Do State and Local Governments Really Need $350 Billion in Aid?
February 21, 2021 Topic: Economics Region: Americas Blog Brand: Politics Tags: CoronavirusStimulusJoe BidenEconomicsNational Debt

Do State and Local Governments Really Need $350 Billion in Aid?

President Biden’s anti-coronavirus stimulus plan has faced some push back.

Democrats and the Biden administration have repeatedly pushed for the passage of the American Rescue Plan, a $1.9 trillion stimulus package that they claim will save the United States from the seething coronavirus crisis.

In efforts to swiftly pass the bill, Democrats are working to jam through the proposal via budget reconciliation, a legislative process that wouldn’t require a single Republican vote.

Economists, however, have sounded the alarm at the administration’s expensive piece of legislation, as it pumps billions of unneeded funds into the economy, likely creating long-term economic consequences that will be difficult to recover from.

A recent report from the nonpartisan Committee for a Responsible Federal Budget (CRFB) highlighted one area of concern with the new package—the amount allocated for state and local government aid.

The CRFB took a bold stance against a key Democratic priority this week, as the committee wrote that state and local entities don’t need the $500 billion outlined in President Joe Biden’s proposal—a figure that includes $350 billion for direct relief to state and local governments; $130 for public schools; and $30 billion for transit authorities—since they’ve already received more than $360 billion worth of aid from previous pandemic-related bills, according to the report.

“While the economic downturn did take a toll on state and local revenue collections, that revenue decline has largely recovered on average—with some states doing better than others—and losses to date have mostly been covered by the $360 billion of federal aid to state and local entities enacted so far,” the report said.

The report also noted that state and local revenue has “mostly recovered” amid the economic downturn due to a “robust federal response” and “a relatively strong but uneven partial economic recovery.”

The United States Census Bureau’s state and local government tax revenue data confirms the committee’s findings, as the data reveals a total state tax revenue boost of 19.6 percent in the third quarter of 2020 compared to the same period in 2019. 

Dr. Wayne Winegarden, a senior fellow in business and economics at the Pacific Research Institute, said that considering the bureau’s data and “the $360 billion already spent, all states are in a better financial position today then before the pandemic. This does not mean that difficult financial trade-offs are necessary, but these are always necessary.”

But of course, some state and local government are still struggling to survive with the impacts of the pandemic. The Urban Institute estimated that twenty-six state governments experienced a revenue decrease, while twenty-one states saw a revenue increase. States like Alaska, Hawaii, Texas and Florida saw a shortfall, due to losses in the oil and gas industries and low rates of tourism. Other states, however, like Idaho, Utah, Colorado and South Dakota actually experienced financial rewards, despite the public health crisis.

“The economic costs from the pandemic-induced shutdowns are undoubtedly still with us. But, the federal government has already allocated an unprecedented amount of money toward the crisis, including to the states, much of it has been wasted,” Winegarden said. “The best thing the federal government can do is stop wasting money on politically motivated programs that are economically unwise—the $600 checks to families based on income, not impacts from the pandemic, exemplify these types of programs. We need to focus on the public goods that the government should be providing and stop with the illusion that federal government spending is a free lunch with no consequences. The more and more we spend, the larger these consequences are becoming.”

The committee’s report outlined estimates from three different groups, all of which echo that Biden’s spending for state and local entities is too much. The Center on Budget and Policy Priorities, a group that’s been a proponent of increased state and local aid, estimated that they only need $225 billion to recover from pandemic-related revenue shortfalls. Economists at the American Enterprise Institute said only an additional $100 billion is needed, and Moody’s Analytics estimated that they need just $86 billion. 

Treasury Secretary Janet Yellen, however, insisted that if the package is passed, “we would get back to full employment next year” and if not, “the unemployment rate is going to stay elevated for years to come.” However, several economists cited in the committee’s analysis say the price of the overall package, as well as the allocated funds for state and local aid, stretch federal spending far too thin. Former Treasury Secretary Larry Summers fears the bill’s price would launch high inflation.

Winegarden also noted that too much spending could lead to severe consequences in the long-term.

“There are very large risks from too much spending,” Winegarden said. “Remember, the federal government does not create resources, it redistributes resources that are created by the private sector. This means that the federal government cannot provide one state resources without taking those resources away from residents from other states. In the current situation, such transfers threaten the vibrancy of the recovery and actually works against the stated policy goal of incentivizing a strong recovery that promotes prosperity.”

But despite these economic revelations, the House will move to pass the relief plan before the end of February, according to House Speaker Nancy Pelosi (D-Calif.).

Rachel Bucchino is a reporter at the National Interest. Her work has appeared in The Washington Post, U.S. News & World Report and The Hill.

Image: Reuters.