SACRAMENTO — City halls and statehouses are getting a boost in their scramble for federal aid from an unexpected source: the U.S. Chamber of Commerce.
The Chamber, whose primary job is to look out for big businesses, says if help doesn’t come, states and cities will likely lay off more workers, cut services and raise taxes, deepening the economic crisis. Businesses are concerned, especially about taxes.
As state and local governments struggle with how to plug pandemic-induced budget holes, businesses see a play in helping them get aid from Congress to avoid shouldering more of the burden.
“Part of our conversation with Republicans on Capitol Hill is that ironically, if your concern is big state government, then the last thing you want to do is force states to replace one-time lost revenue with permanent tax increases,” said Neil Bradley, the U.S. Chamber’s chief policy officer, in an interview.
Federal Reserve Chair Jerome Powell this week hinted at the need for a local government lifeboat. Millions of people work for states and localities, he told the Senate Banking Committee — sectors that could be forced to make deep cuts absent more help.
“It’s certainly an area I would be looking at if I were you,” said Powell. “That’s going to weigh on the economy.”
Estimates show the deficit nationwide across state and local governments could near $1 trillion. The National League of Cities estimates lost revenue will total $360 billion for cities and counties from fiscal years 2020 to 2022, and the Center on Budget and Policy Priorities, a left-leaning think tank, estimates shortfalls across all state governments will total $615 billion during the same time period.
Without more money, officials will have to choose between missing payments on what’s owed, whether it’s debt or operating costs, or hiking taxes — even if Washington does send hundreds of billions of dollars out to state capitals and American cities.
“The sheer size of the collective city deficits knocks the wind out of you when you try to figure out how they’re going to try to balance those budgets,” said Jot Condie, president and CEO of the California Restaurant Association, who, like many business leaders, is hoping Congress steps in.
Financial analysts, including Moody’s Investors Service, have predicted that the federal government can protect local credit ratings by offering more cash assistance to state and local governments. But so far, Congress hasn’t done much to help local governments balance their budgets — even though the biggest employer in many counties nationwide is the government itself.
The public sector was a sore spot in the otherwise surprising uptick in jobs numbers in May, with a 1.5 million drop-off in local government jobs over three months, reflective of just how differently businesses are faring under Congress’s watch.
While companies are benefiting from fairly broad, unrestricted access to capital through the $670 billion in forgivable loans in the Paycheck Protection Program, governments must vie for $150 billion in CARES Act funding, restricted to costs governments incurred due to the coronavirus.
And a $500 billion short-term lending program known as the municipal liquidity facility, while seemingly large, is limited in practice. Financial analysts say the market has interpreted it as a lender of last resort, now that the central bank has detailed the terms for borrowing with interest rates above what most governments can get on the open market.
Most states are trying to hold off on tax changes until the economy rebounds or federal aid comes in, but governors are already facing political blowback for budgets attempting to fill a revenue crater without the promise of cash assistance.
In New Jersey, Republicans have threatened to sue Democratic Gov. Phil Murphy over a proposal to borrow up to $14 billion. And New York Democrats are fighting among themselves over New York City Mayor Bill de Blasio’s $7 billion borrowing request.
California and Colorado cut back on tax breaks for companies to bridge their state deficits, though Colorado’s measure was watered down after negotiations with the business lobby. On the other side of the spectrum, Louisiana’s legislature has been working on tax breaks for a variety of sectors, including oil and gas and the gaming industry.
Michael Frerichs, the elected Democratic state treasurer of Illinois, said the Fed’s emergency lending program allowed his state to borrow $1.2 billion at more favorable rates than the open market and delay budget decisions. That’s because Illinois has a credit rating hovering just above junk status.
“I think the General Assembly decided the borrowing was the way to get through this trouble period and tell the federal government, ‘Make some sort of decision on paying for states,'” said Frerichs.
Big cities like Seattle and San Francisco are pressing ahead with tax changes, some of which were set in motion before the pandemic. Case in point: Seattle council members have long been pushing for new taxes on Amazon, and some of the proceeds from a new effort would help with the city’s Covid-19 response.
In California, business interests are gearing up to fight a November property tax proposal. The statewide ballot initiative would raise taxes on many commercial properties that have had assessment limits alongside homeowners dating back to the state’s landmark 1978 property tax revolt. It is estimated to raise billions of dollars annually for schools and other government services, though polls have shown public support for the effort sinking.
Economists generally agree that cash assistance for states is appropriate and needed, given the federal government’s ability to borrow vast sums of money and the unusual nature of the pandemic-induced economic crisis. Government officials depressed economic activity to prevent hospital systems nationwide from being overwhelmed.
“The economically correct response in a situation like this is to borrow to finance current needs because we know we are poorer now than we will be in the future,” said Jesse Rothstein, a public and labor economist at UC Berkeley’s Goldman School of Public Policy. “There’s not any ambiguity that that’s the right response.”
Congress is likely to approve some level of direct aid because red states like Texas — hammered by plummeting oil prices — are suffering, said David Shulman, a senior economist at the UCLA Anderson Forecast.
Shulman added that he wouldn’t be surprised if Republican lawmakers added provisions to a spending package requiring tax deferrals or reductions for the private sector. Otherwise, any tax benefits passed down to businesses would depend heavily on lobbying, he said. “You could say,`Why do we have to lay off these three firemen so you could get a tax break?’”
One travel industry tax proposal has recently gotten traction in the White House. McClatchy reported this week that the White House was considering a $4,000 tax break for domestic travelers in the next relief package.
Tax revenue from hotel operations alone will drop by $16.8 billion nationwide in 2020, plummeting by $1.9 billion and $1.3 billion in California and New York, respectively, after the cancellation of countless vacations, work trips and conferences, according to projections in a new report by Oxford Economics released Thursday by the American Hotel & Lodging Association.
But cities’ staggering budget shortfalls have made local negotiations tough going for industry trade groups seeking tax reprieves.
The New York City Council, facing a multibillion-dollar deficit, rejected appeals from the hotel industry to defer commercial property tax payments due in July, said Vijay Dandapani, president of the Hotel Association of New York City.
“The city is really cash strapped,” said Dandapani, “and so they have not agreed to any deferral, much less a reduction.”
Many California cities are adopting placeholder budgets with “trigger cuts” that will happen absent federal aid, as Gov. Gavin Newsom initially proposed for the state budget; others are considering November sales tax measures, said Michael Coleman, a local government consultant.
Nevada State Treasurer Zach Conine, an elected Democrat, said state budget planning this year has been defined by the unknown.
“There’s green shoots, and they’re right next to dead grass, and I think people are really trying to understand what’s going to happen and I don’t think anybody has a great handle on that,” said Conine.
But Illinois Treasurer Frerichs said state legislatures can’t wait forever to find out: “It’s fairly clear if the federal government does nothing,” he said, “states are either going to have to raise taxes or cut services, fairly dramatically.”
Victoria Guida contributed to this report.