The Importance of State and Local Relief Funds in the Next Stimulus Package

State and local governments are tightening belts as their revenues take a huge hit. What does this mean for Americans, and will Congress do something about it?

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Congress still hasn’t passed another economic stimulus package despite the desperate need for one. Each Friday until they do, I’ll be covering one possible component of a future stimulus bill and explain why it’s needed.

Last week, I talked about unemployment benefits and why the CARES Act boost needs to be extended. Since then, another 1.2 million people filed UI claims. The July jobs report also came out, showing another huge addition of jobs and dip in unemployment. But it also showed that the recovery we want is becoming less likely.

This week’s topic: aid for state and local gov budgets and why it needs to be included in the next stimulus package. Be sure to file this under “Well, duh.”

States and local governments need money

As the Brookings Institute noted in March, state and local entities are on the front-lines of addressing the pandemic. They administer much needed services, fund nonprofits to help fulfill their responsibilities, oversee COVID-19 mitigation efforts.

If we really want to beat this thing and move on appropriately, these governments need to keep their heads above water. It’ll be expensive for state and local govs.

But the virus does more than hike up costs—it also takes a bite out of revenues needs to fund services. With income and sales declining dramatically, there’s less money available for states, cities, and other local bodies.

You might wonder why they can’t just operate with a deficit and pay it down in the future, like the federal governments. Here’s why: Many states, cities, and other local bodies are constitutionally obligated to pass a balanced budget.

With the economic toll continuing indefinitely, the options in lieu of federal aid are less than ideal. The Tax Foundation lays several out here for states (applicable to cities, too), but the one states and local govs will be most likely to use is cuts to services, leaving many without the support they need and putting thousands of government workers out of a job.

These governments could also use reserve (“rainy day”) funds. That’s what these funds are for, after all. However, not all states and local govs have these funds. Plus, many that do may not have enough for an economic downturn of this magnitude.

The potential long-term effects

We can expect the effects are long-term since this was the case for the Great Recession. At the time, state and local govs were forced to make similar decisions about cutting services and jobs. You don’t have to think that far back to remember how difficult a period this was.

Fast-forwarding, Pew found that states still experience lingering effects despite a decade passing. In a report that appropriately calls the post-GR recovery the “Lost Decade,” Pew shared that spending in many states was still below pre-GR levels. Plus in 2018, some states were still collecting less in tax revenue, almost 10 years after the economic downturn.

Recessions also have effects on individual earnings. People who enter the workforce during a downturn are shown to suffer from permanently lower employment rates and wages. This is especially prevalent among Millennials who entered the workforce during the GR. While this by itself is a huge concern, it could also trickle up to state and local gov revenues: lower earnings among huge portion of a community means less spending at local businesses, lower rates of homeownership (think: property taxes), stuff like that.

The effects in real time

We’re past the predictive stage of this mess. We now know with certainty that federal aid is needed.

Local governments have seen steep reductions in revenues. This has led to postponement of much-needed public works projects and steady lay-offs.

States haven’t been fairing any better. Almost all have seen significant drops in revenue compared to last year. This past March-to-May period saw 34 states experience reductions of 20% or more. Here is NPR’s representation of this:

Source: NPR.

Looking onward, forecasts for state revenues in 2021 are bleak. There is some variation, depending on which source you use (namely Center for Budget and Public Policy, Tax Foundation, Urban Institute-Brookings’ Tax Policy Center). Generally, the states altogether could see between $200 billion and $300 billion less in revenue. The higher end of this range would mean a hit to state budgets larger than any other event in history.

So what’s the move?

For the most part, state and local leaders have been lobbying hard for federal assistance. Back in April, state and local government advocacy groups made direct requests to Congress to include budget relief funds in the next stimulus package. You might remember this leading to a pointless debate about red states vs. blue states pushed by those on the right and left.

That entrenchment hasn’t improved much. In the current stimulus package negotiations, state and local aid is one of the big ticket items that remains unresolved. The White House has offered $200 billion in aid, an important development considering the President initially supported no aid at all. Still, that’s a far cry from the nearly $1 trillion Democrats seek. (It’s also less than what the National Governor’s Association requested for states alone in April, $500 billion.)

Red vs. blue aside, every state and local gov deserves direct federal assistance. As stated last week regarding the boost to unemployment, there are strong moral and economic arguments for the federal government to step in.

Congress and the White House has a moral obligation to address this. Failing to do so would mean they aren’t protecting the well-being of the public they serve. And if we want to succeed in a strictly numbers-sense, something has to be done. Several leading economists say as much. Otherwise, the strain on state and local communities will only grow worse and prevent the economic growth we desperately need.

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