'Brace for a downward spiral': Economics columnist zeroes in on a creeping financial catastrophe we're not prepared for

The coronavirus pandemic is not only a massive health crisis — it is also a massive economic crisis. Economist and long-time New York Times columnist Paul Krugman has warned that “markets are implicitly predicting not just a recession, but multiple years of economic weakness.” And similarly, journalist Catherine Rampell, this week in her Washington Post column, outlines some of the many ways in which the pandemic could inflict economic misery on state and local governments in the United States for “some time to come.”

“States are facing huge shortages — and not just of ventilators, masks and health-care personnel,” Rampell warns. “They’re about to confront enormous budget shortages too. This is the sleeper issue of the current economic crisis, and aiding states now could well be the difference between a brief recession and a prolonged depression.”

States, Rampell explains, will likely be facing a “major drop” in tax revenue — from sales taxes to income taxes.

“Among the biggest problems are the expected declines in sales tax collections, which make up about a third of state revenue,” Rampell asserts. “With millions of retail stores, restaurants and other businesses shuttered, sales on which those taxes are based have stopped. Even the early-pandemic panic-buying is unlikely to help because groceries, medications and other necessities are often exempt from sales taxes.”

At the local level, Rampell adds, a sharp decline in revenue from property taxes is another strong possibility.

“Tax money that would normally be withheld from people’s paychecks this year will also be depressed while people are out of work, suggesting revenue shortfalls will continue for a while,” Rampell notes. “Depending on how long layoffs last, they could eventually start to depress property values too — and thus, the property taxes that disproportionately pay for schools and local services. Which suggests there could be reverberating fiscal effects for years after this pandemic ends.”

Different states, according to Rampell, are likely to be hurting in different ways — and that includes states “whose economies are especially dependent on tourism” such as  Florida and Nevada as well as states with energy-driven economies like Texas and Oklahoma. And because of “stock market declines,” Rampell observes, states that are “dependent on capital gains revenue” like New York and California will “take a huge hit.”

“High-fixed-cost public transit systems everywhere will suffer as they lose rider revenue,” Rampell predicts. And because the U.S. is confronting a “public health emergency,” she writes, Americans can expect “even more demand for public services than usual.”

This week, Republicans and Democrats in Congress have been vigorously debating the elements of a huge economic stimulus package. But for state and local governments, Rampell warns, even that package might not be enough.

“Unlike the federal government, most state and local governments are legally required to balance their budgets,” Rampell explains. “Without more federal help, states and cities shouldn’t expect a swift snapback from this crisis. Instead, they should brace for a downward spiral — of service cuts, deteriorating conditions for households and businesses, and depressed economic conditions for years to come.”