Don’t punish our states for the big spenders

To date, 28 free-market think tanks in 26 states have signed a letter calling for Congress to grant states flexibility in using $150 billion available through the CARES Act. Without that flexibility, the latest problem stemming from the COVID-19 pandemic could be state “budgetary gluttony.”

State governments spend money. It’s what they do. The CARES Act does nothing to change that behavior.

Congress outlaws spending money from the CARES Act on any item already funded in a state’s budget. It bans use of CARES Act funds for one-time tax forgiveness for citizens and businesses, or to make up for lost tax revenue. So some states have started picking new projects, increasing employee pay, and finding myriad ways to spend the fruits of Washington’s largesse. All with the expectation of another round of federal funds.

Free-market think tanks agree that Congress should not “bail out the states.” Every day, we fight needless spending by our state and local governments. That includes spending forced by federal mandates with the promise of more federal money if the state behaves properly. Many state and local governments are still trying to avoid furloughs and other savings measures that businesses and families have already experienced. The governments wait for money to pour down eventually from Washington. They have more than enough federal funding, but not the freedom to use it well. 

Take our states — North Carolina and Nebraska — as examples of right actions being punished because of the profligacy of poster children for bad budget behavior.

North Carolina stands to receive $4.1 billion from the Coronavirus Relief Fund (including $500 million for our four largest local governments). That’s on top of an estimated $350 million to cover $150 million in additional Medicaid expenses, $856 million through the Education Stabilization Fund, and an undetermined amount from the $45 billion Disaster Relief Fund.

After a decade of smart fiscal decisions by the Republican-led state legislature and a budget standoff with Democratic Gov. Roy Cooper, North Carolina entered March with $1.2 billion in its rainy-day fund and a projected $2.2 billion cash balance for the fiscal year through June. 

The state delayed its income tax deadline until July, just as the federal government did, which transfers $2 billion in revenue from this budget year to the next. Sales tax and income tax collections have slowed with the shutdown. They will remain slow even as businesses reopen, turning a sizable cushion into a precarious balance heading into hurricane season.

Last year, Nebraska faced a 1-in-100-year flood. It destroyed crops and livestock and resulted in the state having the lowest growth rate in gross domestic product in the nation. Couple that with low corn and soybean prices, a trade war, and an uptick in farm bankruptcies, and one might think Nebraska faced the worst possible situation entering the pandemic.

Despite all these negative economic variables, Nebraska was experiencing a budget surplus for the first time in many years. The state had about 10 percent of annual General Fund appropriations in its cash reserve fund when the health crisis began.

The $1.25 billion sent to Nebraska from the CARES Act will allow the state to reimburse itself for $83.6 million in emergency appropriations to address immediate needs. But use of the rest of the funds is limited. Treasury guidelines confirm “funds may not be used to fill shortfalls in government revenue to cover expenditures.”

In a recent press conference, Gov. Pete Ricketts said he would prefer that the federal government give locals the freedom to use the money to fill budget holes over passing another bailout. CARES Act money sent to Nebraska is more than enough to help state government recover from this crisis. Despite negative events in recent years, the state has seen benefits from fiscal discipline.

North Carolina, Nebraska, and other responsible states would have the wherewithal to endure revenue declines through December if they could cover lost tax and fee revenue with CARES Act funding. This is impossible under current constraints. 

States do not need more money in a fifth COVID-19 relief package. They just need flexibility to offset lost revenues and forgive tax bills their citizens can’t afford. Congress should not throw good money after bad. It should not punish solvent states for the crimes of the big spenders.

Sarah Curry is policy director at the Platte Institute in Nebraska. Joseph Coletti is Senior Fellow with the John Locke Foundation in North Carolina.