Federal Money for State and Local Governments Could Stop Tax Increases

Joel Fox
Editor and Co-Publisher of Fox and Hounds Daily

Governor Gavin Newsom is hoping for federal funds to avoid about $14 billion in budget cuts. Political tensions over a federal subsidy to state and local governments—some Republicans label it a bailout—have held up Washington assistance to the states, but the odds are some form of federal help eventually will come. The federal funds could thwart efforts by state and local governments to raise taxes, especially on businesses. Raising taxes would quash the economic recovery. 

Across the board, Washington politicians want the recovery to happen as soon as possible. That’s not to say that Washington must be careless in how money is doled out to state and local governments. Critics of the subsidies have a point when they claim they don’t want to send money to states whose decisions on financial matters, especially pensions, put undue stress on the budgets’ bottom line.

The politics is obvious in the push and pull over aid to state and local governments. House Speaker Nancy Pelosi engineered a $3 trillion subsidy bill, a third of which would be dedicated to state and local governments. Pelosi was able to get it through the house. Newsom praises Pelosi’s effort often.

Yet, the bill stalled in the Republican controlled senate. Politics pops up when data discloses that the large majority of coronavirus cases are found in blue states that demand the federal money to offset their experiences with the disease.

The debate over state or local government mismanagement of budgets that are beyond coronavirus needs is a valid discussion point, but is set against the backdrop of the need for a quick as possible economic recovery for the country as a whole. That won’t happen so easily if the tax bully is released to deal with the budget problems and that would only make fiscal matters worse.

Most observers believe Pelosi’s bill was an opening gambit and negotiations could bring about a relief measure that would include help for state and local governments. President Donald Trump said he is willing to listen to such pleas.

Indeed, a $500 billion measure to help state and local governments hurt by the coronavirus was introduced by a bi-partisan group of senators, co-authored by three senators from each party.

While much government money is fungible, if relief money can be tied to specific government services related to the virus–health care services, reimbursement for protective equipment, even education money for online learning and more—the bill, or one like it, has a chance.

Putting it over the top would be a realization that the economy must not be hindered by any other impediments. If state and local governments turn to tax increases to help close budget gaps, especially tax increases on struggling businesses, that could stall or kill any recovery.

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