Budget Status Could Predict Post-COVID Future for States

The COVID-19 pandemic will have a colossal impact on states’ fiscal futures. Many state officials are already predicting that their states could run out of money without significant financial interventions. What’s less clear is exactly how states will respond.

One wrinkle in the timing of states’ response to the fiscal impact of the pandemic is whether lawmakers have already enacted the state’s budget for the coming fiscal year. 

Every state is required, either by constitution or statute, to pass a balanced budget every year, using the revenue forecast at the time the budget is enacted. States, such as Virginia or New Mexico, that passed their budgets before the pandemic hit may not be legally required to reckon immediately. Many states will likely return for a special legislative session later in the year, but they have time to evaluate the full extent of the fiscal impact. States with pre-existing biennial budgets, such as Minnesota or New Hampshire, also have more “wiggle room.” Nonetheless, some of these states may choose to act more quickly. For example, Minnesota Governor Walz (D) just released a second supplemental budget, coming only 12 days after his first supplemental budget proposal, to allocate additional funding to combat the pandemic. 

But states that have not yet adopted a fiscal year 2020-21 budget may face significant challenges requiring an immediate mix of revenue increases and spending cuts. Why? Because revenue forecasts are already being adjusted radically downward. Thus, budget processes, which in January seemed smooth and easy in a time of robust economic growth, will suddenly be very difficult, made more so by the fact that many legislatures have recessed their legislative session to slow the person-to-person spread of COVID-19.

These factors will put significant pressure on lawmakers to act, and, as we’ve noted before, high-pressure from an impending calamity can lead to dramatic policy changes. 

The map below indicates those states that have not yet reached a budget agreement for the coming fiscal year. These are the states where taxpayers are at greatest risk in the immediate term due to lawmakers’ likely need to act sooner and more aggressively to shore up revenues as part of the process of enacting a budget.

Thus far, states have taken few fiscal actions related to COVID-19. If state officials have taken any action at all, it is to extend tax filing deadlines to alleviate the burden that individuals and businesses are facing at this stage of the crisis. But in the weeks and months to come, policymakers will need to think seriously about how to balance state budgets in a time of unprecedented economic disruption and uncertainty.