The Hill is carrying an opinion piece this week that argues that the next big battle on Capitol Hill likely will concern aid to states and localities. The comment was written by former Rep. John Faso, D-N.Y., who represented that state’s 19th congressional district from 2017-2019.
Faso argues that the $1 trillion plan being proposed by House Speaker Nancy Pelosi, D-Calif., will turn out to be a non-starter for the Republicans leadership and that linkage between “any new aid package” and liability protections from COVID-related lawsuits for employers who have acted responsibly” could be in the works.
He notes that the administration has sent mixed messages on the topic but is likely to support some form of state and local aid.
Faso also argues that states and localities perform critical public functions for education, law enforcement and infrastructure--and also partner with the federal government in the Medicaid program, providing health care to the poor and the elderly. And, he observes that the shutdown of the national economy has triggered mass unemployment, business stoppages and closure of schools.
In addition, it has also meant significant declines in revenue for state and local governments. The National Association of State Budget Officers estimates that states have suffered revenue declines of at least 20%, he says.
He cites an analysis by Moody's Analytics that found that only five states have enough reserves to absorb the revenue losses caused by the shutdown. In fact, state income and sales tax collections are dropping precipitously, he says, which is why many governors are pushing hard to reopen their state economies gradually.
In that connection, he thinks that there is “no doubt that some form of federal assistance is in the offing. The question is, what is the most equitable form of aid and how should the program be designed?” He is suggesting that the General Revenue Sharing program should be considered for re-use. It was used between 1972 and 1986 to distribute funds to states and localities based on a formula that considered population, tax effort and per capita income, he says,
Part of President Richard Nixon's "New Federalism," the program provided unrestricted aid with few strings attached, but that plan was complicated due to the need to also provide funds to thousands of local governments.
A more efficient way to address state revenue loss would be to allocate aid based upon the proportion of total federal income taxes paid by residents of each state. This information is readily available from the IRS, Faso says.
“Data anomalies” connected to the 2017 tax reform legislation and the timing of tax payments in 2017-18 suggest that data from 2016 provides a “better base” from which to determine state-level calculations. Faso concludes that basing allocations on federal income taxes paid is a simple, straightforward way to determine reasonable shares for each state.
Unlike the earlier revenue sharing program, the Faso proposal would hold states responsible for directing a portion of their assistance to localities and school districts. Each state has existing mechanisms to assist local governments and school districts and Congress would be foolish to attempt to reinvent that wheel, he thinks. Such a task, and the political responsibility it implies, should be left to governors and state legislatures as part of their existing budgeting process.
A $200 billion program of state-local assistance would provide significant aid to support critical state and local government programs, including education. Such assistance, while not covering all state revenue shortfalls, would cushion the financial shock caused by the economic shutdown.
The state hardest hit by the crisis, New York, has experienced an estimated revenue loss of $15 billion, with billions more lost to localities. New York State taxpayers pay approximately 8.7% of federal income taxes and would receive $17.4 billion if $200 billion were allocated nationally. If the legislation provided that a minimum of 40% of such aid be allocated to local entities, New York localities and school districts would receive at least $6.9 billion from the state.
Under this plan, for instance, Illinois would receive $8.8 billion, Kentucky $1.68 billion, Texas $15.4 billion and Florida $12 billion. Regardless of whether states rely upon income, sales and other levies, significant revenue declines are occurring.
Just as Washington has acted to shore up hospitals and small businesses, it will become necessary to help remedy state and local finances. No allocation formula is perfect but using income taxes paid by residents of each state is a fair and efficient method of allocating emergency financial assistance.
So, we will see. The problem is extremely complex, made more so by the increasingly toxic politics of this election season. And, certainly any broad revenue sharing can be expected to be bitterly contested in some quarters, in part because of the enormous amounts of spending involved. This is an important fight and one producers should watch closely as it emerges, Washington Insider believes.
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