Pennsylvania facing up to $4 billion shortfall as coronavirus shutdown upends state budget

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HARRISBURG — The coronavirus outbreak could cost Pennsylvania $2.7 billion in lost tax revenue over the next 15 months, blowing a serious hole in the state budget, according to a report released Wednesday by the state’s Independent Fiscal Office.

And that’s the best-case scenario, assuming that businesses can reopen by April 27. If the statewide shutdown has to remain in place for six more weeks, the office estimates, the state would be facing a financial hit of $3.7 billion in lost revenue.

Even that grim number is “cautiously optimistic,” said Matthew Knittel, director of the fiscal office.

“Taxpayers should be prepared for a significant reduction in state resources,” Knittel said. “What we’re seeing, there’s just no precedent for it.”

Those numbers don’t take into account the effects of the $2.2 trillion federal stimulus package, which will bring roughly $50 billion to Pennsylvania through a variety of programs. The federal funding will help soften the blow, but won’t offset the revenue losses altogether, Knittel said.

Roughly 20% of the state’s workers have been temporarily laid off, he said. The resulting deluge of unemployment claims could cost the state between $4.5 billion and $6 billion by the end of the next fiscal year, the report said.

As long as Gov. Tom Wolf’s statewide shutdown order remains in place in an effort to combat the coronavirus pandemic, the tax revenues Pennsylvania counts on to balance the budget and pay for essential services will fall far short of estimates.

“This is a 10% to 12% drop in revenue capacity, and accommodating this within our recurring spending commitments is an enormous challenge,” said Sen. Pat Browne (R., Lehigh), chairman of the Senate Appropriations Committee.

"This gives us at least a snapshot of something to look at, but we’ll need to see more in terms of actual results before we can make decisions on recurring budget obligations.”

Rep. Matthew Bradford (D., Montgomery), minority chair of the House Appropriations Committee, said this year’s budget “will now be much more challenging."

“The numbers are obviously not great, but it gives us something to start looking at," he said.

The report represents the first attempt to put a number on the financial toll the outbreak will take on the state’s finances. But with so much uncertainty, the fiscal office acknowledged that its forecasts come with caveats and will likely need to be revised later in the year.

“It’s hard, when you look back, to model that appropriately,” Knittel said. “There’s no other examples of this.”

Adding to the uncertainty, he said, is that it’s not clear how quickly businesses could return to normal even once the shutdown order is lifted. People may hesitate to congregate in shops and restaurants again, and they might cut back on spending amid a national economic downturn.

The delay of the state deadline for filing personal income taxes, which was moved from April 15 to July 15, further complicates the picture, pushing billions of dollars in revenue into the next fiscal year and prolonging the uncertainty around how steep the shortfall will be.

Business closures and layoffs, which have led Pennsylvanians to file for unemployment in record numbers, mean less money coming in from sales and personal income tax, the state’s two largest sources of tax revenue.

The state Department of Revenue, which produces the official revenue estimates on which the budget is based, has not released any numbers on the fiscal impact of the coronavirus outbreak. A spokesperson said the department is “closely monitoring the impact of the pandemic.”

State tax revenues for March, which don’t fully reflect the economic impact of the virus, came in 6% short of official estimates, with Revenue Secretary C. Daniel Hassell predicting the April numbers would be even worse.

Wolf has started cutting costs, implementing a hiring freeze, laying off around 2,500 seasonal and temporary workers, and last week stopping paychecks to more than 9,000 state employees who cannot telework.

Pennsylvania is heading into the economic downturn with scant reserves, even after large deposits into the Rainy-Day Fund last year. The state has enough saved to cover just 3½ days of operating expenses, the Treasurer’s Office estimated at the time.

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