The HEROES act is scheduled for a vote in the U.S. House today. We first wrote about the $3 trillion relief package proposed by House Democrats here. It’s a lot of money and comes with a lot of questions. (By the way, HEROES stands for “Health and Economic Recovery Omnibus Emergency Solutions Act.” Who comes up with this stuff.?)
Tax Foundation analyst Jared Walczak has looked at the aid to state and local governments included in the legislation. Several of his observations surprised us, and suggests why the act faces a tough reception in the Senate. And remember, this is on top of assistance already provided.
The HEROES Act, proposed by House Democrats as a next round of fiscal relief during the coronavirus outbreak, contains about $1.08 trillion in aid to states and localities. That would bring the pandemic total to $1.63 trillion—an amount so large that it might overwhelm their ability to spend it and could reward fiscal irresponsibility.
With the CARES Act, the Stafford Declaration (freeing up emergency funding), and now the proposed HEROES Act, states would be in line for about $1.12 trillion, of which $714 billion could be regarded as “flexible,” able to be spent backfilling lost revenues or for other general purposes. The remainder—particularly funding from the Coronavirus Relief Fund under the CARES Act—would be for dedicated purposes, many of which would not have existed prior to the pandemic. Localities would receive about $515 billion, of which $375 billion is flexible.
Walczak puts this aid into perspective.
For context, state tax revenue was $1.08 trillion in FY 2019 and, prior to the pandemic, was projected at $1.10 trillion in FY 2020 before the pandemic reduced collections. Local tax collections are responsible for another $760 billion. The HEROES Act’s state and local aid is identical to a full year’s worth of state tax collections nationwide. Combined with relief efforts from earlier in the year, total aid to states and localities is equivalent to about 88 percent of the combined annual tax collections of all state and local governments.
It is also significantly more than state and local governments are expected to lose. Using FY 2020 projected revenues as a baseline, Moody’s projects that state and local governments would lose a combined $482 billion across FYs 2020 and FY 2021. If the HEROES Act were enacted, state and local governments would be eligible for up to $1.09 trillion in flexible aid by the close of FY 2021, more than twice their anticipated revenue losses.
As he says, there’s a lot of uncertainty surrounding what might be permitted. He also raises the prospect of state tax cuts as a result of the aid:
If it seems peculiar that states might be able to radically increase spending at a time when revenues are plummeting, it is equally surprising that they might be able to use the money for sizable tax cuts. Not only might it be possible to justify them as part of the economic response to the crisis, but to the extent that they reduce revenues compared to prior projections, they also likely increase the amount of revenue that states are allowed to backfill.
Read the whole thing. Walczak acknowledges,
The HEROES Act is likely to meet with opposition in the Senate, if not before, so we may never know exactly how some of this money would have been allowed to be spent, but ideas from the HEROES Act are quite likely to make it into other legislative proposals.
As Emily Makings writes for the Washington Research Council,
But as the state and local governments begin to address revenue shortfalls, they should certainly not count on this level of federal funding. The bill has not been passed by the House yet, and the Senate is not likely to accept it in its current form.
A work in progress.
