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Ever since the coronavirus pandemic sent tax revenues plummeting a year ago, states and local governments have been seeking financial aid from Washington. President Biden’s $1.9 trillion stimulus bill, passed by Congress earlier this month, answered that call. Known as the American Rescue Plan, it contains $350 billion in funding for state, local, tribal and territorial governments.
“The legislation will help states and local governments respond to rising spending demands due to the pandemic,” said Kathryn Vesey White, director of budget process studies for the National Association of State Budget Officials. She noted that the ARP would largely restore state revenues to pre-pandemic 2019 levels. Most states and local governments — unlike the federal government – are required to balance their budgets.
Twenty-six states and more than 700 cities had revenue shortfalls in 2020, according to the Washington Post.
The American Rescue Plan provides:
- $195.3 billion for states and the District of Columbia, $25.5 million of which will be equally distributed among the states and D.C. while the remaining money will be allocated based on each state’s unemployment rate.
- $103.2 billion for local governments, including $65.1 billion for counties, $45.6 billion for metropolitan cities and $19.6 billion for smaller cities and towns.
- $20 billion for tribal governments and $4.5 billion for territories.
Major Breakthrough for Local Governments
The ARP was a breakthrough for states and local governments in comparison to two previous stimulus bills passed by Congress in an effort to jump-start an economy battered by lockdowns and other restrictions and help those who have lost jobs during the pandemic.
In March 2020 the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act allocated $150 billion to states and local government but limited spending to expenses directly tied to the pandemic.
A $900 million stimulus bill passed last December during the waning weeks of the Trump administration contained no aid for states and cities.
The rescue plan just passed by Congress allows states and local governments to use federal funds until Dec. 31, 2024, to aid households, small businesses, nonprofits or impacted industries such as tourism, hospitality and travel.
The federal money can also be used to fund government services that have been curtailed as the result of the pandemic and to make “necessary investments” in water, sewer or broadband infrastructure.
But states are prohibited from spending the money on pensions or using it to offset revenue resulting from a tax cut, a provision added at the behest of Democratic Sen. Joe Manchin that some state officials say is overly restrictive.
“It is an intrusion into what would traditionally be a state prerogative of how we balance our budget,” Ben Watkins, director of the Florida Division of Bond Finance, told the New York Times. “If they want to give us the money to deal with COVID, they should just give it to us with no strings attached.”
Last week, 21 Republican state attorneys general sent a sharply worded letter to Treasury Secretary Janet Yellen asking her to approve funds to offset any tax cuts that were already in the pipeline.
Bolstering the ACA
The Biden rescue package also made temporary changes in the Affordable Care Act, which will reduce costs for some enrollees and is intended to entice reluctant states to participate.
The ACA allowed states to expand Medicaid, which provides health insurance to the poor and disabled, to include persons with incomes up to 138%t above the poverty line, as 37 states have done. The ARP will allow holdout states, including Florida and Texas, to expand Medicaid with the federal government picking up most of the costs.
More than 11 million people with incomes above the Medicaid threshold have purchased insurance under the Affordable Care Act, but the relatively high cost of these policies has kept millions more from participating. The rescue plan will subsidize purchases of ACA health care plans for two years. An example given by the Congressional Budget Office is that monthly payments for a 64-year-old earning $58,000 a year would be reduced from $1,075 to $412.
GOP Split
The two stimulus bills approved by Congress last year had bipartisan support, but the American Rescue Plan passed along party lines. Every Democratic senator and all but two Democratic members of the House supported the measure, and every Republican in both chambers opposed it.
Republican members of Congress complained that the bill was too expensive and contained many items unrelated to the pandemic such as an $86 billion bailout of 185 union pension plans that are close to collapse.
But outside the Beltway, the rescue plan attracted significant Republican support. Eighty-three Republican mayors were among the 402 members of the U.S. Conference of Mayors who issued a statement supporting the plan. One of them, Miami Mayor Francis Suarez, told the House committee that was considering the bill: “Florida’s cities are in agony and are crying out for help.”
Across the continent, Mayor Jerry Dyer of Fresno, Calif., also a Republican, was similarly supportive. “It’s not a Republican issue or a Democrat issue,” he said “It’s a public health issue. It’s an economic issue. And it’s a public safety issue.”
Although state revenues during the pandemic have exceeded expectations, advocates of the rescue plan say federal assistance is needed to stem the loss of jobs. Despite strong job growth in February, 9.5 million Americans remain out of work. The state and local government job shortfall stands at 1.4 million jobs, with a million of those losses coming in state and local education, according to the Economic Policy Institute.
Mistakes of the Past
The gigantic stimulus of the ARP, which includes $1,400 checks for 85% of Americans and extension of unemployment insurance benefits for 25 weeks, is designed to avoid repeating what Biden and his economic advisers see as a mistake the last time the nation faced economic calamity.
That was the Great Recession, which began in December 2007 and ended in June 2009. When the recession was at its height, Congress passed the American Recovery and Reinvestment Act, which provided more than $800 billion of fiscal stimulus.
That measure, like the ARP, was passed largely on party lines, with Republicans saying the amount of spending was excessive. In fact, the stimulus proved insufficient, and recovery was slow. Some states took six years to reach the revenue levels they had attained before the Great Recession.
This time, a pall of sadness descended over the nation as losses in the pandemic were marked in lives as well as jobs. As of mid-March, there have been 29.5 million COVID-19 cases in the United States and more than 536,000 deaths.
Because of pandemic quarantines and other restrictions, most of those who have lost loved ones for any reason have been unable to give personal farewells.
As the rate of hospitalizations and deaths decrease and vaccinations increase, many states have opened businesses and discarded restrictions such as mask-wearing. These reopenings, which some see as premature and others as necessary, are a work in progress. The same might be said of the American Rescue Plan.
Only in hindsight was it recognized that the stimulus provided by Congress during the Great Recession was inadequate. It will take months and perhaps years before a full verdict on the American Rescue Plan can be fairly rendered. Whether it will lead to inflation, as some economists fear, is unknown.
For now, however, states and cities and counties are buoyed by the aid that was so long in coming.“We believe the amount of state aid in the American Rescue Plan is sufficient to meet state needs, especially as the vaccine rollout continues to expand,” said Mandy Rafool, group director of the fiscal affairs program at the National Conference of State Legislatures. “We are seeing state revenues stabilize after months of uncertainty caused by the ongoing public health emergency and economic shutdowns put in place to curb the spread of COVID-19.”
This article first appeared in the State Net Capitol Journal.
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