The $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act signed into law last week will allocate roughly $200 billion in fiscal relief to state and local governments. This is on top of about $1 billion provided to support the public health response by states and localities in the phase 1 aid package, and an estimated $40 billion in additional Medicaid funds provided in phase 2 relief.  

This is a significant amount of federal support. It may also prove to be grossly inadequate.

What the CARES Act provides for states and localities

Among the major provisions in the latest federal response are:

• $150 billion for a Coronavirus Relief Fund dedicated to state and local governments
• $30 billion for an Education Stabilization Fund (half for K-12 and half for higher education)
• $25 billion for mass transit agencies
• $5 billion in Community Development Block Grants
• $3.5 billion for Child Care Development Block Grants

Why that is not nearly enough

Cities and counties on the front lines of the public health crisis estimate they will spend tens of billions of dollars this year beyond what they’ve budgeted because of the emergency response.

States that normally would be putting the finishing touches on their fiscal 2021 budgets are instead ripping up those plans (and the obsolete revenue projections underlying them). Instead, they are rushing to pass emergency supplemental appropriations before adjourning legislative sessions early to avoid unnecessary coronavirus exposure. There won’t be new budget plans for quite a while.

States are also following the federal government and pushing back their tax-filing deadlines. This helps people and businesses, but because most states end their fiscal year on June 30 and normally collect a significant share of income tax revenue in April, it puts even more stress on state budgets.

But the COVID-19 budget ramifications for states and localities will go well beyond these initial costs. In fact, whenever state legislators return, they will confront a grim budget picture.

Sales taxes are plummeting due to the (absolutely correct) orders from governors and mayors to shut down businesses in an attempt to slow the virus’s spread and to people staying home and generally pulling back on consumption.

Personal income taxes will also fall as businesses shed jobs and reduce employee hours—especially in the hospitality, tourism, and leisure industries. Falling oil prices will compound budget problems in energy revenue dependent states.

Also hard hit will be states with income taxes that rely disproportionately on high earners, whose stock portfolios suffered collateral damage. California’s non-partisan Legislative Analyst warned of rough seas ahead. New York’s Governor Andrew Cuomo called COVID-19’s revenue ramifications “incalculable.”

Exacerbating the problem, as in previous recessions, demands for state and local services such as Medicaid and Unemployment Insurance (UI) will spike just as revenues plummet. The most recent UI claims were literally off the charts.

This is a problem because states and localities, which spend over $3 trillion a year, are restrained by balanced budget rules that make deficit financing difficult if not impossible. Thus, without federal assistance, these governments are forced to cut services or raise taxes—both of which can harm people, businesses, and the economy when they are most vulnerable.

While most states did an admirable job building up their rainy day funds after the Great Recession, those funds are insufficient for an economic shock this large. The median state rainy day fund is roughly 8 percent of annual expenditures, and this percentage varies considerably across states.

It is troubling that most federal funds for states and localities in the CARES Act are primarily for costs related to the coronavirus, spending not otherwise accounted for in the states or localities most recent budgets, and expenses in this calendar year (though not before March 1).

Congress must go beyond this and directly support states and localities' fiscal health during the economic fallout from COVID-19—just as they did during the depths of the Great Recession. And correctly timing and targeting that relief is important.  

For example, it is problematic that additional Medicaid dollars in the COVID-19 phase 2 package are tied to the length of the public health emergency (as determined by the US Secretary of Health and Human Services) and not to state fiscal emergencies, which will last much longer.

Congress must also ensure the money goes to where it is most needed. In the CARES Act, much of the money is allocated on a per capita basis, which may have been most politically expedient but is unlikely to be clearly related to the disease’s health and financial impact.  

And because most federal funds in CARES Act are reserved only for unbudgeted expenses, the bill inexplicably penalizes places that were the most prepared.

Given the predicted trajectory of this virus, Congress should soon contemplate an additional recovery package. Next time they should support state and local governments in ways that go well beyond covering only virus-related costs. Doing so would not only help these governments but the people, businesses, and economies that depend on them.