A lot of money flowed to state and local governments during the pandemic, even as revenues in most states, like Washington, recovered from the pandemic recession. Buoyed by the federal revenues, the Washington state budget grew at a pace not seen in decades, if ever. Emily Makings with the Washington Research Council writes that with state and local governments now flush, the second guessing in the other Washington has begun. We’ll quote her extensively here.
Expecting states and local governments to face severe budget shortfalls and new spending needs related to the pandemic, Congress appropriated hundreds of billions of dollars for two fairly flexible relief funds: the coronavirus relief fund (CRF, part of the CARES Act last year) and the coronavirus state and local fiscal recovery funds (part of this year’s American Rescue Plan Act).
The state of Washington was allocated $4.428 billion from the coronavirus state fiscal recovery fund, and the Legislature appropriated $3.162 billion of it this year. At the same time, Washington’s revenue forecasts have improved substantiallyand the state did not have a shortfall to address this year.
The New York Times reports that budget situations across the country have similarly improved, to the extent that there is second-guessing in DC about the usefulness of these funds:
From California to Virginia, many states that faced devastating shortfalls in the depths of the pandemic recession now find themselves flush with tax revenues because of a rebounding economy and a soaring stock market. Lawmakers who worried about budget cuts are now proposing lucrative increases in school spending, tax cuts and direct payments to their residents.
The unexpectedly rosy picture is raising pressure on President Biden to repurpose hundreds of billions of dollars of federal aid approved this year, in order to help fund a potential bipartisan infrastructure deal.
The NYT story is worth reading, as it gives a good look at the challenges now facing Congress as it struggles to find bipartisan support for an infrastructure bill.
Last week, Senator Mitt Romney, Republican of Utah, suggested that Mr. Biden and Republican negotiators look to “some of the funding that’s been sent to states already under the last few bills” to help pay for that agreement. “They don’t know how to use it,” Mr. Romney said. “They could use that money to finance part of the infrastructure relating to roads and bridges and transit.”
Some economists and budget experts support that push, arguing that the money could be better spent elsewhere and that states’ spending plans could add to a risk of rapid inflation breaking out across the country.
We doubt state and local officials have much need to worry.
Even if the administration wanted to recoup or divert the funds, it is unlikely that it could repurpose the money or make significant changes to how it is used without congressional action.
And Congressional action these days begins to sound like an oxymoron, although
Repurposing unspent funds could help advance an agreement, particularly given Republican opposition to bankrolling state aid in previous rescue packages.
Some experts see repurposing as a way to fund essential infrastructure without further stoking inflationary pressures.
Some economists, like Harvard’s Lawrence H. Summers, a former Treasury secretary under President Bill Clinton, have pushed Mr. Biden to repurpose the state and local aid for longer-term infrastructure projects, in hopes of easing what Mr. Summers warns is a dangerous buildup of inflationary pressure. Administration officials view high inflation as a much lower riskthan Mr. Summers does.
An interesting debate.