Fasten your seat belts because it is going to be a bumpy ride.
The COVID pandemic will rule the day for some time to come. We will need social distancing, masks, and increased caution. The effects of COVID will last for some time to come.
Not the least of the effects of this disaster will be a significant impact on state and local budgets, in addition to the impact made on the federal budget. The feds, however, don’t mind using deficit financing to get through crisis periods.
State and local budgets do not have as much leeway. Deficit spending is much less possible for states, thus they need to use their revenues wisely. And the COVID effect on state and local budgets has just begun to make a large impact.
Two-thirds of state income comes from income taxes and/or sales taxes. Since shops and restaurants have been either closed or have seen significantly fewer customers, there is obviously less tax income produced for states (and local governments as well).
The rise in unemployment has repercussions throughout state budgets. With unemployment spiking, income taxes are down as well.
Each percentage-point rise in the unemployment rate cuts state revenues by an estimated 4.5% an article in The Economist magazine notes. Costs to states at the same time rise.
The Center on Budget and Policy Priorities estimates that the combined state-budget shortfalls will surpass those of the great recession of 2009-11. These statistics auger poorly for Missouri, and particularly for North Missouri that has a great stake in income from local higher education institutions financed by the state.
How the state weathers this storm will be crucial for northwest Missouri and other rural areas that depend upon vigorous support including for local higher education institutions.
The federal government has reacted to the state financial crisis by financing new unemployment insurance with $110 bn; but the monies cannot be used to compensate for revenue shortfalls in the basic states budgets.
This will all mean that states will either have to curtail their budget spending or raise money through additional taxes. And you know that Missouri will not support additional taxes, so look for significant budget cuts in the next two years.
And since education is the largest area of spending by the state, that means cuts in state aide to education. Local public schools will be protected as much as possible, of course, since this is a priority for state legislators (there are public schools in each of their districts and thus public support for state aide).
Higher education surely will be a target for increased budget cuts from the state, since it is a significant percentage of the state budget and has fewer local support bases. It is estimated that nationally there may well be a $300 million plus shortfall in state budgets by 2021. So institutions should be making plans now for significant adjustments to their state support by 2021.
If you think that the COVID pandemic is hard on your day-to-day life now, wait for the full impact to come within many crucial areas of life, not the least of which is education.
Richard Fulton is an emeritus professor of political science.