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How COVID shocked state and local revenue

BEA data track the ups and downs of federal grants-in-aid and local tax revenue

State and local governments receive two major sources of revenue: transfers from the federal government and their own tax receipts. Each of these series (since 1960) is plotted in the FRED graph above in billions of dollars at a seasonally adjusted annual rate. Both series trend upward over the past 70 years, as each has grown with the U.S. economy overall.

The graph shows the pandemic’s effect on the economy. First, the CARES Act, signed into law in March 2020, allocated hundreds of billions of dollars to state and local governments to fight the pandemic. The blue line spikes in the second quarter, with the surge in federal grants-in-aid to state and local governments, such as $150 billion through the Coronavirus Relief Fund. In the next two quarters, grants-in-aid remained above their long-run trend but fell from their very high level in April through June.

Second, there was concern that state and local tax revenues might be diminished by the pandemic. The graph shows an initial dip in tax revenue during the second quarter of 2020, but tax revenue largely recovered and ended 2020 at or slightly above its long-run trend.

Note that the most recent reported data end in December 2020. So, we don’t yet see the $350 billion in grants from the American Rescue Plan Act, which was passed in March of this year.

How this graph was created: Search FRED for “state and local government grants” and click on the relevant result. From the “Edit Graph” panel, use the “Add Line” tab to search for and select “state and local government current tax receipts.”

Suggested by Bill Dupor.

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