The Fiscal Cost of COVID-19: Evidence from the States
30 Pages Posted: 15 Jun 2020 Last revised: 22 Jun 2020
Date Written: June 22, 2020
How has the COVID-19 pandemic affected state budgets? Using a quarterly panel of states between 1994 and 2019, we estimate how changes in employment affect tax revenues. We find that a one percentage point (pp) rise in employment is associated with a 1.56pp rise in total tax revenue, which is concentrated among sales taxes (a 1.19pp increase), individual income taxes (a 1.63pp increase), and corporate income taxes (a 4.13pp increase). These results are robust to a wide array of controls, such as state composition and housing price growth, and instrumental variable specifications. After estimating state-specific elasticities, and forecasting counterfactual employment within states using continued unemployment claims, we find that the average state will experience a 2.9% decline in their tax revenues (or $2 billion) and $101 billion nationally in 2012 prices, assuming a recovery that follows trends up to April. We are incorporating additional employment to account for the economic recovery.
Keywords: Budgets, COVID-19, Employment, State and Local Tax Policy
JEL Classification: E62, H24, E71, E72, J21
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