's said, as well as the volatility of its state revenue sources and how bad the state's virus outbreak has been.

"It will take years for state revenue to return to 2019 levels without tax increases, while recovery to a level where no coronavirus crisis occurred is unlikely over a five-year horizon," said Marcia Van Wagner, a vice president at Moody's who worked as an analyst on the report.

In order not to weaken credit ratings and deal with revenue shortfalls, Van Wagner said states would need to consider support from federal aid, borrowing, dipping into state reserves, spending cuts and shifting expenses to "downstream entities," such as local governments and public universities.

In particular, the ratings agency said states that are "comfortable adjusting taxes" and are less dependent on economically volatile taxes such as personal income, capital gains, and sales and use taxes will be able to better weather the storm.

"Even with a record $115 billion in aggregate reserves as of fiscal 2019, few states would be able to cover projected tax revenue losses solely with available cash," the report said.

The volatility of each state's revenue collections varies, with the most volatile, at 40%, being Alaska because of its dependence on oil and the least volatile being Pennsylvania at 3.5%, the report said. Other states with tax volatility above the median include North Dakota, New Hampshire, Vermont, New Mexico and Utah, the report said.

Some states with moderate to high tax volatility — such as New York, Michigan, Illinois and New Hampshire — don't have the reserves to cover 25% of a potential two-year revenue gap, the report said.

States such as New York, California, Connecticut and New Jersey, which have more volatile revenue streams, could respond to shortfalls by raising taxes, the report said. New York, with an earlier end to its fiscal year than other states and facing steep tax revenue shortfalls, resisted tax increases in its budget this month, though calls for tax hikes have continued.

Between the big drop in state revenue, the contraction of the economy and an increase in spending on emergency response and health care, Republican and Democratic governors have asked the federal government for $500 billion for states, James Nash, a spokesman for the National Governors Association, told Law360.

Nash pointed to a letter the association sent to congressional leaders last week requesting $500 billion in aid to help replace lost state revenue and avoid cuts, and noted comments from governors across the country in the last few weeks who have said they're confronting tough budget seasons.

U.S. Senate Majority Leader Mitch McConnell, R-Ky., has said he wants a liability shield for businesses and health care workers in the next round of federal negotiations, while Democratic members of the House are pushing for a larger relief fund for states and cities in an interim package. Meanwhile, in a tweet Monday, Republican President Donald Trump seemed to dislike the idea of federal spending on states.

"Why should the people and taxpayers of America be bailing out poorly run states (like Illinois, as example) and cities, in all cases Democrat run and managed, when most of the other states are not looking for bailout help? I am open to discussing anything, but just asking?" Trump tweeted.

The Moody's report said that after the 2008 financial crisis, states reduced spending by about 3.8% in the 2009 fiscal year and 5.7% in the 2010 fiscal year, citing data from the National Association of State Budget Officers. But those reductions would have been much harder, Moody's said, had there been no revenue increases and other state actions.

"The potential revenue declines in the current crisis outstrip historical precedent," the report said.

The full magnitude of state losses is still not clear, according to Jared Walczak, director of state tax policy for the right-leaning Tax Foundation. But he said that just like after the Great Recession, states are likely to rely on a combination of savings, spending cuts and tax increases in response to the crisis.

"However, states should be careful about tax hikes that undercut the economic recovery, and particularly those that would make it more difficult for businesses to rehire employees once the pandemic abates," Walczak said. "Timing matters, as does choice of revenue streams."

So far, most states weren't considering tax increases to raise revenue, said Shelby Kerns, executive director of the National Association of State Budget Officers.

"Raising taxes and fees would be difficult and counter to economic recovery, given the largest rise in unemployment claims since 1967, when data began to be tracked," Kerns said. 

The offices of the White House and McConnell didn't immediately respond to requests for comment Wednesday.

The office of Senate Minority Leader Chuck Schumer, D-N.Y., didn't immediately respond to requests for comment.

The offices of House Speaker Nancy Pelosi, D-Calif., and House Minority Leader Kevin McCarthy, R-Calif., didn't immediately respond to requests for comment.

--Editing by Neil Cohen.

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