Republicans push Biden to divert federal infrastructure aid
WASHINGTON – From California to Virginia, many states that faced devastating deficits in the depths of the pandemic recession are now overflowing with tax revenues due to a rebound in the economy and the surge in the economy. stock market. Lawmakers worried about budget cuts are now proposing lucrative increases in school spending, tax cuts and direct payments to their residents.
This turnaround is in part the product of strong tax revenues, especially in states that heavily tax high incomes and the rich, whose finances have weathered the crisis well. The surprisingly rosy picture is pressuring President Biden to reallocate hundreds of billions of dollars in federal aid approved this year to help fund a possible bipartisan infrastructure deal.
Last week, Utah Republican Senator Mitt Romney suggested that Mr. Biden and Republican negotiators look to “some of the funding that has been sent to states already under the last bills” to help pay this agreement. “They don’t know how to use it,” Mr. Romney said. “They could use this money to finance some of the infrastructure related to roads, bridges and public transit.”
Some economists and budget experts are backing the push, arguing that the money could be better spent elsewhere and that state spending plans could increase the risk of rapid inflation across the country. Other researchers and local budget officials say federal aid is saving hard-hit cities and states, like New York and Hawaii, from a cascade of layoffs and spending cuts.
Biden administration officials say they continue to support the distribution of all of the $ 350 billion state, local and tribal aid contained in the $ 1.9 trillion economic assistance package that Mr. Biden signed in March. They say the aid will help ensure that the economic rebound does not repeat the years of national and local budget cuts that followed the 2008 financial crisis, which slowed the resumption of recession and helped millions of Americans wait years to reap the rewards.
“We still believe that the national and local plan is essential to ensure that we have a strong insurance policy for the kind of high growth we want, the kind of fair recovery the country deserves,” Gene Sperling, advisor Mr. Biden’s principal who is overseeing the execution of the March assistance program, said in an interview, “and to return the 1.3 million jobs lost nationally and locally.”
Even if the administration wanted to recover or embezzle the funds, it is unlikely that they could reuse the money or make significant changes to the way it is used without Congressional action.
The state and local funding debate comes as Mr Biden goes through a critical week of negotiations with Republicans over infrastructure seeking a deal, and as he prepares to travel to Cleveland on Thursday for talk about the economy. How to pay for any new spending is a major obstacle in the talks, with Mr Biden pushing for higher taxes on businesses and Republicans preferring an increase in user fees like the gas tax.
Reallocating unspent funds could help move a deal forward, especially given Republican opposition to state aid capitalization in previous bailouts. Democrats have been pushing to include lucrative financial aid for states, cities and tribes in Mr Biden’s bailout bill. Republicans fought these efforts, warning they would serve as a “bailout” to liberal states with high taxes and high spending. They also cited a series of projections from Wall Street companies and other analysts suggesting that many state incomes were doing better than officials feared in the early months of the pandemic.
It increasingly appears that many liberal states are not “bailed out” – but also that some of them do not need more federal money. This is especially true in states that do not primarily depend on the tourism or hospitality industries for their tax revenues. Those with progressive tax systems that have nabbed growing income from the investment income enjoyed by wealthy residents – like the Silicon Valley tycoons – are also doing well.
California officials expect a $ 15 billion surplus this fiscal year, after fearing a $ 54 billion shortfall. Virginia recorded nearly $ 2 billion in unanticipated income. Much like Oregon, where economists recently updated the state’s revenue forecast – from projected deficits to surplus – in a report that surprised and delighted many lawmakers.
“It’s extremely surprising,” said Mark McMullen, the Oregon state economist.
“Obviously when the closures started and we saw these catastrophic job losses, we treated them like a normal recession in our forecast,” he said.
But surging tax revenues and several rounds of federal aid have now placed the state “above our pre-pandemic forecasts,” added McMullen.
The high income numbers come as more and more federal relief funds are just starting to come out. The Treasury Department started sending funds to states this month and has so far distributed more than $ 100 billion – about half of what’s available to be disbursed immediately. Local governments are expected to receive the remainder next year, although states that still experience a steep rise in unemployment will immediately receive a lump sum.
The Committee for a Responsible Federal Budget estimates that state and local governments have received a total of nearly $ 1 trillion in relief over the past year. State and local government revenues were about 7 percent above pre-pandemic levels in the last quarter – excluding the federal aid they received.
Marc Goldwein, the committee’s senior policy director, said states like Hawaii and Nevada that rely heavily on tourism clearly need help, but for many others the money was not needed.
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The reasons vary, but Goldwein noted that home values have risen across the country, which has given property taxes a boost; that states fighting against falling oil prices have seen these prices rise; and that consumers are spending at a sustained rate thanks to stimulus measures and an increase in unemployment benefits.
“State and local governments, on the whole, are a positive swimmer in revenue,” Goldwein said. “It’s pretty clear to me that we spent a lot of money on states that we didn’t need.”
Some economists, like Lawrence H. Summers of Harvard, a former Treasury secretary under President Bill Clinton, have pushed Biden to reuse state and local aid for longer-term infrastructure projects, in the hope of relieve what Mr Summers warns as a danger build-up of inflationary pressure. Administration officials see high inflation a much lower risk than Mr. Summers’.
Other analysts warn that the state’s fiscal position could deteriorate if the stock market plunges sharply or economic growth falters. Many cities, like New York, have struggled with slow tax revenues and still depend on the federal government to avoid further layoffs.
New York expects to receive more than $ 22 billion in federal Covid-19 aid, according to the non-partisan Citizens Budget Commission. Despite the funds, the city is still anticipating budget deficits in the years to come, as a result of falling revenues such as property taxes.
In retrospect, said Lucy Dadayan, senior research associate at the Center for Tax Policy, the March law should have included “more targeted funding” for states and cities that need it most.
“I would always be helping state and local governments – more local governments than state governments, given what we know,” Ms. Dadayan said.
Treasury Department officials say the Biden administration wants states to have sufficient resources to cover the immediate costs of exiting the pandemic and to be able to pay for more expensive services to help the people hardest. affected.
But many states and cities are considering one-off spending plans that go far beyond fixing their safety nets. Gov. Gavin Newsom of California, a Democrat facing a recall vote, has proposed a series of spending increases, including $ 1,100 stimulus checks to individuals and tax credits for filmmakers.
In Florida, the revenue forecast for 2021 has been revised up twice in the past year. The state is now expected to receive $ 8.8 billion from the federal government. Ben Watkins, director of Bond Finance’s Florida division, said the state is using the relief funds to invest in infrastructure and water quality projects and is directing some of its surplus funds to disaster preparedness. hurricanes.
He described the manna as astounding.
“It’s a good problem to have,” Mr. Watkins said, “but that doesn’t mean it’s not over the top.”
States have substantial leeway in how they use the money, although they are prohibited from using the funds to subsidize tax cuts. Several Republican-led states have sued the Treasury Department, arguing the restriction infringes on state sovereignty.
The lawsuits do not appear to be slowing the delivery of funds. Ohio failed to win an injunction preventing the restrictions from being enforced this month, and Missouri saw its case thrown out of court after a federal judge said the state had failed demonstrated that the law had caused him harm.
The Treasury Department plans to closely monitor how the money is spent and whether states are using budget tricks to actually fund tax cuts. The agency argues that the federal government has the right to place conditions on how federal funds are used and that states are allowed to withhold the money. A Treasury Department official said no state has yet indicated that it will reject the funds.
In the meantime, the states that are bursting with revenue are pursuing their projects. Nebraska approved a $ 26 million corporate tax cut last week, and lawmakers told the Omaha World-Herald they believed that by keeping federal funds in a separate account from the general fund of the State, they were complying with the law.
Nicolas fandos and Dana goldstein contribution to reports.