Why is Maine’s revenue picture better than expected?

Past recessions wreaked havoc on Maine’s state budget and the COVID recession was expected to do the same. While Maine’s current revenue forecast, finalized in early December of 2020, anticipates a $651 million shortfall for the next three years, this picture is less dire than many – including MECEP – predicted at the outset of the pandemic.

The revenue forecast is important because it determines how much lawmakers can spend in the state budget. The current forecast will be updated in May of 2021 to account for newer data on the state’s economic performance and consider other important factors like our public health outlook. So far, revenues have been coming in above the December forecast.

Maine’s situation is not unique. Across the country, many states have seen revenue forecasts improve since early predictions of sharp declines. But there is still a shortfall that threatens Maine’s COVID response and investments in the future. The state must increase revenues to ensure Maine can meet the moment and make progress on long-term needs — including many needs, such as health care, housing, education, and infrastructure that predate the COVID crisis.

Here’s what’s driving the better-than-expected revenue forecasts in Maine and elsewhere:

Federal stimulus worked

With increased and expanded unemployment benefits, direct stimulus payments, and grants for businesses to keep workers on payroll, the federal government kept money moving through communities and the economy. All told, in 2020 Maine families received $1.7 billion in unemployment benefits and $1.2 billion in stimulus checks, while Maine businesses received $2.3 billion in paycheck protection grants to help keep workers on payroll and cover basic business expenses.

This influx of predominately federal dollars has helped to stimulate demand and consumer spending throughout the state. This stimulus has been helpful in containing the COVID recession to sectors that cannot safely operate normally in the pandemic.

Job losses during the pandemic have been most acute in low-pay sectors

Maine’s economy had 48,400 fewer jobs in December 2020 than it had in February 2020. That’s nearly 18,000 more layoffs than the state had at the bottom of the Great Recession, in August 2010. But the income loss, and resulting hit to state revenue, of the last year don’t come close to the losses experienced over any two-quarter period of the Great Recession. Why?

The answer lies in the make-up of jobs lost in each economic downturn. During the pandemic, two-thirds of the jobs we’ve lost have been in the three sectors of our economy that rely most on face-to-face contact with the public:

  • Leisure and hospitality, which includes restaurants, hotels, and tourism businesses lost 20,200 jobs.
  • The health care and social assistance sector lost 6,400 jobs, which were concentrated on social service agencies including childcare centers, outpatient offices, and nursing homes.
  • Local government lost 5,900 jobs, with most of those losses in local school systems.

Most of the jobs in these sectors of the economy offer low pay compared to other sectors. That’s different than the Great Recession, which also saw massive job losses in higher-paying sectors such as construction, manufacturing, and finance, to name a few. The low-wage jobs lost during this recession make up a much smaller share of the state’s income tax base. While it offers little comfort to the tens of thousands of Mainers who are out of work during the pandemic, this dynamic lessens the impact on state revenue shortfalls relative to previous recessions.

Those at the top maintained or grew their wealth during the recession

The experience of those in the low-wage industries is mirrored, in reverse, at the top.

Despite the hardship among workers laid off during the crisis, the pandemic brought major stock market gains that increased the wealth of those with investments, who tend to come from higher-income households to begin with.

We’ve also seen a hot housing market during the crisis and job stability for high-wage jobs, both trends have helped higher-income households prosper even as Maine sustained massive job losses in low-wage sectors and continued to fight the COVID pandemic.

These gains at the top helped buoy state revenues despite unprecedented job losses at the bottom.

Maine still must act to reduce hardship and build a stronger, more resilient economy

Altogether, these result in a state tax base that has proved remarkably resilient in the middle of an unprecedented public health and economic crisis. Maine’s revenues have remained stable because wealthy households and corporations have maintained their incomes and profits in 2020. The worst version of a predicted budget crisis has not come to bare.

But Maine’s budget remains inadequate to the scale of Maine’s unmet needs and challenges, many of which existed long before COVID arrived in our state.

We cannot allow rosier-than-expected revenue projections to blind us to the economic catastrophe that is still roiling so many Maine families. Policymakers should be looking for solutions to ensure all families and communities are able to come back stronger than they were before, and to fill in the cracks in our economy that were laid bare in 2020.

Federal funding to states in the latest stimulus bill is likely to inject more than a billion dollars into Maine. Those funds should be used to address immediate hardship for families and communities most affected by the COVID recession, and to make forward-looking investments in education, health care, local services, infrastructure, and social supports for families struggling to get a hold in the economy. These investments will improve our economy and make it more resilient in the future.

That federal funding will help address near- and medium-term needs, but it’s one-time money. Maine will still face many unaddressed long-term challenges that existed before COVID. Lawmakers should still be looking for opportunities to begin addressing those needs, which will require additional revenue beyond the expected federal aid.

Now is the time, when the wealthiest and large corporations have prospered despite the global pandemic, for policymakers to roll back loopholes and tax breaks for those at the top and raise the resources Maine needs to set our state up for shared prosperity long into the future.