Should Congress Provide More Aid to States?

This article was originally published by CQ Researcher.

States have received billions in federal aid via the $2 trillion Cares Act, and the Federal Reserve authorized up to $500 billion in loans to state and local governments via the Municipal Liquidity Facility. Additional federal bailouts would erode state sovereignty, create incentives for fiscal irresponsibility and reward fiscally reckless states at the expense of responsible ones.

Federal bailouts will also lead to higher state taxes. Eric Fruits, a Portland State University economist, found that every $1 states receive from the federal government costs state and local taxpayers $0.82 in increased taxes and fees, on average, because the “strings” attached to federal funds push state spending higher. In 2009, for instance, the “maintenance of effort” provisions in the 2009 American Recovery and Reinvestment Act, which required states to continue running some programs, proved far costlier than expected.

Although some state and local governments face pandemic-related shortfalls in the near term, especially within their unemployment insurance trust funds, their revenue collections and total spending have been rising steadily for decades. Even after adjusting for increases in population and inflation, state and local spending has grown by nearly 90 percent over the past 40 years. Hundreds of billions of dollars in additional federal aid would let states continue that cycle of spending and send the wrong message to states that have practiced fiscal discipline.

Florida, which does not have a personal income tax, spends just $2,327 per resident. On the other hand, New York spends $5,231 per resident and has requested $60 billion in federal bailout funds. If New York only spent at Florida’s level per resident, the Empire State could save $56.7 billion each year. Unfortunately, too many elected officials would rather have taxpayers submit to a tax increase rather than undertake the hard work of prioritizing expenditures.

In 2002, Washington state demonstrated genuine fiscal discipline by successfully closing a $2.5 billion budget gap without raising taxes under the leadership of Democratic Gov. Gary Locke and a bipartisan group of legislators. They did this by identifying the core functions of government and ranking agency and program spending needs from top to bottom until they spent available revenue.

Fiscal discipline is not easy, but it is necessary. Our national debt could soon surpass a previously unthinkable $30 trillion, and a federal bailout of the 50 states would have disastrous results for U.S. taxpayers.