Economists warn against excluding state aid from COVID-19 relief

Economists are warning that a COVID-19 relief bill without aid for state and local governments would mean passing up an opportunity to include a proven stimulus provision.

Congressional leaders are at odds over not only the price tag of a new relief measure, but what should be in it. The various proposals on Capitol Hill range from tens of billions of dollars in government aid for states, cities, tribes and territories to no funds at all.

“The most effective form of relief and stimulus for the overall economy is flexible money that states can use depending on need,” said Tracy Gordon, senior fellow with the Urban-Brookings Tax Policy Center, which is led by a former Obama administration official.

State and local government budgets have been hit hard by the pandemic, losing revenue from sales taxes and business taxes as local purchases dried up and stores shuttered. Other fees and revenue sources are dwindling as residents draw back on most day-to-day activities.

Though shortfalls today are well below some of the estimates made in the early days of the coronavirus downturn, states are still expected to slash spending anywhere from 5 percent to 20 percent to keep their budgets balanced, according to data compiled by the National Conference of State Legislatures.

Cutbacks at the state and municipal level have contributed to 1.3 million layoffs, over a tenth of the net jobs lost in the U.S. since the pandemic began. The vast majority — about a million — are in the education sector.

Democrats have prioritized state and local government funds, initially pushing nearly $1 trillion in aid in the $3.4 trillion HEROES Act passed by House Democrats in May. As negotiations have dragged on over the months, both figures have dropped significantly.

The latest proposal from a bipartisan group of moderates included $160 billion for states, local governments, tribes and other territories. But it is one of two areas, along with liability protection, that lacks specifics or legal language for implementation.

Senate Majority Leader Mitch McConnell (R-Ky.) on Tuesday suggested stripping out both the government aid and the liability protections to push the bill ahead.

“Democrats continue to oppose common sense legal protections that university presidents having begging for, and Republicans see no need to send huge sums of money to state and local governments whose tax revenues have actually gone up,” McConnell said.

“Negotiating 101 suggests we set those two controversial pieces aside and plow ahead with a huge pile of things that we agree on.”

Speaker Nancy Pelosi (D-Calif.) swiftly rejected McConnell’s offer, calling it “appalling.”

“Our health care workers, our first responders and other front-line workers have risked their lives to save lives. Now, Leader McConnell wants them to lose their jobs and our constituents to lose the essential services they provide,” she said.

Gordon is among those arguing that time is of the essence when it comes to aid for state and local governments.

“When the crisis hit, they had to find solutions quickly, and that’s why you saw job losses start right away. They did the easy things first,” she said, pointing to policies such as deferring expenses, canceling program expansions and relying on the first round of federal funding.

“Those options are now done.”

State legislatures, which are required by law to balance their budgets, will have to consider further cuts and tax increases in January to get out of the red before the fiscal year ends on June 30.

The Federal Reserve has also taken a strong position on the need for fiscal stimulus, but without specifying a dollar amount for governments below the federal level.

Fed Chairman Jerome Powell is one of dozens of high-profile economists who’ve urged Congress to approve another boost to jobless benefits, aid state and local governments to prevent widespread layoffs and extend housing protections.

An analysis by the nonpartisan Congressional Budget Office in September found that state and local aid offered the highest bang for the buck when it comes to relief spending. Whereas the Paycheck Protection Program to help small businesses stay afloat added 36 cents to the economy for every dollar spent, every dollar spent on shoring up state and local governments boosted the economy by 88 cents to the dollar.

The National Governors Association has pointed to data showing that lack of aid for state governments prolonged the Great Recession and slowed the subsequent recovery.

“Every major economist, regardless of party or ideological bent, came to the same conclusion after the 2007-09 financial crisis: The lack of support for state and local governments slowed the nation’s economic growth for more than a decade,” New York Gov. Andrew Cuomo (D) and Arkansas Gov. Asa Hutchinson (R), the group’s chair and vice chair, said in a joint statement.

“Ultimately, we hope for a relief package that will support the needs of the American people, including health care workers, firefighters, police officers and teachers,” they added.

But disagreements remain about how much state and local governments need, and when.

Mike Leachman, vice president for state fiscal policy at the left-leaning Center for Budget and Policy Priorities, estimates states will face a shortfall of between $275 billion and $415 billion through fiscal 2022.

“What’s at stake is, without additional aid, states will lay off more teachers, health care workers, and other public employees. That’ll just make the pandemic recession even worse. They’ll cut services that businesses need right now,” he said.

Leachman acknowledged that not all of the layoffs are due to a funding shortage. Some of the million education workers who have lost their jobs were laid off due to other aspects of the pandemic.

“Those numbers include teachers, but also bus drivers, security personnel, cafeteria workers and janitors, who in a remote environment are not immediately needed,” he said.

Stan Veuger, a scholar at the right-leaning American Enterprise Institute, said the discussion of state and local funding doesn’t properly account for all the expenditures and costs associated with the pandemic.

“I think in the aggregate for the current fiscal year, there’s not a ton of funding needed,” he said, adding that some harder-hit states still need help.


In his accounting, states face a $300 billion shortfall through June, but a combination of $110 billion in rainy day funds, the $150 billion Congress approved in the early rounds of COVID-19 relief, and funds set aside for transportation, Medicaid reimbursement, hospitals and universities covered some of those shortfalls.

Still, he said, state and local aid is a good idea, and remains among the best forms of stimulus and relief the government can provide.

Gordon noted that concerns about providing too much aid to governments could be addressed through guardrails to keep the money flowing if states need it, and turn it off when they no longer do.

“If the aid is tied to economic conditions like unemployment, the aid would be directed to the places that need it the most, and also turn off when it needs to turn off,” she said.