State Fiscal Leaders: Federal Stimulus Key to Economic Recovery

State fiscal leaders say significant economic volatility underscores uncertainty and call for direct and flexible federal stimulus funds.

The Bureau of Revenue Estimates (BRE) today released alternative fiscal guidance showing the impact that a slower-than-anticipated labor market recovery would have on official projections unanimously approved last week.

As previously reported on Conduit Street, the Board of Revenue Estimates (BRE) last week unanimously approved revenue projections of $18.7 billion for FY 2021 and $19.7 billion for FY 2022.

The FY 2021 forecast reflects a $1.4 billion increase (and a $2.1 billion increase for FY 2022) from unofficial estimates that the Board heard at a special nonvoting session in May to better understand the State’s fiscal posture and review several revenue scenarios in the midst of the COVID-19 pandemic.

“There are significant downside risks to this forecast,” said David Farkas, acting director of the Bureau of Revenue Estimates. “If there is a second-wave [of COVID-19 infections] or an inadequate federal response then we could be talking about a major write-down in December.”

The alternative forecast, compiled at the request of the BRE in recognition of unprecedented economic uncertainty, is $717.6 million lower than the official estimate for FY 2021 and $968.8 million lower for FY 2022. It assumes a stalled labor market recovery through the end of the fiscal year (June 2021) and a sluggish pace of growth for several years thereafter.

“This is yet another indication that our economy remains extremely unstable and we can’t get too excited about the positive signs we received at last week’s meeting,” said Comptroller Peter Franchot, who chairs the BRE. “If anything, the unpredictable pace of a labor market recovery underscores the need for a second federal stimulus program that would provide relief to individuals and small businesses, and prevent an economic catastrophe.”

According to a BRE press release:

The labor market is key to State revenues as it directly impacts income tax withholding and sales tax, the two largest sources of State tax revenue. The alternative forecast, like the officially adopted one, assumes passage of a federal stimulus and that any resurgence of COVID-19 cases during the fall and winter months does not eclipse the national peak set in July. If federal assistance does not materialize or if the second wave of COVID-19 is more significant, these numbers will look considerably worse.

By the time the Board of Revenue Estimates next meets in December, forecasters should have a better feel for the status of a second stimulus program, the outcome of the presidential election, the seasonal impact on the number of COVID-19 cases and several more months of labor market data to more accurately predict the pace of recovery.

Listen to the latest episode of the Conduit Street Podcast for a breakdown of the state revenue forecast, the role of federal stimulus funds in avoiding a catastrophic economic collapse, and why Maryland’s better-than-expected fiscal picture may ultimately be at the mercy of Washington D.C. politics.