Moneybox

Republicans Are Fighting Hard to Bankrupt States

Pat Toomey sits in a hearing on Capitol Hill
Sen. Pat Toomey wants to defund your police, and your fire department, and your DMV. Sarah Silbiger/Pool/AFP via Getty Images

As the frenzied, last-minute negotiations over coronavirus relief wear on in Congress, Republicans are still fighting tooth and nail to keep aid from flowing to state and local governments, many of which have had their finances eviscerated by the pandemic.

So far, the GOP has been fairly successful in this crusade. The original bipartisan proposal that served as a launching-off point for this latest round of talks would have given Democrats a $160 billion pot of cash to help states address their budget gaps, in return for a liability shield protecting employers and businesses from COVID-related lawsuits, which has long been on the Republican wish list. But the sides have since agreed to drop both of those contentious items from the package in the name of getting a deal done before the new year.

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And conservatives aren’t done yet. Democratic lawmakers have pushed to add more funding for the Federal Emergency Management Agency in order to help states deal with crises. Republicans are resisting. More importantly, Republicans, led by Pennsylvania Sen. Pat Toomey, are seeking to permanently shut down the emergency Federal Reserve lending programs created this spring by the CARES Act, including the one for states and municipalities. Treasury Secretary Steve Mnuchin announced last month that he would allow those programs to lapse at the end of this year, but most experts believe that under current law, his successor could revive them, or that the Fed could create similar ones through its own power. Toomey and company are now pressing for language that would ensure that these lending facilities stay shut for good, and aren’t replaced with clones.

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This issue has suddenly emerged as one of the single largest sticking points remaining in talks. Toomey has said that hogtying the central bank is his most important priority at the moment, and a “bright red line” for him in bargaining, while outraged Democrats are accusing him publicly of trying to sabotage the next administration. This is in part because it affects more than just states—the Fed’s emergency lending efforts have also put a backstop on the corporate debt markets, and Democrats are worried that the language Republicans have proposed would put new, tighter restrictions on the Fed’s powers than what existed before the CARES Act, thus hamstringing the Biden administration’s ability to respond if the economy starts to slide again.

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But this debate is also very much about the future of state budgets, too. Very few municipalities have borrowed from the Fed so far, in part because it hasn’t offered attractive terms. Some have hoped the central bank might start offering a better deal under the Biden administration. And no matter what, Toomey is attempting to take away an important safety net should it suddenly become hard for states and cities to borrow.

It is possible that the final relief package will include some substantial aid to states in all but name. Money for battered transit agencies is on the table, and all sides have agreed that the deal must include substantial support for schools, which, depending on the exact rules about how it can be spent, might take pressure off local budgets. But Republicans have shown time and again by now that they are absolutely determined to keep cash out of the hands of states.

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Why? The official party line is that Republicans don’t want to help Democrat-run states that were fiscally reckless before the pandemic hit—hence their constant railing against “blue state bailouts.” That argument has never made much sense, though, given that plenty of red states are also in deep fiscal trouble. (The answer to whether blue states or red states actually have it worse overall seems to depend on whose forecast you look at.) Florida—whose own senator, Rick Scott, has been one of the loudest opponents of state aid—is staring down a $2.7 billion budget gap next year, thanks in large part to the collapse of its tourism industry. Energy-producing states like Louisiana and Oklahoma have gotten walloped by the fall of oil prices. New York and Illinois clearly aren’t the only states in dire need of help.

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Given how hollow the rhetoric of “blue state bailouts” really is, it’s tempting to suspect that some Republicans have an ulterior motive—that they see the pandemic as a chance to force budget cuts that will disproportionately hurt unionized public sector workers, or that they’re hoping state-level austerity will undercut the Biden administration by slowing down the economic recovery, much as it undercut America’s recovery from the Great Recession under Barack Obama.

Thankfully, states are in substantially better shape now than many anticipated at the start of the pandemic. California, for instance, appears to have an unexpected surplus of $15 billion on its hands. In Georgia, tax collections are up so far year over year. There are a number of factors behind these good news stories. For one, the economy has recovered faster than many foresaw, in part thanks to the massive amount of aid included in the CARES Act, and in part because a lot of Americans decided to ignore the plague in the name of eating out. As a result, state tax collections have come in higher than expected in much of the country. The fact that unemployment has been concentrated among low-wage service workers—while terrible from a humanitarian perspective—has also lightened the blow for states that rely on a progressive income tax, since highly paid lawyers, coders, and accountants are still at work. The lofty stock market has been a boon for states that tax capital gains—California in particular has enjoyed a windfall thanks to the recent spate of initial public offerings—as has all the Amazon shopping that’s boosted online sales taxes. And in some ways, states have benefited from back-door sources of federal aid; the generous unemployment benefits the CARES Act created were taxable, which meant more money rushed into state coffers via withholding.

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But the big picture is still fairly dire. In its analysis released this week, Moody’s Analytics suggested that, after taking rainy day funds and existing aid into account, state and local governments are still facing a $171 billion shortfall over this year and next, not counting transit agencies. (For those wondering, Moody’s projects that eight of the 10 worst-hit states voted for Trump.) A few states, like Idaho and Wyoming, are in fine shape, but “nearly every state will see significant fiscal stress this year and next,” the firm reports. Dan White, director of government consulting and public finance research at Moody’s Analytics, told me that so far states have tried to tighten their belts as much as possible without hurting services, but unless they get significant aid, we either should expect deeper, more permanent budget cuts in the coming year or tax hikes. “There’s about $171 billion that will need to come from somewhere,” he said. Brian Sigritz, director of state fiscal studies at the National Association of State Budget Officers, told me much the same. “We are expecting to see many states having to make further spending reductions in fiscal 2021 and moving on in fiscal 2022,” he said.

And right now, Republicans are throwing down to make certain that states don’t have any other option.

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