Economic disruptions caused by COVID-19 hit most states hard. Governors shutdown their economies, leading to losses of revenue through the second quarter of 2020. Considering that most states require balanced budgets, tough choices had to be made in state legislatures as lawmakers were deciding spending priorities.
Congress has allocated more than $360 billion since March 2020, according to the Committee for a Responsible Federal Budget’s COVID Money Tracker. Although the money was allocated to specific programs, states were allowed access to the Coronavirus Relief Fund (CRF).
Passed as part of the CARES Act, the CRF allowed states access to money to help pay for expenses related to COVID-19. States couldn’t use the money to replace revenue lost because of the pandemic. The CRF was funded to the tune of $150 billion. According to the Congressional Research Service, only 52 percent of the money had been disbursed through September 2020.
This week, Congress will consider the $1.92 trillion American Rescue Plan Act, which is the product of the reconciliation recommendations required under S.Con.Res. 5. The recommendations from the House Oversight and Government Reform Committee allocate $350 billion to state, local, and tribal governments.
|Direct to States and DC
|States Based on Total Unemployed Workers
|Direct to Counties
|Direct to Municipalities of At Least 50,000 Residents
|Direct to Municipalities of Fewer than 50,000 Residents
|Direct to Tribal Governments
|Direct to Territories
But do the states need $350 billion from Congress? Sure, revenues decline initially, but the revenue losses weren’t as great as feared. Chris Edwards of the Cato Institute notes that revenues to state and local governments actually went up in 2020. “After revenues dipped in the second quarter, they bounced back strongly in the third and fourth quarters,” Edwards writes. “Personal income and property tax revenues were up for the year, while sales tax revenues were down.”
State and local governments certainly saw revenues decline, but the amount of funding Congress is doling out in the American Rescue Plan Act is far too much. Moreover, there’s nothing in the legislation that encourages states to keep their economies open. One could argue that reconciliation wouldn’t allow strings attached, but the Byrd rule does allow for “terms and conditions” in reconciliation legislation.
More likely than not, Democrats just want to bailout state and local governments, without any strings attached. At some point, the spending we’ve seen over the past year is going to catch up to Congress. Monetary policy goes only so far before there’s a correction for the fiscal profligacy.