Why States Should Reject Democrats’ Bailout Funds
The biblical version of the Golden Rule holds that individuals should do unto others as they would have others do unto them. Washington, on the other hand, often exhibits a different version of the Golden Rule—he who has the gold makes the rules.
A last-minute provision added to the latest “stimulus” measure at the behest of Senate Majority Leader Chuck Schumer, D-N.Y., illustrates how Democrats want to use federal dollars to control and micromanage states—particularly conservative ones. But given the rebound in tax revenues across much of the country, conservative states should take the opportunity to tell Washington: “Thanks, but no thanks—you can keep your bailouts, and we’ll keep our control.”
Can’t Let People Keep Their Own Money
The provision, included on page 579 of the legislation, applies to states receiving bailout funds:
(A) IN GENERAL.—A State or territory shall not use the funds provided under this section or transferred pursuant to section 603(c)(4) to either directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.
In other words, as long as states accept bailout funds, they cannot permit their own citizens to keep any more of their own money, or promote economic growth following months of harmful lockdowns, by reducing tax revenues. But they are of course free to give citizens who don’t pay taxes more money by expanding welfare programs, bloating both government and dependence within their jurisdictions.
Lest anyone think this requirement an inconvenience lasting only through 2021, the legislation further provides that the “covered period” under which states cannot adjust their tax revenues downward will extend through December 31, 2024—in other words, until the end of President Biden’s first term. (Funny that timing.)
Undermines School Choice
Unfortunately, this restriction will have implications that extend well beyond mere economics. As an editorial in the Wall Street Journal noted, many states use their tax codes to provide deductions or scholarships that fund school choice. (Disclosure: I have done paid consulting work on behalf of school choice causes.) In fact, at least 33 statewide tax-credit scholarship or tax deduction programs exist nationwide, with some states having multiple such programs.
If states want to expand their existing school choice programs—perhaps because teachers’ unions continue to thwart school reopenings, causing untold damage to millions of American children—they likely will not have the ability to do so for at least four years. Unless, of course, they reject the bailout funds.
Revenues Have Recovered
Thankfully, most states’ revenue projections have recovered so they do not need these bailout funds, as even The New York Times was recently forced to admit. The trillions of dollars that both Congress and the Federal Reserve pumped into the economy stabilized state revenues.
Congress’s action to increase unemployment benefits, such that many individuals earned more on unemployment than they did while working, bolstered state sales tax revenues. Meanwhile, the Fed’s injection of massive amounts of liquidity led to a run-up in the stock market, increasing capital gains tax receipts in many states.
While some states heavily dependent on tourism or mineral revenues still face budget shortfalls, others weathered the pandemic with their finances intact or even improved. One analyst at the liberal Brookings Institution told the Times that revenues declined by a mere 1.8 percent during the last three quarters of 2020 (i.e., April-December), compared with the same period in 2019.
A separate JPMorgan analysis of 47 states found revenues largely flat last year. While state revenues lagged 14.8 percent behind 2019 levels by the end of June, they recovered to finish even with 2019 by the end of last year, suggesting revenue will continue to grow, particularly as the economy reopens.
A Moody’s Analytics report cited by the Times found that “31 states now had enough cash to fully absorb the economic stress of the pandemic recession on their own.” Given that dynamic, why on earth would conservative states let Senate Democrats dictate the terms of their economic policy for the next four years?
States: ‘Just Say No!’
The restrictions Schumer imposed—so much for the claims of a “no-strings-attached” bailout—could violate the Constitution. The Supreme Court in its 2012 ruling in NFIB v. Sebelius made Medicaid expansion optional to states for that very reason: Obamacare as originally written didn’t offer states an effective choice whether to expand Medicaid to able-bodied adults, and therefore employed unconstitutional levels of coercion.
Indeed, several red states have taken action to challenge the provisions in the “stimulus” legislation. A total of 21 Republican attorneys general wrote to the Treasury Department about the tax provision, asking Treasury “to confirm that [the provisions]…do not attempt to strip States of their core sovereign authority to enact and implement basic tax policy,” and threatening further action by March 23 absent such assurances. Ohio’s attorney general already filed suit over the matter, asking federal courts to prevent enforcement of the restrictions.
Rather than getting involved in constitutional battles, states that wish to retain sovereignty over their levels of taxation (and much else besides) should follow Nancy Reagan’s famous advice and “Just say no!” to bailout funds. That way, states won’t feel the need to follow all of Washington’s diktats, because they won’t have to worry about losing money they never received. Most importantly, state lawmakers will retain the authority to do the job that voters elected them to do—rather than ceding all that authority to Washington, and letting Chuck Schumer boss them around.
This post was originally published at The Federalist.