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State and Local Fiscal Conditions and COVID-

19: Lessons from the Great Recession and

Current Projections



Updated July 8, 2020
Federal assistance to state and local governments has been a central part of the fiscal policy discussion
surrounding the COVID-19 pandemic. Economic downturns tend to depress the tax bases of federal, state,
and local governments, and may also increase demands for certain spending programs. Unlike at the
federal level, however, most states and localities have statutory requirements to balance their budgets
every one or two years. Absent other measures, these balanced budget requirements can necessitate tax
rate increases or spending cuts that could exacerbate economic distress.

Evidence from the Great Recession

The Great Recession, which lasted from December 2007 to June 2009 as measured by the National
Bureau of Economic Research (NBER), was considered the largest U.S. economic shock since the Great
Depression, as significant disruption in the housing and financial markets generated adverse conditions
throughout the economy. At its peak, quarterly real gross domestic product (GDP) declined by 8.4% (in
the second quarter of 2008), and federal deficits averaged 9.0% of GDP from FY2009 through FY2011,
their largest values since World War II.
Trends in revenues, the portion of the budget typically most affected by recessions, may offer some
perspective on the Great Recession's effect on state and localbudgets. Figure 1 shows the actual state
and local own-source revenues in FY2008-FY2010 relative to levels consistent with FY2004-FY2007
growth trends. Relative to FY2004-FY2007 revenue trends, the cumulative combined state and local
revenue gap from FY2008 to FY2010 was $838 billion.








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