The debate over state and local aid in Biden’s stimulus bill, explained

A banner asking Congress for relief is displayed near the Capitol in Washington, DC. | Sarah Silbiger/Bloomberg via Getty Images

Could some of that $350 billion be better spent elsewhere?

With President Joe Biden’s Covid-19 relief package headed to the Senate, it looks like Democrats will finally get their long-held desire for hundreds of billions in unrestricted state and local government aid.

So, naturally, a debate has broken out over whether they might be getting too much of a good thing — or even giving Republicans a political gift.

It’s widely agreed in the party and among nonpartisan experts that some aid is necessary, with some state and local budgets in dreadful shape due to the pandemic-induced recession. But other state revenue numbers, it turns out, are significantly better than many expected several months ago.

“State revenues are in most cases below where states were expecting to be before the pandemic hit,” says Kathryn White, director of budget process studies at the National Association of State Budget Officers. But, she adds, “It is true that states’ revenue projections are currently in many cases not as dire as they were expecting last spring.” States had expected a fiscal catastrophe similar to the Great Recession of 2008-2009, but the current situation is different, with higher-income workers hit less hard and stocks performing well.

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The New York Stock Exchange on Wall Street on February 17.

There have been questions about whether this money could be better spent on other matters, whether it’s wasteful — and whether it means handing many Republican governors large amounts of money that they will then use to fund big tax cuts skewed toward the rich.

A bill like this stimulus is similar to a moving train. Many decisions about it were made at the top some time ago, and changing them could be difficult at this point. The topline number for unrestricted aid, $350 billion, was set in Biden’s proposal in mid-January. House Democrats’ energy was focused on getting the votes to pass the bill they have, not rethinking whether they should do less.

But now moderate senators will have their say. And it’s not just the usual suspects like Joe Manchin (D-WV) and Kyrsten Sinema (D-AZ) who have doubts about this provision — Sens. Angus King (I-ME) and Mark Warner (D-VA) want to make changes to it too, the Washington Post’s Erica Werner, Jeff Stein, and Seung Min Kim report. So the final shape of unrestricted aid in the stimulus remains very much in the air.

Democrats have wanted this aid money for nearly a year

Of the $1.9 trillion stimulus bill passed by the House early Saturday morning, $350 billion is reserved for unrestricted aid for states, local governments, tribes, and territories.

Importantly, this is not the only money in the stimulus going to state and local government entities — there are hundreds of billions more for public school reopenings, pandemic response expenses like vaccinations, transit, child care assistance programs, help for renters and homeowners, and small businesses, as Vox’s Emily Stewart explains. Last year’s stimulus bills devoted money toward some of these priorities as well.

But the political battles over the unrestricted aid have been fiercest, precisely because there are no strings attached. Indeed, there has not been a single dollar of such unrestricted aid signed into law yet — Republicans balked at including any in the 2020 relief legislation, with then-President Trump disparaging it as “bailout money.”

Democrats, though, have argued since last spring that more flexible state and local aid was badly needed. These governments were seeing revenues plummet due to a catastrophe not of their making — the public health emergency and the associated disruption to the economy — and they cannot run deficits like the federal government can. So to prevent devastating service cutbacks or layoffs, large amounts of unrestricted aid would be necessary, the argument went.

Now that Biden is president and Democrats control the Senate, they finally have the power to achieve this longtime goal. The $350 billion included in the stimulus bill that passed the House is divided in the following way:

• State governments and Washington, DC — $195.3 billion: Each state (and DC) would get $500 million, and the remaining $169 billion is divided up according to each state’s share of national unemployed workers. DC’s government would also get $755 million that Democrats say it should have gotten in last year’s stimulus (Republicans insisted then on treating DC like a territory, not a state).
• Local governments — $130.2 billion: Half of this goes to cities and half to counties. The city money would be divided according to a community development block grant formula, and the county money would be given out according to population.

The House bill also contains $20 billion given to federally recognized tribal governments and $4.5 billion to US territories. But keep in mind that none of this is final. All of these details are subject to change as the bill moves to the Senate.

States’ current budget situation is more complicated than was expected

Republican officeholders’ objections to the very concept of unrestricted state and local aid money have been based on politics, not economics. Michael Strain, director of economic policy studies at the conservative American Enterprise Institute, has called the state and local aid money “the best thing” in Biden’s proposal. “Until state and local governments receive relief, this will act as a drag on the recovery and prolong the period of economic weakness,” Strain said in January.

But there has been some recent chatter in the policymaking world about whether the particular amount of money Democrats are devoting to aid in this bill still makes sense, given recent better-than-expected revenue numbers from many states. Slate’s Jordan Weissmann summed up the state of affairs earlier this month in an article headlined “Biden Wants to Give States $350 Billion. Do They Still Need It?”

Remember, the national political debate over state and local aid began last year, when many feared another Great Recession was about to unfold. Based on early indicators, and what happened last time, state fiscal forecasts were dire.

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Of the $1.9 trillion stimulus bill passed by the House, $350 billion is reserved for unrestricted aid for states, local governments, tribes, and territories.

It turned out, however, that the Covid-19 recession was not a mirror image of the Great Recession. This time around, the impact fell disproportionately on low-income workers; high-income earners were relatively insulated, meaning income tax revenue has stayed strong. Other facts include the strong stock market and the previous federal stimulus packages.

“Revenues have performed a lot better than was feared,” says Lucy Dadayan, a senior research associate at the Urban Institute. Instead of a universal collapse, 28 states saw revenue declines from April to December 2020 compared with the same period in 2019, per an Urban Institute analysis.

The remaining 22 states saw revenue increases compared to the previous year — though not as much as had been expected. “Revenues are still substantially down compared to what they would have been if there was no pandemic,” Dadayan says. And expenses may be up, also due to the pandemic, though that’s tougher to track at the moment. Still, there have been headlines about certain states being “surprisingly flush with cash” (New Jersey) or bringing in “record revenues” (California).

But the Urban Institute analysis also makes clear there are states that have absolutely been hammered. In contrast to Republicans’ claims of a “blue state bailout,” those that have seen the most dire revenue collapses are a mix of blue (Hawaii, Oregon, and Delaware), red (Alaska, North Dakota, Texas, Wyoming, and Louisiana), and purple (Nevada and Florida). Some of these states have been hit hard by the collapse of tourism, some by the collapse in oil prices, and others because they rely on sales taxes rather than income taxes for revenue.

It’s tougher to get a sense of what’s happening with local governments since the data is too disparate. But overall, some states are really hurting badly, others could use some help, and some appear to be doing surprisingly well.

The bill could still change in the Senate — if moderates want it to change

Considering the recent information on state finances, there has been some second-guessing on whether the $350 billion allotted for state and local aid in the bill is too much. (Though it’s less than one-fifth of Biden’s $1.9 trillion stimulus, $350 billion is still a massive sum — Obama’s entire stimulus package in 2009 was $787 billion.)

There are several possible criticisms of the current allotment. From a progressive point of view, if states’ need is less than expected, much of this money might be better redirected toward people who need it more. Or, from a deficit hawk’s point of view, maybe the money shouldn’t be spent at all.

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Senate Majority Leader Chuck Schumer speaks to reporters on specific components of President Biden’s $1.9 trillion Covid-19 relief plan on February 11.

“These excessive funds will unnecessarily add to the federal debt or crowd out other priorities (such as continuing emergency unemployment benefits beyond August),” the Committee for a Responsible Federal Budget argues. “They could also lead many states to enact damaging tax cuts or spending programs that ultimately undermine their long-term finances.”

The more politically minded also wonder about the wisdom of handing many Republican governors large sacks of money, which they could theoretically use for big permanent tax cuts skewed toward wealthy earners. (That’s the nature of unrestricted aid — it’s unrestricted!)

Of course, there’s still time for the bill to change — and now that it’s in the Senate, moderate Democrats may flex their muscles and force those changes.

In an interview, a Democratic Senate aide emphasized to me that the upper chamber’s wrangling over the bill was just beginning. The aide mentioned several possibilities for how the state and local aid money could be tweaked going forward, depending on what moderate Democrats want:

• The overall topline number of $350 billion could be cut.
• There could be new restrictions laying out how the aid money can’t used — for instance, that it couldn’t be used for permanent tax cuts (though this could run afoul of the infamous Byrd Rule that governs what’s acceptable under the Senate’s budget reconciliation process).
• There may also be specifications on how some of the money must be used (according to the Washington Post, there’s talk of redirecting some of it to broadband investment)
• The distribution of the money could be staggered over a longer time, so states could certify if they still need it later on (“that’s something we’re actively looking at,” the Senate aide said).

Overall, though, congressional Democrats haven’t been particularly swayed by the arguments that they should drastically rethink the state aid money. And the reason for that is the ghost of 2009.

“Last time around, a lot of Democratic lawmakers, both in the White House and Congress, were stung by the reality that we did way too little,” the aide says. “So if anything, I think folks want to err on the side of something bigger.”