Life and Death in the Fiscal Vise
Note: I’m writing again after a few months of research on the politics of the COVID-19 pandemic in the US. Such work is an enterprise which, given the pace of events and the rate of change, has a dangerously short shelf-life and is necessarily preliminary. The standard caveats, and then some, apply.
In March, states rushed to impose new stay-at-home orders to slow the spread of the virus. Yet two months later, after establishing ‘gating criteria’ for reopening that were vague at best (“make the essential workforce safe”, “widespread testing”, “protect public health and safety, as well as the health of vulnerable populations”), states unsurprisingly relaxed these restrictions on economic activity, as cases continued to surge. The results of these decisions have been disastrous for public health, prompting top infectious-disease official Anthony S. Fauci to comment this week that states may have to “ seriously look at shutting down” once again.
Advising states to shut down is one thing. But states, not the federal government, are the primary sites of authority over public health. Moral suasion alone has never been, will never be, an adequate coordinating tool. What will keep states from reopening, even as risks mount?
Answering this question requires a careful look at the logic that propels states’ decision-making. From the beginning of the pandemic, partisanship has topped the list of suspects. In March, a persuasive analysis by researchers at the University of Washington highlighted the importance of partisanship as a driving factor. All else equal, they found, “Republican governors and governors from states with more Trump supporters were slower to adopt social distancing policies.” The reason, they suspected, was that Republicans had fewer electoral incentives to move swiftly, especially given partisan gaps on COVID-19 at both the elite and mass level.
The importance of partisanship or electoral considerations in states’ initial decisions to impose stay-at-home orders is beyond question. Yet in the end, all but six states adopted these measures, albeit with varying levels of stringency and with varying durations. Governors netted high approval ratings for their management of the crisis, while President Trump’s approval flagged. While public opinion on the virus may have been divided, strong actions to mitigate the spread of the virus — at least at the outset — appeared to pay dividends for Democrats and Republicans alike.
Nevertheless, and again in a bipartisan fashion, governors swiftly lifted their orders. By May, the New York Times reported that most reopening states had failed to meet even the White House’s admittedly vague gating criteria. Attributing these decisions to partisan considerations alone misses an important dimension of the story.
To see what I mean, consider the decision-making devices governors created to guide their decisions about reopening. These were glossy reopening plans, many of which were created with the help of consultancies like McKinsey. Even a casual glance at the criteria in these plans suggests that they were political instruments, designed for the purposes of stage management rather than risk mitigation. Their titles are as revealing as their contents: Restarting Delaware’s Economy; Seven Benchmarks to Reopen Commonwealth’s Economy (Kentucky); Idaho Rebounds: Our Path to Prosperity; West Virginia Strong: The Comeback. The “gating criteria” they contained provided little clarity on how officials or the public would know that it was “time” to reopen. Some states (Colorado, for example) had no gating criteria at all but “key indicators” that would reportedly inform decisions about reopening. A slide deck presented by Virginia governor Ralph Northam (D) suggested that it would move to phase one of its reopening plan: “when we see” the following:
Downward trend: Percentage of positive tests over 14 days
Downward trend: Hospitalizations over 14 days
Increased testing and tracing
Enough hospital beds & intensive care capacity
Increasing & sustainable supply of PPE
Virginia — where Democrats control both houses of the state legislature and the governorship — proceeded with its reopening plan and is now a viral hotspot.
Focusing on partisanship thus underemphasizes what states have in common: severe fiscal constraints. Unlike the federal government, states cannot create money. Most states have balanced-budget requirements and statutory spending limits. And all but a small handful of states have placed similar restrictions on local governments. Hence, economic crises tend to place states in a ‘fiscal vise,’ simultaneously gripped by both increasing demand for services and dramatic revenue shortfalls. Regardless of partisan control — and regardless of the progression of the virus itself — states will face added pressure to reopen their economies to blunt the impact of a $550 billion revenue shortfall by 2022.
As David Dayen has noted, Congress’s failure to protect states and cities from revenue loss has permitted this crisis to occur. While the state-and-local revenue shortfall is collectively projected to be about $1 trillion dollars, the CARES Act provided states with $150 billion for emergency coronavirus spending (as well as funding through other intergovernmental programs). Further, it did not allow states to use this money to make up for lost revenue. Of the 225 governmental entities eligible for the Federal Reserve’s Municipal Liquidity Facility, 97% are functionally excluded due to costly and restrictive loan terms. As my research has shown, Congress has treated state and local governments not as partners in governing but as a lobbying sector like another (and one it holds with much lower regard than many other sectors). Thus the pressures elected officials face to reopen their economy come not only from Republican voters or politicians, nor solely from state-level manufacturing associations, but from their own fiscal limitations, which Congress has failed to treat seriously.
Congress’s failure to act affects every state: most categories of state revenue have taken a hit (from state lotteries to the gas tax); states that rely heavily on revenue from tourism have also been severely impacted. Yet nationally, COVID-19 has an especially acute effect on revenue from the income tax. Between April and June, the net impact on individual income tax collections is projected to be $83 billion. (As Ronald Alt notes, we will likely see an increase in income-tax payments in July as payments originally due in April are made. Nevertheless, payments will still be significantly diminished for the first two quarters.) By contrast, the net decrease in sales tax over the same period will be $38 billion, while corporate income taxes have been estimated to decline by $24 billion.
Accentuated by congressional inaction, state fiscal constraints appear to have affected key decisions about reopening. Indeed, when Indiana announced its partial reopening, it was celebrated as an important aid to flagging state revenues. To provide a crude snapshot of these relationships at present, I constructed a multivariate logistic regression model predicting states’ current decisions (as of 7/9/20) to proceed with reopening. The results suggest that, even when controlling for partisan factors (Republican governor, Trump vote share), the current rate of cases, state population, and per capita taxable resources, states that rely more heavily on the individual income tax as a source of revenue are significantly more likely to proceed with reopening. Holding all other variables constant, a shift in states’ revenue share derived from the income tax from 5 to 10 percent is associated with a 43 percent increase in the probability of reopening.
One need not accept the results of this admittedly crude analysis, or even the emphasis on falling income tax revenues as opposed to other fiscal binds, to see the emerging pattern. States’ revenue constraints have acted as an independent source of pressure, a thumb on the scale in favor of reopening. Add in partisan and interest-group pressure in the same direction, and you have the makings of a public-health tragedy, one which will reverberate in all sorts of public institutions as fall approaches. States are unlikely to cast off their self-imposed fiscal constraints in the next few months, though if Congress continues to stall they will have to choose between unprecedented austerity or rarely-seen feats of fiscal creativity (complementary currencies are one option here). The former seems far more likely. The Fed also seems reticent to revise the terms of the MLF. What is required now is arguably the largest one-time transfer of revenue from the federal government to the states in the last century. Short of that, the message from Congress — to states, cities, and their residents — might as well be “drop dead.”
