Just Taxes Blog by ITEP

McConnell Balked at More Stimulus Aid to States, Betting Red States Wouldn’t Need It. Now?

December 4, 2020

Earlier this year as Congress debated another round of economic relief following the CARES Act, GOP leaders balked at the idea of additional state and local aid. Senate Majority Leader Mitch McConnell referred to it as a “blue-state bailout.” At the time, we noted that although coastal (many blue) states were being hit particularly hard by COVID-19, infectious viruses do not adhere to state boundaries and neither would the public health and economic fallout.

“Picking winners and losers and targeting federal relief responses based on politics reveals the underlying rot at the core of some policymaking… Elected officials who pick winners and losers are defying democracy, being derelict in their duty to serve all their constituents and revealing a warped vision of what economic recovery should look like and for whom government should work.”

Ten months later, thanks to Republican Senators, Congress still has not acted on additional relief for people and families, small businesses, states and localities. The window for action this year is quickly closing and while there has been some movement around a bipartisan $908 billion proposal (that includes $160 billion for state, local and tribal governments), some members of Congress are flinching at the idea of sending even one dime more to states and localities.

Here’s what we know. Federal stimulus under the CARES Act worked. And thanks to provisions including state and local aid, a boost to unemployment insurance, direct cash payments, and the Paycheck Protection loans for businesses, state revenues did not face as steep of a decline last fiscal year as many had predicted. But the effects are wearing off, the pandemic is worsening and states, regardless of political leadership, are hurting.

As an article in this week’s New York Times observes, six of the seven states expected to suffer the biggest revenue declines through 2022 are led by Republican governors. Still, McConnell has refused to act, even when presented with a bipartisan compromise bill to get aid to the people before the Senate adjourns.

The revenue decline states and localities have faced so far is just the tip of the iceberg. More severe declines are expected in 2021, with some states anticipating up to a 20 percent drop over the next two years. The Center on Budget and Policy Priorities estimates a net revenue shortfall (not including additional costs of addressing COVID) between $275 billion and $415 billion through fiscal year 2022 in states, localities, tribal governments and territories. Hits to revenues will keep coming as cases surge and economic activity is restricted. At a time when states and localities need funds to invest in people and communities to ensure immediate action and long-term recovery, lawmakers must seize every possible opportunity to use tax policy to stabilize revenues. For states facing the dual challenges of catastrophic revenue declines and Congressional apathy, asking more of taxpayers with a clear ability to pay is far preferable to mass layoffs, steep cuts in public services and the collapse of state and local economies.

Republican and Democrat governors alike have warned Congress that lack of additional state and local aid would slow economic growth, force public sector jobs cuts and add to the suffering of millions of Americans. This is not a red state v. blue state phenomenon.

Take California, for example. Revenue projections there, as noted by the Wall Street Journal‘s editorial board, are better than anticipated. And editors cherrypicked the state’s data to suggest that blue states are doing just fine and don’t need federal assistance. However, the state’s seemingly favorable position is the result of Congress’s quick action in March to deliver fiscal relief to people (allowing them to continue to spend), states and municipalities, as well as having a progressive tax code. States with progressive income taxes, meaning the more you make the greater your tax rate, are better equipped to manage a crisis that disproportionately affects low-income people, especially when rich people are doing just fine if not better than before. Yet even these states will face budget challenges in the coming months and years as more revenue will be needed to make the deep investments needed to address the COVID-related public health needs and secure a strong economic recovery for all.

States are made of people—workers who have lost their jobs, families struggling to put food on the table or pay rent, public sector employees who face furloughs, wage freezes and debilitating budget cuts. And beyond political affiliation, state and local leaders have an obligation and responsibility to provide for and protect constituents.

Political theater in Washington aside, consider what state and local aid really means for people most impacted by this crisis: protective equipment for essential and frontline workers, cash assistance to ease hardship and boost local economies as a result of unemployment or reduced hours, efficient vaccine delivery and distribution and access to affordable healthcare, and more money to support virtual learning.

It is December 2020. Sen. McConnell has denied states—and their residents—relief for months. Congress must act now. Even if it does, it is unlikely to provide the robust aid needed to keep communities afloat and positioned for healthy recovery. Lawmakers across the country should be prepared to return to state capitals and city halls in the new year with plans to raise revenue not just to weather this crisis, but also to invest in long-term recovery. Look to New Jersey for inspiration where Gov. Murphy championed and shepherded the enactment of a permanent millionaire’s tax. Or, Arizona where voters approved a new surcharge on the state’s richest residents. Lawmakers in New York, Connecticut, Rhode Island and Maine have also called for higher taxes on the rich.

A just path forward requires federal lawmakers to enact additional aid and state and local lawmakers to ask more of their most affluent residents. This is the way.



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