After years of economic growth, the pandemic significantly weakened state and local government financial positions. These governments had accumulated over $200 billion in rainy day funds before the pandemic, resources that provided some temporary relief. But much of these funds have been depleted as the pandemic continues.
On February 15, 2021, the State Policy Network (SPN) published a report about how the federal government’s aid has affected the states. Thanks to the authors of SPN’s original article, Michael Lucci (senior policy advisor at State Policy Network) and Marc Joffe (senior policy analyst at Reason Foundation), for their research and data. The following highlights the report’s core points crucial to understanding the states’ status, the aid’s effect, recommendations and more:
- Pandemic’s Effect on State Tax Returns: State and local government funds plummeted during the pandemic. They are expected to experience $140 billion in revenue losses in the first six quarters of the pandemic. This spans from Q1 of 2020 through Q2 of 2021.
- How the Federal Government is Helping the States: Despite losing a significant amount of its rainy day and reserve funds, SPN says “nearly every single state has received more in federal aid than it has experienced in revenue losses.” The CARES Act and the Consolidated Appropriation ACT are two ways the federal government has supported state and local governments. Forty-eight out of 50 states received more federal aid than anticipated revenue lost.
- Federal Aid Should Stop at a Certain Point: Although federal aid has built up state and local finances, continuous aid packages will erode fiscal federalism. States will be less motivated to prepare their regions and finances for a future recession or other unforeseen economic crisis.
- State and Local Governments Must Focus on Economic Growth: Now that these governments have received substantial aid, they have a new task. They must adjust to the new pandemic era. Focusing on policy shifts conducive to strong economic growth is key. They have the opportunity to lay foundations for the future of their states as America continues to fight COVID-19 and rebuild from the losses.
How government aid should work during a pandemic is far from obvious. The data is helpful for understanding where things stand.