By Raymond Scheppach
Across the country, states got huge infusions of cash from the federal government to help them deal with the effects of the COVID-19 pandemic; the most recent infusion of money comes from the American Rescue Plan Act of
By Raymond Scheppach
Across the country, states got huge infusions of cash from the federal government to help them deal with the effects of the COVID-19 pandemic; the most recent infusion of money comes from the American Rescue Plan Act of 2021, which was President Biden’s COVID-19 stimulus plan. The Conversation’s senior politics editor, Naomi Schalit, interviewed the University of Virginia’s Raymond Scheppach about whether the federal government gave the states more money than they needed. Scheppach is a state budget expert who ran the National Governors Association for 28 years, worked in 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 latest infusion of money from the federal government?
States will get US$195.3 billion over the next year in extremely flexible funds to be spent essentially on any health care costs or to offset any negative economic effects related to COVID-19.
In addition, states can invest the funds to improve drinking water quality, support wastewater and stormwater treatment capacity and expand broadband access.
Given that the impact of COVID-19 differed substantially by 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 had less need, they could use the additional funds for infrastructure, where virtually every state has substantial needs.
Are there limits on how the money can be spent?
The two major restrictions are that states could not use the funds to lower taxes or to make extraordinary deposits to pension funds. The pension restriction exists because a number of senators believe states such as Illinois, Connecticut, New Jersey and Kentucky have been irresponsible in not setting aside enough money to pay for even half of their future pension liability.
The only other restriction is that all funds need to be obligated or committed by Dec. 31, 2024, and spent by the last day of 2026. During most past economic downturns, states have often assisted local government, but this is not necessary this time as the legislation also included $154.7 billion to other governments such as cities, counties, tribes and territories.
Overall, the funds in this stimulus were far more flexible than those in the American Recovery and Reinvestment Act of 2009, a stimulus bill passed during the Great Recession to limit the economic contraction and help states weather the economic downturn. While substantial funds were provided to states in that package, most had to be used for state-administered federal programs such as highway construction and maintenance, housing weatherization for low-income individuals and families and the construction wastewater treatment systems.
Did states receive more federal money for pandemic recovery than they need?
To answer this question, it is important to look back over the last year to see how much the COVID-19 pandemic affected state finances and to look forward to see how rapidly the economy and thus state revenues will recover.
It appears that the pandemic-related economic downturn in states was quite muted, confounding everyone’s expectation, including mine.
First, revenues have held up surprisingly well. For example, sales tax revenues actually grew by 0.5% in fiscal year 2020 and are on track to increase 2% in fiscal year 2021. This is largely because consumers continued to shop but did so online as opposed to in malls. Most states now tax online sales. A few states depend heavily on revenues from the extraction of oil and gas, and that source held up well as prices recovered much faster than expected and production levels were maintained.
Most important, income tax revenues were also up 0.3% i