Stressed over the pandemic, yet prepared for what comes next

by Becki Gray

Raleigh, NC – From flattening the curve to trending, tracking, and tracing. From PPE shortages, to months–long lockdowns and millions of unemployment claims. To stretching our constitutional rights to go along with months of fear, anxiety, and uncertainty. 

photo by Alexander Dummer

Through all this one thing is certain: The COVID-19 pandemic has created a tremendous amount of stress, falling upon our medical system, families, employees, businesses large and small, and students. It affects every North Carolinian — one way or another. 

Now that we’ve flattened the curve and begun to crawl out from a medically induced shutdown, we’ll see how that stress affects our fiscal health. Businesses will reopen and try to put the pieces together, the jobless will find work again, investments will be made, and the economy will begin to recover. The quickness and strength of our recovery depend on our starting point and how well we design, commit, and execute a fiscally responsible plan to revive North Carolina’s economy. 

Moody’s Analytics looked at the stress on state governments and found “the results are equal parts shocking and encouraging.” Shocking is the amount of spending under way to address the needs and challenges of fighting the virus, at least $1.6 billion in the state so far. Encouraging is that North Carolina has set aside a significant amount of money in savings for just such a rainy day. 

State policymakers were smarter than they knew when, in the aftermath of the Great Recession, put in pro-growth policies to reduce government spending, lower taxes, remove burdensome regulations, and make good investments in education and infrastructure. Those decisions resulted in a robust economy and record low unemployment, streamlined efficient government, surplus revenue, and savings of $3.5 billion. 

The pandemic came, and the economic shutdown has dragged on for months. There’s tremendous stress on government services and resources. More than 1 million North Carolinians have filed unemployment claims, a fifth of our workforce is unemployed, 65% of restaurants have the means to survive for two months, and thousands of businesses have closed. Countless employees are furloughed or had their salaries frozen or cut. More people qualify for Medicaid, food stamps, and housing subsidies. The Division of Employment Security can barely process the number of claims, and students are thrust into online learning without the devices and infrastructure to support them. The demand overnight on the state budget is overwhelming. 

With people out of work and businesses closed, tax money isn’t coming in. We don’t know how much, but we know revenue will take a big hit. North Carolina is in better shape than some states, as we rely on more stable forms of tax revenue. But we’re already seeing reductions in sales and use tax collections.  

People aren’t buying, most tourism activities have closed, and restaurants are barely open. Sales and use tax revenue was down $17 million in March, and $96 million in April. The more economic recovery is hampered, the worse those numbers will get. 

Local governments will be under tremendous financial stress as they rely on sales tax to provide services such as water and sewer, fire protection, law enforcement, parks and recreation, and garbage collection. Sales tax revenue comprises 17% of a median county budget and 30% of a municipal budget. According to UNC School of Government blog, many local governments anticipate a 10% or greater revenue shortfall post-COVID-19, and they’ll look to spend down fund balances — if they have them — reduce capital improvements, cutting services and closing facilities to make their budgets. And yes, raising taxes, too.

Revenue from income taxes provides 49% of the funding for our state budget, and we won’t see the full impact of lower income tax revenue for a while. The filing deadline extension to July 15 was for 2019 income, well before effects from the virus. We don’t expect to see effects of income tax revenue hit until April of 2021. Overall, the legislative fiscal research staff forecasts a multibillion-dollar revenue shortfall for fiscal 2020-21.

When times were good, North Carolina put money aside. That foresight is paying off now. With money set aside, we’re better prepared than many states. If not for the $1.8 billion in hurricane recovery, we would be among the most stable of states. We certainly don’t want to spend all of it, but we have savings to stabilize the economy and launch a sound recovery.

The state will take other important steps. We must rein in spending and re-evaluate priorities.  The federal government is providing billions to support for COVID-19 recovery. We must make the money is spent effectively and isn’t used to increase dependency on a federal government that’s deeply in debt.

The worst thing we could do when families and businesses are trying to get back on their feet is ask them to pay more in taxes. Raising taxes is the last thing we want to do, and lawmakers need to find savings where they can. That may mean consolidating state–owned facilities or selling off what we don’t need or use. Taking care of added enrollment costs in Medicaid means we can’t expand Medicaid now. 

During the Great Recession, Gov. Beverly Purdue cut state government spending $2.6 billion over two years, eliminated 1,000 state government jobs, and cut 20 government programs. With significant savings, disciplined spending, and better pro-growth policies in place, lawmakers won’t have to enact such draconian measures. 

Tough days are still ahead, but if lawmakers stick with proven sound fiscal policies and sensibly manage this stress, we’ll weather this storm and be well–prepared for whatever comes next.

Becki Gray is senior vice president of the John Locke Foundation.