Details and Analysis of State and Local Aid Under the Bipartisan State and Local Support and Small Business Protection Act of 2020

On Monday, members of the bipartisan Gang of Eight negotiating an end-of-year pandemic relief package announced that they had settled on language and had divided the package into two bills: a pandemic aid package and a $160 billion state and local support package. Some of the data on which allocations would be made will not be forthcoming for some time, but it may be helpful to provide a summary of what we do and don’t know, and to offer a preliminary sense of what it will mean for states.

Under the bill, $91.2 billion would flow to states and $60.8 billion to local governments and territories ($152 billion total), plus $8 billion to tribal governments. The $152 billion for state and local governments would be distributed in three tranches, beginning with $90 billion intended to go out the door within 30 days of enactment, and the subsequent tranches (anticipated to be $52 billion and $10 billion, respectively) likely arriving in the summer and fall of 2021, judging by the data on which they would be based. States would actually receive all $152 billion but would be obligated to share 40 percent ($60.8 billion) of it with localities, based on (1) population, (2) revenue losses, or (3) some combination of both.

One-third of the $152 billion would be distributed proportionally based on population; this amount ($50.66 billion) would all go out in the original tranche. The remaining two-thirds is to be allocated according to revenue losses, in three tranches of $39.4 billion, $52 billion, and $10 billion, respectively. The first $39.4 billion, which would be distributed in Tranche 1 concurrently with the population-based assistance, would be allocated proportionally on the basis of each state’s share of the total decline in tax revenue from April 1 to September 30, 2020, compared to the same six months (calendar quarters two and three) in 2019. Tranche 2 would be based on losses from October 1, 2020 to March 31, 2021, relative to the same period in 2019 through the first quarter of 2020, and the final small tranche would be another needs-based allocation based on losses from April 1 to June 30, 2021, relative to the same period in 2019.

Each state would be guaranteed a minimum of $500 million in the first tranche, which features both a population-based payment and the first of three needs-based assessments (allocated according to revenue losses). The final $62 billion across the subsequent two tranches would not feature minimum allocations, but states which were grossed up to $500 million in the first tranche—$250 million each as a minimum for the population and needs-based assessments—would be eligible for additional relief in those tranches, like any other state. Nearly all states, therefore, would be expected to claim more than $500 million. The only exception would be any states which experienced no losses in the relevant measurement periods for those tranches.

The following table summarizes this allocation, along with disbursement dates. The legislation instructs the U.S. Census Bureau to accelerate reporting of quarterly estimated tax payments for the first two quarters of 2021 to facilitate disbursements by the end of June and September, respectively, based on that data.

The amounts each state would receive in the second and third tranches will not be known for some time, but a reliable calculation of the first tranche’s distributions will be possible by Thursday, December 17th, when the U.S. Census Bureau releases quarterly state revenue data for the third quarter of calendar year 2020. In the absence of that data, it may be interesting to consider what the first tranche’s distribution would look like based exclusively on population and revenue declines in the second quarter (March through June). The table at the end of this analysis shows these calculations, which will necessarily be biased in favor of states which suffered revenue losses earlier in the pandemic over those in which losses accrued later. For that reason, these estimated allocations are only mildly instructive, and will be revised once July through September revenue data are released Thursday.

As we have noted previously, $160 billion in aid, while well short of the amounts contemplated in the HEROES Act introduced by congressional Democrats in the spring, would be nearly enough to cover likely revenue declines for state and local governments in aggregate across FYs 2020 and 2021 (an estimated $178 billion in losses compared to FY 2019 collections), though aggregate figures can disguise steep losses experienced in a handful of states. While some states are running modest surpluses, several—particularly California and New York—have experienced dramatic revenue losses, or project doing so. Distributing relief based on revenue losses is designed to target some of these needs, though overall levels sufficient for many states may seem inadequate in a few, however allocated.

The Gang of Eight has smartly chosen to use a calendar year 2019 baseline for revenue losses and actual revenues in the relevant periods as the measurement, avoiding the disparities that would be created if states’ revenue projections were used as the baseline instead, as this approach would reward states that made overly optimistic projections while penalizing those that project revenues more conservatively, regardless of their actual economic performance. However, allocating relief on the basis of revenue losses still has its complexities and disadvantages.

For one thing, it doesn’t take non-pandemic revenue changes into account. Furthermore, by focusing on revenue losses rather than a metric like employment levels, it tends to reward states with more volatile revenue streams, which overperform in years of economic growth but swing sharply downward during an economic contraction. States with income taxes concentrated heavily on high earners, for instance, likely had a very strong 2019 but a weak 2020 compared to states which relied more heavily on consumption taxes, which tend to be more stable. The bill does, however, attempt to take actual tax policy changes into account, providing that the Secretary of the Treasury should adjust for tax cuts, credits, or delayed payment deadlines that states could use to lower (in some cases, artificially lower) collections during the measurement period.

Of course, it may be that none of this matters quite yet, as the state and local aid component is far from a done deal. And if it does happen, we will need to wait until Thursday to fully calculate the first tranche allocations. Nevertheless, the following table is offered as a preliminary estimate which, in lieu of data on April through September revenue losses (not yet available), allocates solely on the basis of losses from April through June 2020.