The federal cash – billions of dollars – is coming to Washington state and local governments. So why raise taxes?

The headline story today is passage of the long-anticipated $1.9 trillion aid package. President Biden is expected to sign it tomorrow. 

Congress gave final approval on Wednesday to President Joe Biden’s sweeping, nearly $1.9 trillion aid package, as Democrats acted over unified Republican opposition to push through an emergency pandemic relief plan that carries out a vast expansion of the country’s social safety net.

By a vote of 220-211, the House sent the measure to Biden for his signature, cementing one of the largest injections of federal aid since the Great Depression. It would provide another round of direct payments for Americans, an extension of federal jobless benefits and billions of dollars to distribute coronavirus vaccines and provide relief for schools, states, tribal governments and small businesses struggling during the pandemic.

As they say, that’s a lot of money. In The Seattle Times, Joseph O’Sullivan and Jim Brunner break down what it means for Washington

Dubbed the American Rescue Plan, the legislation directs a fire hose of money to Washington, including its cities and counties. The state is set to receive $1.9 billion for K-12 schools; $655 million for higher-education institutions; and $635 million for child care, according to numbers shared by the office of Rep. Suzan DelBene, D-Medina.

Washington also will receive $7.1 billion in aid for local, county and state governments that saw tax collections drop last year amid the economic downturn caused by the virus and restrictions to stem outbreaks.

Of that, $4.25 billion will go to the state level just as legislators in Olympia prepare new, two-year budget proposals that fund everything from schools and parks, to prisons, environmental programs and social services.

More detail in the story, which we recommend. For those following the state budget, there’s this.

The $4.25 billion for state government comes as Washington’s tax collections already have recovered more quickly than expected compared to the steep drop-off during the early pandemic. It’s a significant amount of money for a budget that Inslee had proposed as $57.6 billion over two years.

The influx arrives as House and Senate budget writers prepare to release their proposed budgets later this month.

“While we have a good idea how much money will be coming to Washington state, we are still sorting out the details of how and when it will be distributed,” said David Schumacher, director of the Office of Financial Management, in a statement. “We will be working with the Legislature and state agencies in the coming weeks on many of these decisions as part of the biennial budget process.”

One impact should be the shelving of any proposed tax increase. Even before Congress acted, the state faced no budget shortfall. 

The Washington Research Council reports on some of the restrictions attached to the aid package. We quote extensively for the detail, but encourage you to follow the link.

The bill appropriates $350 billion for the state and local fiscal recovery funds. The Tax Foundation estimates that the state of Washington will receive $4.285 billion and (on top of that) local governments in Washington will receive $2.435 billion.

Under the bill, this funding may only be used to cover costs incurred by Dec. 31, 2024,

  • To respond to the COVID-19 public health emergency “or its negative economic impacts, including assistance to households, small businesses, and nonprofits, or aid to impacted industries such as tourism, travel, and hospitality;”
  • To provide premium pay to eligible workers performing essential work (premium pay is defined as up to $13 an hour, in addition to wages a worker otherwise receives, not to exceed $25,000 per worker);
  • To provide grants to eligible employers with employees performing essential work;
  • To provide “government services to the extent of the reduction in revenue . . . due to the COVID–19 public health emergency relative to revenues collected in the most recent full fiscal year . . . prior to the emergency;” or
  • “To make necessary investments in water, sewer, or broadband infrastructure.”

Two uses of the funding are explicitly forbidden. First, states and local governments may not use the funds “for deposit into any pension fund.”

Second, the legislation forbids states (but not local governments) from using these funds

to either directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.

“Covered period” is defined as the period from March 3, 2021 to the last day of the fiscal year in which all funds received have been expended. So if the state accepts the money, it would potentially not be able to reduce taxes until Dec. 31, 2024.

On that prohibition on tax cuts, Jared Walczak with the Tax Foundation examines several scenarios for how the restriction affects state legislators’ ability to set tax policy. We recommend reading his analysis. A couple of points from his blog post. First, the big picture.

It’s reasonable for Congress to want states not to spend what are ostensibly COVID-19 relief dollars to cut taxes, though given how disproportionate the Recovery Funds are to needs, and the other limits placed on expenditures, it’s also reasonable for states to wonder what else to do with the money. The real problem, though, isn’t the direct prohibition on spending some of the $350 billion on tax relief, but on broad language about indirect funding of tax relief that could capture tax reforms which aren’t actually reliant on the American Rescue Plan funding at all.

And,

Such federal entanglement in state fiscal policy is highly significant, and even raises constitutional questions. Under the Anti-Commandeering Doctrine, the federal government cannot require states to adopt or enforce a federal law, and there are limits on using federal aid to oblige states to take certain actions. This doesn’t prevent the federal government from attaching strings to the use of federally-provided resources, but if accepting that money ties states’ hands in ways that would otherwise violate the principles of fiscal federalism—the federal government cannot ordinarily prohibit states from cutting taxes—this raises serious constitutional questions.

Some states are in good shape economically and may wish to cut taxes this year or in subsequent years. State aid in the American Rescue Plan Act is not restricted to states with budgetary needs or revenue losses. Even states with multibillion-dollar surpluses can use aid for eligible expenditures, and it would be extremely dubious for the federal government to allow such states to do almost anything with their revenue growth—except cut taxes.

It would not be surprising to see that provision challenged.