As the coronavirus pandemic — and Congress’s undersize response — wreaks havoc throughout the economy, tax receipts are cratering. This means that state and local governments are facing enormous revenue shortfalls at the exact time they are dealing with large additional demands. So far, states and localities have responded by slashing spending and jobs, with 1.5 million public-sector workers laid off by the end of June.
The federal government, which unlike most states does not have to balance its budget every year, could solve the problem tomorrow by providing fiscal relief to states and localities, like the $1 trillion provided by the HEROES Act that passed the House in May.
But regardless of whether Congress acts, states and localities can bolster their local economies and support their residents by raising taxes on those who have not been hard hit by the recession. This is not only the right thing to do from a humanitarian standpoint, it is sound economics.
Spending cuts are enormously harmful to the people who rely on government services and the public workers who lose their jobs. In a recession, cuts also damage the broader economy, causing layoffs to ripple through the community.
When you fire a teacher, you harm her family and her. But you also harm the local grocery store where she shops, and all the other people and businesses she gives money to.
Using conservative estimates, these ripple effects mean that each dollar of spending the state cuts leads to a drop of at least $1.50 in the gross domestic product, and there are reasons to believe that the drop is as much as $2.50. With state budget shortfalls forecast to approach $300 billion this fiscal year, a spending-cut-only approach to balancing state budgets will cause at least a $450 billion reduction in G.D.P.— more than 2 percent.
Tax increases, especially on high-income people who aren’t living paycheck to paycheck, are much less economically damaging, costing the economy only around 35 cents for every dollar raised. States and localities that raise taxes on the rich to increase spending will create at least $1.15 of economic activity for every dollar raised, and most likely closer to $2.15 or more.
State and local spending never bounced back from the deep cuts made during the Great Recession, with devastating consequences for the U.S. economy. Had federal assistance enabled state and local spending to recover fully, the unemployment rate would have dropped to 4.4 percent in 2013, but instead we didn’t hit that level until 2017.
These spending cuts did not just reduce G.D.P., they left core state services underfunded. Take education. Just before the pandemic, public school systems had two million more students in kindergarten through 12th grade than before the Great Recession, and 77,000 fewer employees to teach them and run their schools. As of mid-May, public-sector layoffs had already surpassed their total for the entire Great Recession. With the school year still going, more than 750,000 K-12 education employees had already lost their jobs.
This at a time when education funding should be expanding. The Trump administration’s failure to control the pandemic has made it impossible in most places to safely open schools at current funding levels, but large budget increases to support smaller class sizes, building retrofits and other innovations could make it possible for kids to attend classes in person rather than on the computer. Instead, many districts are shuttering buildings and laying off teachers and other staff members.
This will have consequences for kids, families and our economy for years to come, and it is also stymying whatever recovery is possible: One in five out-of-work adults has stopped working because of the need to supervise online learning or care for younger children.
Some worry that state residents and businesses can’t afford a tax increase during the pandemic, but the truth is that many can, and it’s easy to target them through progressive taxation. Tens of millions of workers have lost their jobs since the beginning of the Covid-19 crisis, but almost half of Americans report that their household has not lost any employment income at all, according to Census Bureau data. That figure jumps to two-thirds for households bringing home more than $200,000 per year.
The current situation is stacked on top of enormous existing inequality, with state and local tax policies that frequently ask the most of those least able to pay. The bottom 20 percent of earners pay, on average, a state and local effective tax rate more than 50 percent higher than that paid by the top one percent.
At the same time, state budget cuts fall disproportionately on those who are hardest hit by the pandemic. Black and Latino Americans have been infected with the coronavirus at three times the rate of whites, and died from the disease twice as often. They have also lost jobs and seen their incomes drop at a higher rate than white Americans, and they are disproportionately affected by public-sector layoffs.
Some will argue that states can’t raise taxes by themselves because of interstate competition, but economic evidence shows that even in boom times progressive state tax increases don’t harm state economies or lead rich people to flee. Now, with education and public health on the chopping block without higher taxes, moving to a low-tax, low-services state is likely to be still less appealing, even for the wealthy: States that institute ruthless cutbacks will prove to be far less attractive places to live.
Economic recovery will require more funding for state and local services. Some steps should be obvious: The 15 states that have not implemented Medicaid expansion, for example, could provide health insurance to millions of Americans, drawing billions of federal dollars into their local economies and over time reducing their overall spending out of local resources. All it would take is a willingness to cover 10 percent of the costs of expansion now.
Some problems will require creativity to solve. For instance, where normal schooling is unsafe, instead of laying off teachers and moving instruction online, school districts could hire more educators, repurpose empty office space and provide all students with the small, contained “learning pods” now favored by the wealthy.
Some states, and their voters, are taking bold action. Oklahoma and Missouri just voted to expand Medicaid by ballot initiative. Arizona voters will decide in November on an ambitious plan to raise more than $900 million a year for education through a 3.5 percent income tax surcharge on the top one percent of Arizonans.
The economic impact of the pandemic is daunting, and it would be better for the federal government to step in. But Americans are living through a catastrophe. They cannot afford for their state and local leaders to abdicate responsibility. States, cities and school districts must require their wealthiest residents to pay higher taxes right now.
The alternative is unacceptable: cutbacks in basic services that will weaken our social fabric and harm our potential for years to come, and a grinding recession that may last for years after the pandemic is brought under control.
Kitty Richards (@KittyRichardsDC) is a fellow at the Roosevelt Institute and strategic adviser to the Groundwork Collaborative. Joseph E. Stiglitz (@JosephEStiglitz), a university professor at Columbia University, is a 2001 recipient of the Nobel in economic science, chief economist of the Roosevelt Institute and the author of “People, Power, and Profits: Progressive Capitalism for an Age of Discontent.”
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