MUNCIE – As I pen this column, Congress is debating a follow-up to the CARES Act, aimed at mitigating the effects of a worsening economic downturn. There are many points of contention between the parties. Among the most important disagreements is that of economic support for state and local governments.

Several prominent members of Indiana’s congressional delegation have spoken out against this proposal, decrying it as a bail-out for fiscally imprudent states. They are right to be wary of this. Federal taxpayers should not bailout irresponsible cities and states. If that were the case, I would support that position. However, the economy is worse than generally believed, and the depth of fiscal distress felt by state and local governments much worse than generally understood. In fact, Indiana’s experience demonstrates why the nation needs a very large state and local tax support payment.

Indiana’s economy has thus far been less affected by COVID-19 than most states. We are manufacturing-intensive, so a fair share of joblessness in the state was temporary. That is reflected in the large reductions of unemployment reported over the last two months. However, while many businesses are able to adapt, the underlying loss of permanent jobs is alarming.

The official unemployment data suffers from its own COVID-related problems. Response rates to the phone surveys are down markedly. It is likely that the loss of responses is clustered among the newly jobless, thus understating estimates of the unemployed. Moreover, the official unemployment data don’t include the loss of over 5 million workers from the labor force in the first few weeks of the recession. Including these workers would boost the unemployment rate by more than 3 percentage points.

All told, as many as one in seven Americans who were working or actively looking for a job in January are now unemployed. We are in the early stages of the worst economic downturn since the Great Recession.

We must also acknowledge that the spread of COVID-19 is worsening. As long as the national response to COVID-19 remains inadequate and ineffective, the disease will continue to erode the economy. Though we are unlikely to see the large, one-month impact we experienced in April, the worst part of this economic downturn remains before us. That is why Indiana’s fiscal condition is such a good example of why the nation needs more stimulus aimed at state and local government.

Indiana began the recession as arguably the most fiscally secure state in the nation. We have $2.4 billion in our Rainy Day funds, or about 14% of a year’s budget. Only states with volatile taxes due to natural resource extraction held a larger share. Most local governments likewise have reserve funds, though these are smaller due to their reliance on more stable property taxes.

However, the state announced last week that state tax collections are $612 million beneath estimates. Previous estimates were unreliable since the state delayed tax filing deadlines. The new reports are alarming. Earlier this year, my colleagues and I at Ball State estimated state tax losses from a V-shaped recovery at $623 million. With the new tax data, it seems certain Indiana is on pace to exhaust nearly all of its Rainy Day funds by the end of next year. It also suggests we won’t be back to the 2019 level of tax collections until 2022 or later.

Our study also predicted a wide range of local tax impacts. About one third of local governments should expect tax collections to drop by 4%. This will affect payments well into 2022, even if the economy fully recovers by Christmas. No economists not currently employed by the Trump Administration believe a recovery is imminent. In fact, the Congressional Budget Office projects the unemployment rate to be in double digits through the end of 2021.

The CARES Act provided some funding to state and local governments to offset the extra spending on COVID-19, but it falls well short of what is needed. We must anticipate that COVID-19 costs will rise in the coming months, as the disease continues to spread. The demands on local public services, schools, universities and state government will grow, not shrink, though this downturn.

Today, the most optimistic scenarios about COVID-19 imply that Indiana, which has a large Rainy Day fund and reasonably stable tax revenue, will still experience the worst fiscal environment in our history. At the same time, the need for the types of public services provided by state and local governments has never been greater. The federal government needs to allocate at least $550 billion to state and local governments.

Members of the House and Senate are right to worry about the size of the deficit, and every penny of the state and local tax support will be borrowed against the future. To place this in context, Congress added more than $1 trillion in debt in calendar year 2019, which the president called “. . . the greatest economy in history!” That was when we should have run a surplus. Newly found fiscal rectitude in the face of the largest economic downturn since the Great Depression holds little moral or intellectual gravity. 

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University.