As the end of the COVID-19 pandemic inches closer, state legislatures should review the policies that worked and those that failed as they chart a path forward and prepare for future crises.  States should examine how they raise revenue, plan for the future, and creatively enable and encourage workers to find new ways to earn a living.

At the beginning of the pandemic, Tax Foundation Vice President of State Projects Jared Walczak noted that consumption-based taxes provide greater stability than income-based taxes alone.  Even when income declines, he wrote, “there is only so much we can—or are willing to—cut.”  To limit revenue loss and lessen the impact on taxpayers, he suggested, states should alter their tax systems to a structure that provides increased economic stability while lessening the impact felt by taxpayers.

States must also work harder on their financial stability by developing strong reserve funds to properly prepare for future economic downturns.  In a 2019 “stress test” of the states, Moody’s Analytics found that only 28 states had enough cash on hand to withstand a moderate recession without resorting to tax increases or spending cuts.  There were 12 states were “within striking distance” of that goal, while the report described the remaining 10 as “significantly underprepared” for a moderate recession.  An April 2020 Tax Foundation report found that state rainy day funds in 2020 ranged from 109 percent of annual revenue in Wyoming to zero in Kansas.  Without strong reserves, many states were forced to rely on emergency funding from the federal government.  A substantial reserve fund, on the other hand, allows states to limit budget overruns in emergencies and decreases the need for federal assistance during periods of decline.

As states consider changes to how they raise revenue and establish stronger financial reserves, they must also adapt to the changing needs of workers.  According to a December 2020 Pew survey, 71 percent of workers who can do their work from home have chosen to do so, while 54 percent would like to continue to do so after the pandemic ends.  With this increasing shift toward remote work, states should remove barriers that inhibit the ability of workers to remotely work, like “double taxation” that charges residents more for working in a different state than their employer.  Without such onerous restrictions in place, states can attract more workers and increase their financial stability.

Another workforce change would be to make reforms to occupational licensing permanent.  In 2021, numerous states broke down barriers to work in a variety of professions, including hair care and electrical work.  As CAGW has previously observed, the permanent removal of occupational licenses “will relieve individuals of high fees and burdensome educational requirements.” States should continue to build upon the successes brought about during the pandemic remove restrictions on how people work.

The COVID-19 pandemic has shown how state governments must alter how they approach public health crises, potential financial downturns, and employee work options.  By stabilizing revenue, strengthening financial practices, and relaxing workforce regulations, states can put themselves in a stronger position to face future crises.  Although the pandemic showed that many states were ill-prepared for a crisis, their experience over the past two years provides numerous lessons and opportunities for the future.