A bipartisan coalition of U.S. Senators has unveiled a $908 billion COVID-19 relief bill which includes, among other provisions, $160 billion in additional aid to state and local governments. It is worth briefly exploring what this would mean, and the amounts of aid each state might expect.
While well short of amounts contemplated in the HEROES Act, introduced by congressional Democrats in the spring, this amount 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). Aggregate figures, however, disguise the steep losses a handful of states have experienced. While some states are running modest surpluses, several—particularly California and New York—have experienced dramatic revenue losses, or project doing so.
The way state and local relief is distributed, therefore, is nearly as important as the amount, and this raises difficult prudential questions. Targeting proven revenue losses would be the most efficient, patching budget holes at the lowest cost, but would be unfair to states which saved more for a rainy day, had less volatile taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. codes, or budgeted more prudently—and would encourage states to act more profligately in the future. (It could also encourage states to game their revenue systems to yield higher losses during the targeted years.) At the same time, completely indifferent targeting—such as using population figures alone, for instance—either means that it takes a far larger overall relief package to meet certain states’ needs, or, alternatively, that some states’ needs go unmet.
Replacing every dollar of lost revenue would be a mistake. States are expected to prepare for recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. s, and federal relief which obviated that need would create perverse incentives for future state tax and budget decisions. But no state anticipated a global pandemic, and it is reasonable for the federal government to provide some measure of relief to account for the difference between an “ordinary” recession and the deep hole many states are now in.
Direct aid is not the only way that the federal government has propped up state revenues, of course. The Pandemic Unemployment Assistance program (an additional $600 a week initially, and now $300 a week, for those collecting unemployment benefits) generates additional taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. for states, and the Paycheck Protection Program, by propping up employment levels, has also helped stabilize state tax collections.
But direct aid to states and localities still has its place. The federal government previously provided $150 billion in aid through the Coronavirus Relief Fund, but these funds were dedicated to state pandemic responses (health and economic) and could not be used to backfill state budget gaps. Indirectly, the federal government also picked up another $385 billion in costs, though here too, much of the money was spent on expenses directly arising from the pandemic. Only a fraction of existing aid was “flexible,” meaning that states could spend it however they chose.
The $160 billion in state and local aid proposed by this bipartisan coalition would presumably be flexible relief, but thus far, we do not know how it might be allocated. Lawmakers could use the HEROES Act formula, which took population, COVID-19 cases, and unemployment levels into account, with breakout allocations for cities, counties, and unincorporated areas. This, however, seems relatively inefficient in hindsight; with coronavirus cases surging everywhere, case counts are no longer a particularly accurate measure of a state’s revenue needs, if they ever were. Population, meanwhile, has a certain fairness to it, but fails to capture a state’s economic standing.
Unemployment levels, which only accounted for about 22 percent of the HEROES Act formula, are the most sensible means of allocating aid at this juncture.
The following table explores how $160 billion in state and local aid might be distributed under three allocation scenarios: first, using the HEROES Act’s formula; next, distributing funding based on unemployment levels; and finally, by distributing funding solely on the basis of population. (Calculations rely on the latest official data.) Since we do not yet know what formulas lawmakers may have in mind, these are only hypothetical allocations. If, however, Congress wants to provide the most meaningful relief, focusing primarily or even exclusively on unemployment levels would be a prudent choice.
|State||HEROES Formula||Unemployment Levels||Population Totals|
|Alabama||$2.371 billion||$2.224 billion||$2.364 billion|
|Alaska||$0.671 billion||$0.349 billion||$0.353 billion|
|Arizona||$3.668 billion||$3.543 billion||$3.509 billion|
|Arkansas||$1.612 billion||$1.315 billion||$1.455 billion|
|California||$18.214 billion||$19.039 billion||$19.047 billion|
|Colorado||$2.955 billion||$3.1 billion||$2.776 billion|
|Connecticut||$1.728 billion||$1.829 billion||$1.719 billion|
|Delaware||$0.706 billion||$0.473 billion||$0.469 billion|
|District of Columbia||$0.712 billion||$0.393 billion||$0.34 billion|
|Florida||$8.923 billion||$9.984 billion||$10.354 billion|
|Georgia||$4.454 billion||$5.028 billion||$5.118 billion|
|Hawaii||$0.83 billion||$0.635 billion||$0.683 billion|
|Idaho||$1.149 billion||$0.903 billion||$0.862 billion|
|Illinois||$6.248 billion||$6.16 billion||$6.109 billion|
|Indiana||$3.252 billion||$3.3 billion||$3.245 billion|
|Iowa||$1.83 billion||$1.613 billion||$1.521 billion|
|Kansas||$1.706 billion||$1.499 billion||$1.404 billion|
|Kentucky||$2.105 billion||$1.939 billion||$2.154 billion|
|Louisiana||$2.176 billion||$2.087 billion||$2.241 billion|
|Maine||$0.818 billion||$0.669 billion||$0.648 billion|
|Maryland||$2.534 billion||$3.114 billion||$2.914 billion|
|Massachusetts||$3.158 billion||$3.564 billion||$3.323 billion|
|Michigan||$4.312 billion||$4.8 billion||$4.814 billion|
|Minnesota||$2.971 billion||$2.977 billion||$2.719 billion|
|Mississippi||$1.509 billion||$1.276 billion||$1.435 billion|
|Missouri||$2.959 billion||$2.949 billion||$2.959 billion|
|Montana||$0.8 billion||$0.53 billion||$0.515 billion|
|Nebraska||$1.259 billion||$1.017 billion||$0.933 billion|
|Nevada||$1.659 billion||$1.526 billion||$1.485 billion|
|New Hampshire||$0.846 billion||$0.719 billion||$0.656 billion|
|New Jersey||$3.823 billion||$4.359 billion||$4.282 billion|
|New Mexico||$1.234 billion||$0.914 billion||$1.011 billion|
|New York||$8.442 billion||$8.973 billion||$9.378 billion|
|North Carolina||$4.546 billion||$4.873 billion||$5.056 billion|
|North Dakota||$0.728 billion||$0.395 billion||$0.367 billion|
|Ohio||$5.202 billion||$5.736 billion||$5.635 billion|
|Oklahoma||$2.11 billion||$1.849 billion||$1.908 billion|
|Oregon||$2.121 billion||$2.113 billion||$2.033 billion|
|Pennsylvania||$5.208 billion||$6.285 billion||$6.171 billion|
|Rhode Island||$0.797 billion||$0.535 billion||$0.511 billion|
|South Carolina||$2.254 billion||$2.357 billion||$2.482 billion|
|South Dakota||$0.769 billion||$0.457 billion||$0.427 billion|
|Tennessee||$3.238 billion||$3.298 billion||$3.292 billion|
|Texas||$13.026 billion||$13.916 billion||$13.978 billion|
|Utah||$1.881 billion||$1.623 billion||$1.546 billion|
|Vermont||$0.568 billion||$0.317 billion||$0.301 billion|
|Virginia||$3.527 billion||$4.224 billion||$4.115 billion|
|Washington||$3.538 billion||$3.94 billion||$3.671 billion|
|West Virginia||$0.978 billion||$0.755 billion||$0.864 billion|
|Wisconsin||$3.025 billion||$3.094 billion||$2.807 billion|
|Wyoming||$0.609 billion||$0.292 billion||$0.279 billion|
|Territories||$4.241 billion||$1.145 billion||$1.77 billion|
Sources: U.S. Census Bureau; U.S. Bureau of Labor Statistics; Centers for Disease Control and Prevention; Tax Foundation calculations.
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