Proposals to deal with state and local financial woes in California are moving on both the state and federal levels. How doable the proposals are is uncertain, but the more immediate relief will come from Washington if a deal comes together. 

California Senate Democrats’ proposal to confront rental issues and state budget shortfalls came one day after Gov. Gavin Newsom joined other Western state governors in urging the Federal government to help state and local governments with a $1 trillion aid grant and the same day that House Democrats included the $1 trillion state and local government funding plan within a larger $3 trillion subsidy bill. 

The Senate Democrats plan would give state tax credits to landlords to replace rents from tenants who are victims of the pandemic and its economic effects. Renters would have to repay the missed rent back to the state over a ten-year period. In addition, the proposal would allow individuals and businesses to pre-pay their taxes and receive vouchers that would come with a discount on future taxes. Both the tax credits and the vouchers could be sold on the secondary market for a quick return of cash.

Would it work? Many concerns. 

Landlords have bills to pay and suggesting apartments for tenants who pay no rent makes it hard for the landlords to meet their own obligations. Even if the landlords can sell the tax credits on a secondary market, there is no certainty such a market exists for the credits, especially if the coronavirus crisis keeps a damper on the economy over an extended period of time. 

The state will reclaim the money through repayment by tenants over a ten-year period. Can the state track the tenants over that time? What if some tenants don’t re-pay all the rent? 

If individuals and businesses have the wherewithal to pre-pay their income taxes ahead of time that could bring in some unexpected cash. But that would tend to leave a budget hole in coming years from the lost revenue associated with the discount in taxes. Then what? You can hear a future legislator argue that the state needs the missing money and taxes must be raised. That’s not part of the proposal, of course, but it would not be a surprising result. 

There is more hope for immediate state and local government financial relief from what’s going on in Washington because one can see the framework of a deal forming. 

While the new plan put forth by Speaker Nancy Pelosi and House Democrats covers a panoply of items totaling $3 trillion, it’s an opening bid. The end amount won’t be nearly as high; however, President Trump shows few signs of being a spending hawk and he might go for a package that would include hefty help for the states and local governments as long as it includes items he supports.

While Republicans in Congress are concerned about more spending, they are also trying to gain liability protection for businesses in reopening the economy. There is also a call for a payroll tax cut to help bring employees back to jobs as the economy opens. 

A package that includes revenue for state and local governments coupled with business liability protection and perhaps another item or two is one of those hold-your-nose and vote “yes” compromises that often take shape during a crisis. 

One more thought–without federal bailout money, state and local tax increases will certainly be attempted. They become less likely if money for government budgets come from Washington. Tax increases likely would stall the recovery. 

If the goal from all sides is to get the economy rolling and put people back to work, Federal money, payroll tax cuts and protecting businesses as they take the risks to re-launch might be the formula to get things going.