Senate Republicans have proposed using $ 700 billion in “unspent” bailout funds to pay them off … [+]
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Negotiations over funding President Biden’s infrastructure plan were hampered by the excesses of his first signature initiative, the American Rescue Plan Act. The bill provided $ 525 billion in assistance to state and local governments, many of which are now running large budget surpluses. Republicans have suggested withdrawing these funds or using them to fund infrastructure, but this would likely not be practical as most of the money has already been allocated. Fortunately, there is a better alternative: Congress should design its infrastructure bill around consistent grants that require state and local governments to provide some of the funding for projects that serve their constituents. This approach would not only reduce unnecessary spending for states already swimming in cash, it would also use federal funds for infrastructure projects that offer the most value.
Most federal infrastructure spending is currently distributed through appropriate grants to state and local governments. It makes sense for these governments to manage funds and oversee projects built in their jurisdictions to serve their constituents. More importantly, however, the commitment of state and local governments to provide some of the funding can encourage them to only pursue useful projects. Otherwise, local leaders would generally want to spend as much federal government money as possible on their constituents if it were done unconditionally. Federal grants typically cover around 80 percent of the cost of a project and must be used to build new infrastructure rather than maintain or repair existing systems.
The arguments that state and local governments are contributing a similar or larger share of the funding for the major infrastructure bill will be reinforced by their financial position after the bailout bill has been passed. At the beginning of the pandemic, many economists (including us at PPI) were concerned that their revenues would collapse during the ensuing recession, such as after the 2008 financial crisis. These heavy loss of income resulted in cuts in the number of state and local workers joining the ranks of the unemployed and prolonged the recession.
But the Covid recession turned out to be different. Although states whose revenues are heavily reliant on hospitality have still faced significant budget constraints, other states have even been able to increase their revenues from pre-pandemic levels thanks to rising house prices, which increased property tax revenues, and a booming stock market, increased taxable capital gains. With downsizing focused on low-income people, the impact of the recession on income tax revenues was muted. The states also benefited last year from state incentives that boosted their economies and provided voters with money, which generated both income and sales tax revenue.
As a result, state and local government revenues were 7 percent above pre-pandemic levels, even before the bailout law gave them more than half a trillion more with few conditions. California alone expects a budget surplus of $ 76 billion over the next two years, much of which will be spent on mailing checks to residents rather than making meaningful long-term investments. Several Republican governors are spending the money on alternative forms of compensation, such as return to work bonuses, which serve as cover to end the bailout plan’s expansion of unemployment benefits early in their states. It is clear that this aid went well beyond what was needed to support many governments.
For these reasons, Republican senators recently proposed saving or reallocating $ 700 billion in “unspent” bailout funds to fund infrastructure bills in lieu of tax increases. You have a point: since many states are tight on budgets – and the federal government runs unprecedentedly high levels of debt – it makes sense that they should be asked to get involved in the infrastructure projects that benefit them. But the Republican proposal greatly exaggerates the funds available for reallocation: states whose unemployment rate is currently more than two percentage points above pre-pandemic levels are already receiving all of their bailout funds, while states with lower unemployment rates receive half should receive this year. By the time an infrastructure bill passes through Congress, there is likely to be less than $ 40 billion of the $ 195 billion earmarked for direct aid to state governments. Most of the remaining funds will go to cities, counties and other local governments who will receive half of their money now and next year.
Rather than breaking promises already made, Washington should use the financial strength of state and local governments as an opportunity to harness the power of matching funds to channel taxpayers’ money from all levels of government into the most productive projects. State and local governments that have the money should help free up federal funding for projects in their districts. The federal government should encourage them to prioritize maintenance and repair efforts that are more cost-effective than building new structures by pooling more funds spent on these projects.
The administration should also encourage state and local governments to use their unspent funds from the rescue plan on the water, sanitation and broadband projects already approved by Congress. Schools should use their remaining funds to invest in eligible technology and building upgrades that will continue to benefit students after the pandemic. Every dollar now being spent on these purposes is one dollar that does not have to be spent in subsequent laws in order to realize the president’s infrastructure vision. Legislators could further promote this responsible use of aid funds by allowing state and local governments to count the rescue plan funds spent on the infrastructure as contributions to the matching funds contained in the next draft law.
These measures would not eliminate the need for substantial increases in revenue to fund a significant infrastructure bill, but they could bring the two sides closer together by cutting costs and improving the quality of projects. A more focused approach would also avoid exacerbating inflation concerns and overheating the economy. The President and Congress would be well advised to consider this.
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