Stimulus Bill, Including Checks And Unemployment, Held Up Over State Budget Bailouts

Both Republicans – for the most part – and Democrats have supported some idea of a second stimulus plan. Both Republicans and Democrats have supported the idea of sending checks directly to taxpayers at home. And both Republicans and Democrats have supported the notion of some increase in the unemployment benefits.

Yet, any compromise of a second round of stimulus bill has remained stalled for weeks, as Democrats have called for larger concessions from Republicans, while the GOP has sought to keep the cost of the bill down. One of the main points of contention between the two sides: How much aid to provide state and city budgets.

Republicans have sought to provide $150 billion in state aid, while Democrats want $900 billion. Republicans have taken the stance that such aid only helps blue states and larger cities. Democrats have argued that the lack of funds to state budgets hindered the 2009 recovery, and without more aide, would lead to an even deeper decline in unemployment and wealth.

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In the most current iteration of the Republican stimulus plan, considered a “skinny” version where even stimulus checks were stripped from the plan, state aid wasn’t included. The bill, which Senate Majority Leader Mitch McConnell (R-KY) hopes to bring to the floor this week, isn’t likely to pass both the Senate and House of Representatives. Instead, it’s a political test to see if it can pressure Democrats to the table, in hopes they appear as if they’re not doing anything for those that need the funds. But it remains unclear if Republicans even have 51 Senators willing to back the bill, nor will it have the support of 60 Senators required to work around any filibuster. Plus, House Democrats already passed a version of stimulus in May, which the GOP controlled Senate chose not to consider.

While politicians will debate over the exact amount of aid – or refuse to negotiate, as has been the case over the past few weeks – there’s at least some truth to the fact state budgets are in dire need of funds. The decline in state revenues, due to a reduction in business activity, loss of jobs and increased expenses to counter COVID-19 has left services and municipal employment at risk.

It’s a potentially bigger near-term threat to many American’s finances, retirement and wealth than losing a second stimulus check.

School Funding Could Get Cut First

As students have returned to school over the past month, it has put more onus on teachers. They have to come up with unique ways to teach in a socially distant world, take on the risk of contracting COVID and still provide an educationally valuable experience. Meanwhile, school districts have had to fund protective tools to help reduce the virus’s spread among students.

When it comes to state budget cuts, one of the biggest areas that could potentially get hit are in the classrooms. The education, health care and public safety departments typically account for the largest chunk of a state and local budget. “If you’re looking at making significant budget cuts, you have to go where the money is,” Brian Sigritz, director of state fiscal studies for the nonpartisan research group National Association of State Budget Officers, said to Bankrate.

School budgets have already started to feel the potential brunt of a shortfall. So far, 63% of job losses at the municipal level have come in education, the Bankrate report added.

Cities have warned states that if larger cuts hit education, then teacher layoffs will also follow. With over 3 million teachers employed in the US, cuts to education would likely result in further economic concerns.  

Higher Taxes Could Follow

At the end of the second quarter, which ends in July, state and local tax receipts dropped 3.8% compared to the year prior. Income taxes were 7.1% lower while sales taxes fell by 9.8%, according to the conservative think tank The Tax Foundation.

Meanwhile, the left leaning think tank Center on Budget and Policy Priorities (CBPP) estimates that state budgets will likely see a 10% shortfall this year and 20% gap next year. The Tax Policy Center found that estimated shortfalls in 2020 will come to $75 billion and reach $125 billion in 2021. 

These gaps, along with a reduction in income, will lead to some tough measures on the part of local and state officials. Some of the decisions will lead to reduction in services, like trash collection or reduced routes on local public transit. But expect taxes to rise in many areas, moving forward. It’s a tactic that few lawmakers will want to make, especially during an election year. But, moving forward, it’s an option they may not be able to avoid.

Depending on the state and municipality, you could see growing taxes on online purchases, in your property taxes or in sales taxes, since it’s how people have continued to spend, even in the light of the slowdown.

It’s Not A Blue State Issue

Republicans have tried to paint this issue as one that only impacts blue states or cities, meaning they have a Democrat as governor. But that’s – unsurprisingly for political maneuvering – a very simplistic view of the situation.

It’s true that many of the states seeing the largest gaps in revenue are run by Democrats, including Nevada, New Mexico, Hawaii, California and New York, according to data from the CBPP. That’s also likely because the states took greater efforts in the containment stage of the virus or were disproportionally impacted by stay-at-home orders.

While experiencing less initial revenue impact, eight of the ten states with the highest cases-per-100,000 are run by Republicans, according to Center for Disease Control (CDC) data. Louisiana – which leads all states in cases-per-100k – and Nevada were the only two states within the top 10 that you could consider “blue” solely based on the party of the governor. (New York may also be included within this group, but CDC data separates the state from New York City figures, where the US saw its initial surge in cases.)

Of those in the top-10 of per-100k cases, Nevada saw the largest decline in revenue, with an expected hit of 26% in 2021. That’s certainly due to the impact on tourism to Las Vegas and the loss of gambling revenue. Texas came in second, with a 15% fall in revenue expected next year.

While this conversation shouldn’t hinder on who runs a state, it’s important to point out that no matter which party was in charge, states face significant revenue shortages, even as COVID remains a threat.

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