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Coronavirus resurgence threatens U.S. states' revenue gains

CHICAGO, Nov 13 (Reuters) - After a few months of improved tax collections, U.S. states’ revenues could fall again as the coronavirus resurges across the nation and negotiations over additional federal economic aid remain at an impasse.

Since fiscal 2021 began for most states on July 1, revenue performance for some has defied dire projections or even surpassed pre-pandemic monthly collections as a drop in virus cases during the summer and fiscal stimulus measures perked up the battered economy.

With huge revenue losses still expected due to the pandemic, some state credit ratings are under pressure, resulting in recent downgrades for New York and New Jersey, while Illinois risks falling into junk.

“If the latest wave of COVID-19 cases grows in the winter, economic conditions worsen, and Congress is unable to pass another aid package, it would all negatively impact state tax collections,” said Brian Sigritz, director of state fiscal studies at the National Association of State Budget Officers (NASBO).

Total state tax revenue, which fell 25.8% in the April-through-June period, was up 1.1% in August and 2.8% in September, according to Lucy Dadayan, senior research associate at the Urban Institute.

For states dependent on energy production like Alaska, tourism like Hawaii, or sales taxes like Texas, revenue was lower in August and September, she said.

A three-month delay in the income tax filing deadline pushed a big chunk of revenue from April to July for states that levy the tax, and 19 states applied the payments to their fiscal 2021 budgets, according to NASBO.

Erica MacKellar, principal of the National Conference of State Legislatures’ (NCSL) Fiscal Affairs Program, said improved revenue shrank projected deficits in Connecticut and Wyoming, while Oregon revised its revenue forecast up by $2 billion and October tax collections in Kansas were 7.9% higher than the same month in 2019.

But she cautioned that for most states experiencing better-than-expected revenue, it was not enough to prevent significant shortfalls, particularly if increasing virus cases lead again to business shutdowns.

“I think we’ll see many states need to make budget cuts or raise revenues to shore up their budgets in the next legislative session,” she said during an NCSL webinar on Thursday.

Illinois Governor J.B. Pritzker warned of “painful” spending cuts to deal with a projected $3.9 billion deficit after voters rejected a constitutional amendment that would have allowed the state to tax high-earning residents more.

New Jersey boosted its revenue outlook by $398 million last week, but noted that positive collection trends “are assumed to be reversed during the winter months as consumers and taxpayers become more cautious given ongoing economic uncertainty related to the pandemic.”

The state is scheduled to sell up to $4.29 billion of emergency bonds next week to fill a revenue gap. (Reporting by Karen Pierog; editing by Alden Bentley and Jonathan Oatis)