Stimulus and States
The compromise stimulus bill likely to win Senate approval attracted a handful of Republican votes by adding tax cuts and trimming spending. Most of the spending cuts came in programs intended to aid states directly, including education assistance.
However, with 46 states now in the red, and states expected to run cumulative deficits of more than $350 billion through 2011, that choice seems odd. Keeping state and local governments from raising taxes or laying off workers to meet their balanced budget requirements should be a top priority of any stimulus. Keeping income and sales taxes from rising in the heart of the recession would, at the very least, keep things from getting worse. When the New York Times surveyed economists in December, about two-thirds of economists across the political spectrum endorsed the idea of increasing federal spending to maintain current state budgets or expand education.
Yet, the main items on the Senate chopping block are money for education and other direct state aid in the “state stabilization fund”. The House bill includes $79 billion in funds for education and other state services, largely through grants to school districts and states, but the Senate compromise provides just $39 billion, and cuts back the most flexible part of the state grant money. The Senate bill would also eliminate $16 billion in school construction grants.
There is still plenty of help in the House and Senate bills for states (and localities). Both measures increase federal funding for Medicaid, another major state spending program. Both also increase assistance for unemployment insurance. And infrastructure spending may help some in the short-run, though much of this money won’t be spent for several years. The stimulus bill also expands states’ ability to issue tax-exempt bonds, though it’s unclear how many investors need tax-exempt income right now.
The House stimulus is far from perfect. Urban Institute analysts have proposed different ways to get aid to states faster and more effectively. Yet, pumping cash to states through increased education spending and the block grant would provide a pretty good bang for the buck.
Some blame the states for their own fiscal mess. They say governors should have restrained spending before the slowdown hit. Yet, up until two years ago, many states had healthy rainy day funds and hadn’t raised taxes beyond levels since the last recession. In 2008, about half of states ran into budget trouble, especially those hit hard by the housing crisis. This year, states are being hammered by falling revenues. The falling stock market and heavy job losses are shrinking state income taxes. Sales taxes are plunging in the wake of the slowdown in consumer spending, and property taxes will fall as assessments catch up to plummeting house prices.
Perhaps states could have been more prudent when they were flush. So could banks and insurance companies. However, we must now deal with things as they are, and forcing states to slash spending or raise taxes in the teeth of a deep recession seems like a very bad idea.