Article Summary: “Plummeting Tax Revenues Will Put Governors in Tough Budget Situations” by Raymond Scheppach
Plummeting Tax Revenues Will Put Governors in Tough Budget Situations
This article is a political view of state leadership and the Covid-19 implications in the United States by Raymond Scheppach. Firstly, Scheppach explains how governors enjoy appointment powers (Scheppach, 2020). For instance, governors appoint their commissions, personal staff, and agency executives. Moreover, governors have legislative powers. As Scheppach argues, governors highly contribute to state budgeting, which consists of high amounts of money. For instance, in 2019, the budget amounted to US$6.1 billion in one of the smallest states. Moreover, the quantity was US$311.3 billion in one of the biggest states, such as California.
As Scheppach argues, the budgetary power granted to governors exceeds the presidential fiscal capabilities (Scheppach, 2020). Any governor who succeeds in becoming the US president usually wishes to have the budgetary powers once held in the governorship. Governors have the authority to edit the budget passed by the legislature.
In the wake of Covid-19, governors play a significant role in the management and control of the disease. As Scheppach argues, disruptions of the economic infrastructures by the current Covid-19 situation may present significant state financial crisis, thus affecting their leadership role. Scheppach predicts a tremendous financial crisis synonymous with the Great Recession of 2008-2009, informed by the impacts of Covid-19 (Scheppach, 2020). The fiscal turmoil which has already started emerging will render states bankrupt, diminishing their abilities of service delivery and payments.
The overall state expenditure in the year 2019 amounted to US$2.1 trillion. Medicaid contributed 28.9% of the spending while 19.5% and 10.1% of the amount was spent in elementary and secondary education and higher education, respectively. Further, transport infrastructures spent 8.1% of the amount. The rest of the expenditure was made in the environment and economic development.
The revenue amounted to almost $2.1 trillion, 40.8% of it accruing from taxation on personal income, sales, and corporate income—further, 28.5% of the revenue collected from other taxes and special fees. Finally, 30.7% of the revenue came from the federal government, specifically from grants and contracts.
The Covid-19 has a severe challenge to governors and their states. In understanding the seriousness of the potential impact of Covid-19, the following five components are essential to note. Firstly, it will take a short period for the previously accumulated funds to diminish. Collectively, states had collected $113.2 billion, which is about 13% of the general expenditures in 2019. Unfortunately, the amount governors thought would see them through 2019 is likely to be depleted by June 2020. Already, sales tax revenues have collapsed due to lockdown and curfew and social distancing policies. The system of buying and selling goods and services has crashed; thus, this call for the utilization of rainy day resources.
Secondly, Scheppach argues that the state’s revenues will witness a downfall. According to the congregational budget office, economic activity will see a significant drop, and people will be struck by unemployment (Scheppach, 2020). Income tax revenues will drop due to unemployment. Tax collection will be significantly affected until the end of the pandemic. Moreover, Scheppach argues that the imminent financial crisis may be hit harder than the previous one.
Thirdly, Medicaid, the leading program in expenditure, will explode. The fact that Medicaid is sponsored by the state and federal government, and it is used mainly by low-income people, will see a significant influx of newcomers. Unemployment will be the lead cause of the influx into Medicaid. This situation was last witnessed during the Great Recession, which informed a flow of about six million people into Medicaid.
Fourthly, governors’ expenditures will be cut, and taxes will increase. Governors won’t be able to spend as usual due to a reduction in “money in.” Moreover, the state’s budget has to be balanced. Arguably, governors have already begun budget cuts. As Scheppach argues, raised taxes are yet to be witnessed, but it will soon be witnessed.
Finally, there will be a need for federal action. Cutting the state budget and increasing taxes will affect aggregate demand weakening the economy. Thus, the economic downturn will likely be more profound and more prolonged. States require federal action to increase relief package in Medicaid and boost the state’s ability to fill the widening gap. Further, significant funds from the federal government are vital to sustaining the economy.
Scheppach concludes that covid-19 and its associated impact will highly affect US politics. He adds that the criteria for passing the election will highly depend on the leader’s response efficiency and effectiveness in addressing the current state’s economic and public health crises.
Reference
Scheppach, R., 2020. Plummeting Tax Revenues Will Put Governors in Tough Budget Situations.
The Conversation [online]. Available at: <https://theconversation.com/plummeting-tax-revenues-will-put-governors-in-tough-budget-situations-135981> [Accessed 9 May 2020].