A third of the $3 trillion Democratic coronavirus aid package the House passed in May boosted funding for state, local, and tribal governments that have lost tax revenue during the coronavirus outbreak.
The nearly $1 trillion in aid sought by Democrats is a central sticking point in a weekslong partisan stalemate over the next coronavirus spending package.
But the steady reopening of economies across the country, coupled with an earlier $150 billion boost in funding from the federal government, could be slowing the revenue loss in state and local governments and weakening the argument for a new, big bailout that most Republicans already oppose.
Data released last month by the Bureau of Economic Analysis showed only a slight dip in state and local tax revenue. It indicated that a significant boost in federal aid earlier this year offset the losses.
“State and local governments have already received far more federal cash than their reduction in tax revenues from the recession,” Chris Edwards, director of tax policy studies at the Cato Institute, told the Washington Examiner. “In the second quarter of 2020, state-local tax revenues were down just $13 billion from the first quarter, yet the states had already received $192 billion in federal aid.”
In July, Senate Republicans introduced a $1 trillion federal aid package to help the nation recover from the coronavirus outbreak. The bill excluded state and local bailout funds central to the HEROES Act that House Democrats passed in May.
Many Republicans said that they oppose providing another large aid package for the states because the money may be unnecessary and could get used to bail out mismanaged and financially insolvent pension plans or backfill budget shortfalls unrelated to the coronavirus outbreak.
“Democrats think they smell an opening they have wanted for years to make Uncle Sam bail out decades of mismanagement and broken policies in places like New York, New Jersey, and California,” Senate Majority Leader Mitch McConnell said in August.
The Kentucky Republican accused Democrats of trying to force Congress to pass “colossal” funding to the states unrelated to needs created by the coronavirus.
The Democratic proposal may be excessive, some studies suggest.
The nonpartisan Tax Foundation analysis of the more than $1 trillion in state, local, and tribal resources provided in the HEROES Act found the amount “is significantly larger than existing estimates of state and local revenue losses — not just through next year, but for the full five years anticipated as necessary for government revenues to recover in real terms.”
A Wall Street Journal analysis released last week suggests that states may need even less help than anticipated earlier in the pandemic, thanks in part to the slow reopening of economies throughout the country.
A monthly revenue report showed single-digit drops in tax revenue in many states, not the predicted double-digit disasters that governors warned would result in mass layoffs of police, teachers, and firefighters.
States also benefited from low interest rates for borrowing money and a relatively robust real estate market.
The Wall Street Journal analysis found that blue states with more authoritarian and more prolonged lockdowns have suffered more significant revenue losses.
The staunchest GOP opponents to a new round of federal aid to state and local governments point out that the bulk of the last round of support remains unspent.
By the end of July, states had used less than 25% of the $150 billion in aid Congress passed in March.
The Treasury Department’s Aug. 24 update shows states have still not spent the bulk of the money.
Tax revenue has decreased by double digits in New York, but the state has only spent little more than half of the $7.5 billion in bailout money it received in the last round of federal coronavirus aid.
New Jersey, which also experienced a double-digit dip in tax revenue, has spent less than 5% of the federal government’s $3.4 billion.
Republicans opposed to a new round of aid told the Washington Examiner that they want the states to use up the first round of funding before Congress provides more.
The GOP measure introduced in July would give the states greater flexibility to use the remaining funding.
Republicans also fear adding to the nation’s exploding debt, which now tops $26 trillion after Congress passed $2.9 trillion in coronavirus aid in several packages earlier this year.
“I don’t think we should be authorizing a dime more until we know exactly where the $2.9 billion went, where what has been unspent, [and] how we are going to spent that,” Sen. Ron Johnson, a Wisconsin Republican, told the Washington Examiner. “I’m happy to talk about redirecting and repurposing that.”
The two parties have remained in a prolonged stalemate over the next round of federal aid.
Democrats this summer raised the cost of their $3 trillion measure to $3.7 trillion, but Speaker Nancy Pelosi said last month that she is willing to drop the price to $2.2 trillion. A spokesman did not respond to the Washington Examiner’s inquiry about the possible reduction of state and local aid.
Pelosi and Treasury Secretary Steven Mnuchin talked on the phone for about half an hour last week, but it did not yield an agreement.
“Economists, the chairman of the Federal Reserve, and others have urged Congress to invest robustly in the American people now because interest rates are low, and our economy needs certainty,” the California Democrat said in a statement issued following the phone call. “All seem to agree that a dollar spent now is a better dollar than one spent down the road.”
Republican leaders face pressure from some GOP lawmakers who say Congress needs to pass more aid to help local governments.
Sen. Bill Cassidy, a Louisiana Republican, introduced legislation with New Jersey Democrat Bob Menendez to provide $500 billion to state and local governments to make up for tax revenue lost due to the coronavirus.
Cassidy cited the National Association of Counties, which anticipates that local communities will suffer a $200 billion shortfall through 2021 and said that his bill would prevent states from using the money to bail out pension plans.
“I understand concerns about spending,” Cassidy said in August, “but I fear the cost of doing nothing would be worse.”
