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Relief or Bailout? The predicament of additional funding for state and local governments.

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KEY THEMES

Politics
Health
2020 Elections

location

United States

KEY SOURCES

Brookings Institution
Tax Policy Center
Center on Budget and Policy Priorities
National Conference of State Legislatures
American Enterprise Institute
Mercatus Center
CATO Institute
Pew Trusts
Hoover Institution

WHY THIS QUESTION MATTERS: 

In the last few months, the federal government has passed a series of relief packages to address the far-reaching effects of COVID-19. These packages represent the largest federal stimulus in United States history — including the historic $2 trillion CARES Act. State and local governments are now calling for further relief from the federal government to the tune of half a trillion dollars. Is this a good idea? 

We’ll walk through the research from both sides. You decide where you land.


RELIEF TO DATE:

To date, congress has passed three phases of federal relief packages. The first was the ‘Coronavirus Preparedness and Response Supplemental Appropriations Act,’ which provided $8.3 billion in emergency funding to federal agencies to respond to the crisis. 

Second was the ‘Families First Coronavirus Response Act,’ which provided an additional $3.5 billion in funding for expanding SNAP food program, additional testing, expanding federal government’s support of Medicare, and expanding emergency family and medical leave. 

Most recently was the ‘CARES Act,’ which was by far the largest package to date including over $2.2 trillion in funds. Check out our recent article if you want the breakdown. 


To date, these packages are projected to have a colossal effect on the country’s annual deficit. Before COVID-19, the Congressional Budget Office (CBO) projected an annual deficit of about $1 trillion for 2020. Now they expect a deficit of $3.7 trillion (which is almost 18% of our GDP).

MORE RELIEF:

Looking ahead, there is a general consensus in Washington that more aid will be needed. But how should this aid be distributed? One increasingly contentious proposal is whether to provide additional stimulus to state and local governments. State and local governments already received $150 billion as part of the CARES Act. However, proponents of additional aid say that these funds did not go far enough. Let's take a look at both sides.

THE COMMON THREAD:

Both sides say that additional relief is needed to support the economy in these unprecedented times.

FIND YOUR THREAD:

Supporters of additional state funding say that support from the federal government is the only way states will be able to continue to provide vital services. Opponents say that funds should go directly to businesses and specific sectors, rather than provide opportunities for states to get bailed out of budget issues incurred before the crisis.

What do you think?

​YES, THE STATE AND LOCAL GOVERNMENTS NEED ADDITIONAL FUNDING

Reason 01

COVID-19 is not just a health crisis, it’s a far reaching economic crisis.

  • When the White House declared a national emergency, it was focused narrowly on granting greater flexibility to the Department of Health and Human Services, framing the crisis merely as a public health emergency. It is clearly that—but also much more. Brookings Institution

  • We should utilize the well-established disaster relief and recovery framework to get additional funds to state and local governments, under federal coordination. This is the process we’ve used in previous emergencies, such as Hurricane Katrina and oil spills. Brookings Institution

Reason 02

Current relief to state and local governments will not be enough.

  • While most states did an admirable job building up their rainy day funds after the 2008 Great Recession, those funds are insufficient for an economic shock this large. The median state rainy day fund is roughly 8 percent of annual expenditures. Tax Policy Center

  • While helpful, state and local government funding via the CARES Act will not be enough. Sales taxes are plummeting due to businesses shutting down and to people staying home and generally pulling back on consumption. Personal income taxes will also fall as businesses shed jobs and reduce employee hours—especially in the hospitality, tourism, and leisure industries. Falling oil prices will also compound budget problems in energy revenue dependent states. Tax Policy Center

  • Projected state budget shortfalls in fiscal year 2021 will far exceed those in the worst year of the Great Recession and will extend into 2022. In total, we project $500 billion in state shortfalls over fiscal years 2020-2022. This figure doesn’t include the shortfalls many local governments will face. Center on Budget and Policy Priorities

Reason 03

State and local governments are also employers who provide vital services.

  • State and local governments are significant players in the U.S economy. Employment by state and local governments, for example, represents about 13 percent of total employment in the U.S., and state and local tax revenues make up about 9 percent of GDP. Brookings Institution

  • More funding will be needed to keep vital services running in the wake of the COVID-19 crisis. Reductions in public spending during a recession are never a good idea, and families suffer when governments cut back on essential services.  Brookings Institution


NO, ADDITIONAL FUNDING SHOULD NOT GO TO STATE AND LOCAL GOVERNMENTS.

Reason 01

State and local governments have already received aid and more funds are going directly to businesses and hospitals.

  • The CARES Act has already provided state and local governments with federal relief via a $150 billion fund. Each state received a minimum of $1.25 billion in federal funds directed to state and local governments. National Conference of State Legislatures

     

  • Additionally, there are already federal relief packages that target specific industries, such as healthcare and education, which should relieve pressure from states. The CARES Act included $30.75 billion for k-12 and higher education, funds to augment unemployment, and health services and supplies. Center on Budget and Policy Priorities

Reason 02

States shouldn’t take advantage of the crisis to get bailed out of pre-existing budget challenges.

  • The pandemic and the ensuing economic disaster are placing enormous pressure on state finances, and there is no question that Congress will be called on to help. Some help is in order, yet some states are also clearly using this crisis opportunistically to try to back-fill longstanding obligations resulting from their own fiscal mismanagement. For example, Illinois has requested $10 billion to help fund the state pension. American Enterprise Institute

  • Numerous states have consistently experienced ongoing structural deficits, a growing reliance on debt and underfunded pensions that are unrelated to the current crisis.(GRAPH) Mercatus

  • Many states and special interests, including over 200 unions, are already “lining up for a share of the trillion-dollar bailout bills.” CATO Institute and Pew Trusts

 

Reason 03

Additional federal spending to fill state coffers may create perverse incentives.

  • Additional funding from the federal government may create incentives for state and local governments to remain shut down for a longer period of time as they are no longer as reliant on tax revenue. Meanwhile, a tax “tsunami” may be approaching to address “otherwise unsustainable state spending.” Hoover Institution

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