Commentary, COVID-19, NC Budget and Tax Center

Three reasons why federal aid to state, local governments is not enough

Last week, Congress passed the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, which was immediately signed by the President.

While the bill has many good provisions, it misses the mark in many ways, like prioritizing tax breaks for big companies over federal aid to state and local governments.

Of the approximately $4 billion North Carolina is expected to receive, the Center on Budget & Policy Priorities estimates that $3.5 billion will go to the state and only about $481 million to local governments. This is largely a result of the allocation formula, which only provides allocation to local governments if the population is above 500,000 residents.

State and local governments are on the front lines of trying to keep communities healthy and to protect people from losing income and access to basic needs. Prior to the passage of the CARES Act, the NC League of Municipalities wrote letters to state leaders calling for additional resources to make up for declining revenue and meet the growing need for public safety personnel and broadband access. In a letter to Congress, the National League of Cities outlined four recommended improvements the CARES Act: enact a stabilization fund for cities and states, make local governments eligible for tax credit to offset costs of paid leave, stabilize the municipal bond market, and repeal state and local and property tax deduction caps.

Although the state and local aid in the CARES Act is a meaningful and important first step, it is likely to be insufficient to support North Carolina’s increased expenditures from combating COVID-19, as well as the potential loss in revenue from an economic downturn.

First, we know that fighting this pandemic is requiring new expenditures in medical supplies, health care, and stabilization of household costs for housing, child care, and much more.

Second, based on what we know from the U.S.’s last recession, state revenues could drop as a result of the contraction in economic activity, leaving state lawmakers with a shortfall that many states are already beginning to project. During the Great Recession, there was an 11% decline in state revenues year over year, which reduced the availability of funds by $2.4 billion. This funding gap could have continued over multiple years if it weren’t for the work of the American Recovery and Reinvestment Act. Indeed, as public health professionals project a more lasting or potential cyclical nature to COVID-19, an impact over multiple fiscal years should be anticipated.

Finally, and of utmost concern to the state’s capacity to respond in this moment, is the $3.6 billion less in revenue that the state has available because of tax cuts over the past several years that have primarily benefited the wealthy and big corporations. The missed investments in our public health system, in the technology and learning materials for students, in broadband infrastructure in rural communities, and in the construction of affordable housing have combined to make us less resilient in this moment.

North Carolina cannot afford to cut services at this time, which means we must raise the revenue needed to responsibly respond to the coronavirus pandemic and put the state on firmer footing for the future.

The good news is that with the passage of the CARES Act, state legislators can move to drive federal dollars to critical needs and make sure our federal delegation continues to advocate for all North Carolinians. Additional Congressional action is need to plug the holes that the CARES Act leaves empty, but the North Carolina General Assembly should waste no time before making its own commitment to combating this pandemic and containing the economic harm, both of which threaten the well-being of us all.

Leila Pedersen is a Policy Analyst with the Budget & Tax Center, a project of the NC Justice Center.

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