Issues & Insights

States Push For Bailouts While CARES Act Funds Go Unspent, IG Report Finds

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While the forceful lobbying campaign continues to pressure Congress to pass another massive spending package to “bail out” state and local governments to the tune of hundreds of billions of dollars, the U.S. Department of Treasury’s Office of Inspector General (OIG) recently released a report detailing how much of the CARES Act’s Coronavirus Relief Fund (CRF) allocations have been spent by states as of June 30th.  

While some state reportedly have allocated additional portions of the CRF support but have not yet incurred those costs, shockingly, the OIG report highlights that states have, on average, spent less one quarter of their federal CRF funds as of June 30. In our precarious situation with nearly $27 trillion in national debt, why would Congress send more aid to states when such a large amount of current aid has not even been spent?

Unsurprisingly, the states asking for even more bailout money are many of the same states that have used a larger portion of the CRF support. For instance, California has already spent roughly 75% of its CRF dollars. Conversely, states that did the hard work and reduced spending growth during the longstanding pre-COVID economic expansion, created rainy day funds, and reduced liabilities, clearly do not need (or want) as much federal aid. States like Texas and Florida have only spent around 12% of their respective CRF aid allotments, according to the OIG report.

However, it is interesting to note that relying on extra federal money like this has not dampened the desire of California’s big government policymakers to continue to raise their already high taxes. In fact, one recent proposal would hike economically-damaging income taxes by $8 billion and send the Golden State’s top personal income tax rate to a crushing 16.8%. Another radical proposal in Sacramento would create a “wealth tax” on those with more than $30 million in assets – and supporters claim they will continue to tax individuals even after they leave California. Stay tuned for legal challenges if that passes.

Even before this new OIG research from Treasury came to light, more than 1,500 state legislators and other state leaders made their voices heard and joined an ALEC letter addressing their policy concerns with a federal bailout of states.  These legislators wisely understand the often-forgotten lesson from the great economist Milton Friedman: There’s no such thing as a free lunch. Every dollar used to bail out a state or city must eventually be extracted from a hardworking taxpayer in some state or city across America.

It is undoubtedly true that many states and cities have accumulated financial challenges — like massive unfunded pension liabilities and other debts — over many years, if not decades, of irresponsible policy decisions. However, just because you federalize a problem does not magically make it disappear. The federal “solution” to these long-term challenges, unfortunately, assists in kicking the can further down the road, socializes costs to taxpayers in other jurisdictions, and perhaps most insidiously, provides an incentive for states to double down on this failed tax-and-spend policymaking.

Real budget reforms are needed at the state level. (The ALEC State Budget Reform Toolkit has many successful budget reform ideas that have worked for other states. ) However, if states expect a future federal bailout, what incentive do they have to undertake some of the heavy lifting that it takes to enact big-picture reforms like creating a priority-based budget or enacting institutional spending limits to protect taxpayers from the next economic crisis?

Moreover, federal bailouts undermine federalism. Federal spending is notorious for tying down state budgets with costly rules like maintenance of effort requirements. Portland State University Professor Eric Fruits found every $1 received by states from the federal government costs state and local taxpayers 82 cents in increased taxes and fees, on average.

Even for those who support the dangerous idea of a federal bailout of the states, the report from the OIG at Treasury should be a major cause for concern.

Jonathan Williams is the executive vice president of policy and chief economist at the American Legislative Exchange Council. Follow him on Twitter @taxeconomist. Theo Bookheimer, a researcher at ALEC, contributed to this article.

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