America’s system of shared governance between the federal and state governments is under attack. Congress is resisting calls from the National Association of Governors to provide substantial financial assistance to help states close gaping holes in their operating budgets that have resulted from an unprecedented decline in economic activity.
The outcome of this debate could well have long-lasting political/fiscal implications, but in the short-term, it will undoubtedly result in an uneven, inequitable, and weak economic recovery.
The fiscal positions of states are directly linked to the level and change in economic activity. It is impossible to separate the fiscal crisis at the state level from the economic and financial crisis of individuals and businesses.
The loss of income and sales shows up in less tax revenue in the coffers of states. Two-thirds of state and local revenue comes from the taxes levied against personal and corporate income and retail and business sales. So how the economy goes so goes the fiscal finances of states.
The uneven nature of the current fiscal crisis at the state level is a direct result of the disproportionate geographic aspects of the coronavirus. States that have experienced a higher number of COVID cases and enforced broader and greater restrictions on businesses and people mobility have seen a greater drop in tax revenue and wider budget deficits.
Providing financial assistance to states to help cover the financial costs associated with the shutdown of the economy is not an argument in favor of big government any more than paying people not to work is a move towards a larger welfare state or providing public money to small businesses to stay open represents a shift towards socialism.
An all-out crisis requires an all-out policy. Congress's initial decisions to provide aid to workers, the unemployed and small businesses were based on need and not geography. Congress should not use a different test or set of factors in its decision to offer financial assistance to states.
The short-term economic implication of denying aid to states will slow the economic recovery since the largest states with the biggest payrolls and spending budgets have been the hardest hit. The disparity in unemployment rates between states could easily become very wide, triggering a political backlash.
The longer-term political consequences of denying aid to states could well be a new coalition of voters who defend their economic self-interests that sets in motion subsequent political changes that evolve over several electoral cycles.
Federalism might not be dead, but its no longer working like our father's federalism and that will in time endanger the economy.
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