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.
“The ultimate effect of the pandemic was a net positive,” said Stephen Parker, assistant city manager for the Los Angeles suburb of Upland, where sales tax revenues are soaring. “Isn’t that unbelievable? It’s just crazy to think of that.”
Upland, a city of 79,000, was representative of many cities at the outset of the pandemic. It reported an estimated loss of nearly $6.1 million in 2020 — the result of a steep but short-lived national recession and what Parker describes as a “generous” Treasury Department method for calculating losses. That figure was the median amount among more than 900 cities that reported their revenues to the department under the American Rescue Plan Act.
Upland’s financial situation turned around even before the end of 2020, Parker said. Federal COVID-19 stimulus checks played a role. So did a shift in consumer spending to goods instead of services. That lifted city revenues, Parker said, because services often are exempt from sales taxes, while goods are not.
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.
Upland, which is getting $15 million, plans to use part of its flexible spending to repave parking lots and repair hundreds of sections of sidewalks that might not otherwise have been eligible.
Federal assistance 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. A strong stock market drove up capital gains taxes. 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% 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.
