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Congress will soon consider another legislative solution to COVID-19, having already passed four bills in response to the pandemic. Those bills have increased the budget deficit by some $2.4 trillion, and new legislation will likely near $1 trillion, adding more to the budget deficit.
One of the primary points of contention in the next COVID-19 spending package is going to be money for state and local governments, which have seen revenue declines due to partial economic shutdowns imposed by governors. Congress is already working through it. A bipartisan group of senators led by New Jersey Democrat Bob Menendez has introduced the SMART Act to create a $500 billion slush fund for state and local governments. The HEROES Act, passed by the House in May, would hand states and local governments $1 trillion.
As part of the CARES Act, Congress created the Coronavirus Relief Fund, allocating $150 billion to the fund to help states and local governments respond to virus-related expenditures incurred between March 1 and Dec. 30 for which the state didn’t budget. The Treasury Department issued guidance allowing the CRF to be used for several expenses, including unemployment benefits, salaries for first responders, workers compensation, supporting public and private hospitals, and preventing evictions of people who are out of work due to COVID-19-related economic disruptions.
Transparency in federal spending is sorely needed, especially with the unprecedented legislative response to COVID-19. Unfortunately, it’s not clear how CRF funds that have been distributed have been used. Senate homeland security committee Chairman Ron Johnson of Wisconsin recently sent a letter to governors inquiring about how they have used these and other federal dollars made available.
One impermissible use of dollars from the CRF was the replacement of tax revenues lost because of COVID-19. The economic downturn caused by the pandemic has caused tax revenue shortfalls, and state and local governments are looking for ways to plug those budgetary holes. Congress doesn’t have a complete idea of the scope of the problem. The next phase of COVID-19 legislation will almost certainly include more money to states and local governments. There is a concern, however, that state and local governments will try to use these funds to save themselves from past fiscally irresponsible decisions or may continue to stall or delay reopening their economies. These outcomes would be unacceptable.
Current proposals, such as the SMART Act, fail to take into account whether or not a state is responsibly addressing the revenue shortfalls through necessary budget cuts. Certainly, some states are taking these steps. Georgia, for example, has cut spending by $2.2 billion because of revenue shortfalls. Meanwhile, Illinois will spend $2.4 billion more than last year, even as revenues decline.
As Congress moves forward on the next legislative response to COVID-19, members must ensure that states and local governments have the resources they need to continue to respond to the pandemic. Congress could do this by apportioning half of the funds based on a state's population and number of COVID-19 cases and restricting the use of the money based on the previous CRF guidance. The second half of the funds allocated could be made available 60 days after enactment of the legislation, but Congress could tie these funds to stages of reopening. The funds would, again, be tied to population and COVID-19 cases, but they would be distributed slowly and in one-third increments as states progress into the different phases of reopening, as established in the White House’s reopening guidance. Although the first half of the money couldn’t be used to replace lost revenue, the second half could be used for this purpose. If a state were to backtrack on reopening its economy before the November election, it could be forced to return a prorated share of the funds. This would encourage states to continue reopening their economies, providing a necessary “carrot and stick” approach.
Simply pouring more money into state and local governments is not a sound policy approach. Congress, if it does appropriate more dollars to state and local governments, must set tangible goals for state and local governments to meet. Moreover, taxpayers deserve accountability after the size of the commitment that Congress has already made in response to COVID-19. We understand that state and local governments have taken a fiscal hit, but taxpayers shouldn’t be on the hook for years of fiscal mismanagement. If Congress decides to assist state and local governments with revenue shortfalls, the next COVID-19 aid must come with strings attached.
Jason Pye is the vice president of legislative affairs for FreedomWorks.