Many States Are Flying Fiscally Blind Into 2023
Even If They Wanted To, California, New York and Texas, For Example, Can’t Formulate a Fact-Based Fiscal Strategy for the Next Two Years.
Before the pandemic, one could look at a State’s finances and make arguments, one way or another, about its fiscal policy. For 99% of the population, boring stuff. However, most would agree that the accounting facts were there. That is less true.
An important tenet of free-markets is price discovery. That’s a fancy name for “how badly do people really want or need this?” When we get free money it’s easy to brush off those questions (at least, I do!).
Was it socialism that doomed The Soviet Union or was it ignoring those questions? Have we repeated the same mistake; albeit, in a different set of circumstances?
Assuming the virus fades away soon (which I expect) we’ll shift from a free-money economy to our old friend, deficit-based spending.
How did we get here? When we confronted masses of people out of work, the Federal government sent money quickly. Businesses? PPP. Families? Tax credits.
There was little effort to make sure the “right” amount of money was sent and, just as important, kept separate from state-based revenue accounting. Perhaps, even with the best intentions, there wasn’t enough time.
As I’ll go into below, huge amounts of Federal money made it into State tax collections in a way that obscures the price-discovery of what States can afford — or what they want to pay for— in taxes; or, what we might learn about our economic health through tax data.
In short, the States may be find themselves short of cash and look back with regret at squandered spending.
About a year and a half ago I became fascinated with State unemployment data. Unlike most employment data, which is survey based, unemployment insurance benefits aren’t extrapolated. They don’t survey 100 people and ask them if they’re unemployed; they count them as they apply for benefits. These charts represent real people (who have social security numbers) making initial claims and continuing with benefits.
These numbers suggest many States are woefully under-estimating the ability of their workers to pay higher taxes in the future (let alone, feel economic optimism).
In the beginning of 2020, California had about 350,000 people collecting Unemployment Benefits. A few months later that number was near 3 million. New York started with 165,000 and shot up to 2 million. Texas began with 130,00 and end up at 1.2 million. By late spring all three States were paying roughly 6.2 million people unemployment benefits.
At the time I calculated that people were not getting new jobs and leaving their 26-week (later extended) benefit period. States did not keep track of workers after these benefit period (a bugbear of mine), which would have been the rational thing to do. Politically, no one wants to give or receive bad news. That’s easy to accomplish if you make sure there’s no data to look at. That has been the guiding principle of government (politically motivated) economic statistics from the beginning.
Here are government employment survey statistics.
The U.S. Bureau of Labor does not match the experience of New York and Texas which both had 2nd spikes in unemployment at the beginning of 2021. Again, I want to point out the UI stats are counting real people. The stats above are essentially guestimates. What else but political influence can explain the data not showing an increase in unemployment at the beginning of 2021?
Do the States make their own assessments of unemployment? If they do, I can’t find any independent analysis. Instead, they use government and large public firms like Moody’s to project future employment.
As of November, 2021, the government estimates that 50% of the people, in those states, who lost their job at the beginning of the pandemic, are working again. Where they’re working, how their pay or benefits compare to where they started, no one knows.
This is where it all gets interesting; if you weren’t hanging on every word so far.
The table above shows how much each State owes in UI Benefits borrowed from the U.S. Treasury because it hadn’t saved enough. In my State, Massachusetts, they blew through $4 billion and ended up borrowing $2.6 billion.
Collectively, our three states owe around $30 billion. Texas owes nothing because it didn’t need too — mostly because they don’t pay much in UI. Further, later this year the three states will need to pay back $200 million in interest.
As I pointed out, the hard data doesn’t foot to the survey data. Does it matter if someone doesn’t want a job, or can’t get one? I favor the hard data; therefore, I believe employment hasn’t really improved for those 6 million who lost their jobs in the late winter of 2020; that is, if there is job “growth” it isn’t creating economic growth.
There are more job; not better jobs. And there’s the debt pointed out above.
How can one figure out what effect that wave of unemployment has had on State finances? The data says — I’m not joking — that the States have done much better from the pandemic than they did growing their economies prior to 2020.
Not having 4th quarter 2021 data, I’ve graphed each State using the first 3 quarters of their tax revenues for that past 3 years. As expected, each one experienced a dip in revenues during 2020, but then saw an increase in tax revenues in 2021 GREATER THAN 2019!
How is that possible!!!
We know. It was the tsunamis of Federal money washing over everything.
As much as I’d like to get into a doom and gloom about money printing (I look forward to your comments), I’ll say only this — there is no way the States can know what their fiscal situation will be in 2022 and 2023. All the Federal pandemic fiscal and monetary programs have distorted and polluted the data States use to ascertain how much to spend, borrow or tax.
As an acid check, I looked at one of the stabler forms of taxes generally not affected by the Federal monies: utilities.
Except for Texas, this data says what we expect it to say. Reduced economic activities has lowered utility usage. To me, this data also bolsters the argument that employment is not creating economic growth.
This chart also gives weight to what many are pointing out — New York is dying. A cynic would say it’s whistling in the dark as it does so.
As the aphorism goes, “you can’t manage what you can’t measure”. Uncertainty is bad for economies. In 2023 many States may regret not updating their accounting to factor in the above distortions.
Interested in your State’s tax situation? Check out Truth In Accounting.