NYAPRS Note: The following piece provides powerful arguments as to why Congress and the Administration must approve a major CARES 2 emergency relief package for extremely hard pressed state and local governments. While House Democrats have committed to such a package, Senate Republicans continue to resist in the face of the extreme pain Americans are feeling back home…and that will only get much worse without action.
That is why we need Senate Democratic leader Chuck Schumer to take a leading role here to see that CARES 2 is promptly enacted into law.
Congress Must Do More To Help States And Localities Respond To COVID-19
By Tracy Gordan and Richard Auxier, Tax Policy Center, March 30, 2020
…Cities and counties on the front lines of the public health crisis estimate they will spend tens of billions of dollars this year beyond what they’ve budgeted because of the emergency response.
States that normally would be putting the finishing touches on their fiscal 2021 budgets are instead ripping up those plans (and the obsolete revenue projections underlying them). Instead, they are rushing to pass emergency supplemental appropriations before adjourning legislative sessions early to avoid unnecessary coronavirus exposure. There won’t be new budget plans for quite a while.
States are also following the federal government and pushing back their tax-filing deadlines. This helps people and businesses, but because most states end their fiscal year on June 30 and normally collect a significant share of income tax revenue in April, it puts even more stress on state budgets.
But the COVID-19 budget ramifications for states and localities will go well beyond these initial costs. In fact, whenever state legislators return, they will confront a grim budget picture.
Sales taxes are plummeting due to the (absolutely correct) orders from governors and mayors to shut down businesses in an attempt to slow the virus’s spread 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 compound budget problems in energy revenue dependent states.
Also hard hit will be states with income taxes that rely disproportionately on high earners, whose stock portfolios suffered collateral damage. California’s non-partisan Legislative Analyst warned of rough seas ahead. New York’s Governor Andrew Cuomo called COVID-19’s revenue ramifications “incalculable.”
Exacerbating the problem, as in previous recessions, demands for state and local services such as Medicaid and Unemployment Insurance (UI) will spike just as revenues plummet. The most recent UI claims were literally off the charts.
This is a problem because states and localities, which spend over $3 trillion a year, are restrained by balanced budget rules that make deficit financing difficult if not impossible. Thus, without federal assistance, these governments are forced to cut services or raise taxes—both of which can harm people, businesses, and the economy when they are most vulnerable.
While most states did an admirable job building up their rainy day funds after the 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, and this percentage varies considerably across states.
It is troubling that most federal funds for states and localities in the CARES Act are primarily for costs related to the coronavirus, spending not otherwise accounted for in the states or localities most recent budgets, and expenses in this calendar year (though not before March 1).
Congress must go beyond this and directly support states and localities’ fiscal health during the economic fallout from COVID-19—just as they did during the depths of the Great Recession. And correctly timing and targeting that relief is important.
For example, it is problematic that additional Medicaid dollars in the COVID-19 phase 2 package are tied to the length of the public health emergency (as determined by the US Secretary of Health and Human Services) and not to state fiscal emergencies, which will last much longer.
Congress must also ensure the money goes to where it is most needed. In the CARES Act, much of the money is allocated on a per capita basis, which may have been most politically expedient but is unlikely to be clearly related to the disease’s health and financial impact.
And because most federal funds in CARES Act are reserved only for unbudgeted expenses, the bill inexplicably penalizes places that were the most prepared.
Given the predicted trajectory of this virus, Congress should soon contemplate an additional recovery package. Next time they should support state and local governments in ways that go well beyond covering only virus-related costs. Doing so would not only help these governments but the people, businesses, and economies that depend on them.