Yes, states received more money from Washington than they needed for COVID-19 relief – FCW


Across the country, states have received huge infusions of federal government funds to help them cope with the effects of the COVID-19 pandemic; the most recent cash injection comes from the American Rescue Plan Act of 2021, which was President Biden’s COVID-19 stimulus package. The Conversation’s political editor-in-chief Naomi Schalit asked Raymond Scheppach of the University of Virginia about whether the federal government had given states more money than they needed. Scheppach is a state budget expert who headed the National Governors Association for 28 years, worked at the Congressional Budget Office for seven years, and is considered an authority on state and federal relations. He says the flood of federal money may have been a rare occurrence in federal-state relations: too much of a good thing.

What can states do with the last injection of money from the federal government?

States will receive US $ 195.3 billion over the next year in extremely flexible funds to be spent primarily on health costs or to offset the negative economic effects associated with COVID-19.

In addition, states can invest the funds to improve the quality of drinking water, support wastewater and stormwater treatment capacity, and expand broadband access.

Since the impact of COVID-19 differed significantly from state to state, it appears that the drafters of the legislation wanted to cover all of the direct health and economic costs of the pandemic. But in situations where individual states needed less, they could use the additional funds for infrastructure, where virtually every state has substantial needs.

Are there any limits to how the money can be spent?

The two main restrictions are that states could not use the funds to reduce taxes or to make extraordinary deposits into pension funds. The pension restriction exists because a number of senators believe states like Illinois, Connecticut, New Jersey and Kentucky have been irresponsible for not putting enough money aside to pay for even half of their future retirement commitments.

The only other restriction is that all funds must be committed or committed before December 31, 2024 and spent before the last day of 2026. During most past economic downturns, states have often helped local communities, but that is not necessary this time around, as the legislation also provided $ 154.7 billion for other governments such as cities, counties, tribes and territories.

Overall, the funds for this stimulus were much more flexible than those for the US Recovery and Reinvestment Act 2009, a stimulus bill passed during the Great Recession to limit the economic contraction and help states weather the economic downturn. Although substantial funds have been provided to states in this package, most were to be used for federal government-administered programs such as road construction and maintenance, weatherization of housing for low-income individuals and families, and construction wastewater treatment systems.

Have states received more federal pandemic recovery money than they need?

To answer this question, it’s important to look back on last year to see how much the COVID-19 pandemic has affected the state’s finances, and to look forward to seeing how quickly the COVID-19 pandemic has affected the state’s finances. economy and therefore state revenues will recover.

It seems that the the economic slowdown linked to the pandemic in the states has been fairly moderate, confusing everyone’s expectations, including mine.

First, revenues have held up surprisingly well. For example, sales tax revenue actually increased 0.5% in fiscal 2020 and are on track to increase by 2% in fiscal 2021. This is largely due to the fact that consumers continued to shop, but did it online rather than in malls. Most states now tax online sales. A few states rely heavily on revenues from oil and gas extraction, and this source has held up well, with prices recovering sharply faster than expected and production levels were maintained.

More importantly, income tax revenue also increased by 0.3% in FY2020 and is expected to increase by 2.8% in FY2021. This is due to the fact that many middle- and upper-income people have moved from the office to work from home with little interruption of unemployment.

On the spending side, the federal government’s early action has largely cushioned the traditional explosion in Medicaid spending that occurs during an economic downturn. March 18, 2020 family first coronavirus response law was promulgated and it included a 6.2% increase in the share that the the federal government paid states for their Medicaid spending. This additional Medicaid money from the federal government allowed states to use the 6.2% they originally budgeted for Medicaid for other needs, like education. An example: for a small state like Connecticut, that could represent more than 550 million dollars.

The other important factor in calculating whether states have received too much money is how much state revenue will rebound over the next year.

Pent-up demand for travel, entertainment and dining means the U.S. economy is estimated to have grown 8.6% over the course of in the second quarter of 2021 and 6.4% in 2021, compared to 2020. Consumers have money to spend as the savings rate has increased dramatically during the pandemic.

This all adds up to a rapid recovery and will quickly translate into similar growth in the state. sales tax and income tax, the two main sources of government revenue. Additionally, Medicaid enrollments will decline as individuals find employment and once again benefit from employer-paid health care, further reducing state spending.

So, did states get too much money in Biden’s bailout? The answer is certainly yes, given that state revenues have never declined much, coupled with help from the federal government to offset the Medicaid spike, and the fact that the current recovery will be robust in terms of revenues. government all support this conclusion.

What are the economic challenges for the States of tomorrow?

Many states are increasing their spending for fiscal year 2022 by two-digit percentages, like Vermont at 14.5%, Pennsylvania at 21.3% and North Carolina at 11.6%. A large portion of these funds will be spent on primary, secondary and tertiary education, as well as Medicaid.

Once all of the federal money is spent, many states can face a serious fiscal problem: not enough money to support the spending levels they assumed in their FY2022 budgets. will likely produce when the economy slows down and real incomes fall below their budgeted levels.

States will also have tough decisions this year about how much to spend on current operations and how much to spend on long-term investments, such as continuing to expand broadband.

Spending all federal money by the mandated end date of December 31, 2026 can also be difficult, and there is a potential risk that the federal government will take back all uncommitted funds. This would cause states to spend or lose funding, which could lead to bad choices, or at least ineffective choices. Problems that are resolved quickly might take priority over those that can be more serious, but they take longer to resolve.

For example, a state could commit funds to wastewater treatment, where it can be spent quickly, as opposed to highways, where the needs are greater but the planning horizon is longer.

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