States alone will likely see about $350 billion in tax revenues evaporate over the next two years. At the same time, state Medicaid and other COVID-19-related health-care spending is expected to explode by over $150 billion. Local governments are being hit just as hard: In April alone, layoffs and furloughs helped to reduce the government workforce by nearly a million employees, and more than 800,000 of those jobs were lost in local government.
The Democratic-controlled House has passed a new stimulus bill, the $3 trillion HEROES Act, that includes $915 billion in flexible aid for state, local, territorial and tribal governments. While the Republican-controlled Senate has not taken up the bill and President Trump has described it as "dead on arrival," several Republican senators are now speaking in favor of some form of aid, and a bipartisan group of senators has introduced its own legislation, the SMART Act, which would provide $500 billion to states and localities.
There's no way to predict what might eventually emerge on Capitol Hill, but state and local leaders can make three strong arguments for aid from Washington:
• The economy will not recover anytime soon without such assistance. In 2019, state and local government spending was 17 percent of GDP. If there is no federal assistance, the balanced-budget requirements in 49 states and many local governments will force them to cut spending far more than they already have, raise taxes or both. This will reduce aggregate demand and make the economic downturn deeper and longer. Even with the 2009 stimulus enacted in response to the Great Recession, states had to cut previously appropriated spending by $54.3 billion between 2009 and 2011, and they enacted tax and fee increases of $23.9 billion in 2010.
The other major components of GDP will also continue to decline. Businesses will reduce investment due to uncertainty regarding the speed of the economic recovery. Consumer spending, which is about 70 percent of GDP, will remain sharply down due to consumers' increased debt and reluctance to travel and make non-essential purchases. The only sector where spending will increase is the federal government, but that will not offset the contraction in the other three sectors. If the federal government does not assist states and localities, it will be at least five years before the economy again reaches the GDP level of 2019.
• Good partners help each other. The United States has a federal-state partnership: The federal government runs only two major domestic programs, Social Security and Medicare, while states administer all of the others. The system is very interdependent and very efficient, as states are allowed to tailor programs such as health care and food assistance to the unique needs of their citizens.
State governments share in the cost of these programs, committing over $250 billion of their own revenues annually. By far the largest federal-state program is Medicaid: In 2019, states paid $231 billion, or about 37.5 percent of the total cost. States also contribute a match of over $20 billion a year for the 200 or so other federal programs that they administer.
It does not make sense to throw overboard a strong and efficient partnership in time of crisis. Instead, it is time to strengthen it and for federal policymakers to appreciate the fact that by 2019 states had built surpluses totaling $72.3 billion, or 7.6 percent of their general-fund spending.
• There are two precedents that worked well. Both in 2003 and 2009, Congress recognized that it needed to assist states in order to offset their proposed budget cuts and tax increases and to stabilize the economy.
In 2003, the states received $20 billion in flexible funding. The first $10 billion was for Medicaid, but the money was flexible in that states could free up their own funds budgeted for the program and use those funds for other critically needed services. The second $10 billion was in the form of flexible block grants.
The 2009 stimulus law, the $787 billion American Recovery and Reinvestment Act, provided $154 billion in flexible funding, an increase of about $100 billion in the federal share for Medicaid, and $54 billion in a stabilization fund primarily for education.
In both cases the legislation reduced unemployment and helped stem the economic decline. Not only did the legislation work, but the Government Accountability Office also gave the states high grades for transparency and accountability — for minimizing fraud and inappropriate spending.
It can work again, and states and localities have powerful allies in making their case to Congress and the White House: Both Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell have signaled their support for another round of federal stimulus spending to speed recovery and avert long-term damage to the economy. For state and local leaders, there's no time to waste in making that case.
Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.
