Much has been made of the decision not to include state and local government relief in the $910 billion Coronavirus Response and Relief Supplemental Appropriations Act which recently passed Congress, pending presidential action. The exclusion of direct aid in the lame duck session legislation was likely informed by the relatively good shape of many states’ budgets (state 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. collections are only down $37.4 billion through September, compared to the same nine months in calendar year 2019), and the inability to come to an agreement on how to distribute any aid. Nevertheless, the bill contains over $100 billion in state aid that can be used by state governments to backfill revenue losses, if needed.
The bill provides nearly $82 billion for the Education Stabilization Fund, $14 billion for mass transit, and $10 billion for state highways. In each case, the money appropriated to the states must be used for these purposes. However, receipt of the funding is not contingent upon a state’s own contributions, so in many cases, states can reduce their own contributions to education, highways, and mass transit while maintaining current funding levels due to the federal infusion. This frees up the state’s normal share to be used for other purposes, including backfilling revenue losses.
This is not the first time that such an approach has been used to prop up state budgets, either during the current pandemic or previous economic crises. The Families First Act, for instances, increased FMAP (the federal Medicaid match) by 6.2 percent, worth about $50 billion for states. The CARES Act, moreover, deposited just under $31 billion in the Education Stabilization Fund and provided $25 billion for transit infrastructure, collectively providing about $106 billion in fairly fungible state aid. Whether coincidentally or by design, the $82 billion for the Education Stabilization Fund and $24 billion for transportation—most of which could be flexed—would provide another roughly $106 billion in flexible aid, bringing the total to $212 billion. States have also been able use some of the $150 billion from the Coronavirus Relief Fund to cover existing expenses, like the salaries of public safety and public health officials, further alleviating state budget shortfalls. This all compares favorably to the $144 billion provided during the Great 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. through an FMAP increase and the State Fiscal Stabilization Fund.
To date, most states have been able to cover losses with their existing revenues and the federal aid they have already received, often without making any spending adjustments at all. Some states, however, particularly those heavily reliant on tourism or the energy sector, are struggling disproportionately to their peers, and others fear that the worst is yet to come. This is particularly salient in states which fear that temporary relocations due to the COVID-19 pandemic may turn into long-term outmigration. The forced experiment in remote work is creating enhanced location flexibility for employers and employees alike, many of whom may relocate to states with lower taxes and a lower cost of living if doing so does not mean sacrificing a job (for employees) or access to a qualified workforce (for employers). But for now, at least, the news is largely good, considering that we are in the midst of a pandemic. In California, for instance, revenues from July to October are 21.6 percent above projection, with the state now projecting that it overstated biennial revenue losses by $26 billion.
These indirect state aid provisions in the COVID-19 relief package may not be everything that proponents of state aid wanted, but it is sizable considering current losses.
Stay informed on the tax policies impacting you.
Subscribe to get insights from our trusted experts delivered straight to your inbox.Subscribe