Statement by Linda Bilmes on Impact of COVID Relief Bill

As the Biden administration's COVID relief bill headed to the President's office for his signature, Linda Bilmes reflected on the impact the bill would have on the economy and those most affected by the pandemic.

“The Covid-19 rescue package is a potential game-changer for the finances of state and local government. The bill provides $195 billion for states, territories, and tribal governments and $130 billion for cities and counties, with few strings attached. This money is intended to ‘to mitigate the fiscal effects stemming from the public health emergency’ – which means to replenish lost revenue, restore local services, and to hire back some 1.3 million state and local workers laid off in the past year.

The impact of the pandemic on local finances has been uneven across the country. Twenty- eight states saw revenue declines in the period April to December 2020 compared with the same period in 2019.  The hardest hit were those reliant on sales taxes, tourism and oil and gas. Elsewhere the fiscal situation is less dire than predicted.  The pandemic hurt low-wage workers far more than high earners, who continue to work remotely and pay taxes.  The stock market rally also boosted incomes and capital gains. Consequently, in 22 states tax revenues increased during the same period, some generating a budget surplus.

Overall, the total cash shortfall facing states for budget years 2020-22 now looks to be about $148 billion, according to forecasters at Moody’s Analytics, less than half of what was originally predicted.

For distressed states and communities, the Covid-19 Bill will provide critically needed funding. Unemployment remains well above pre-pandemic levels and many local governments need to plug budget holes in schools, housing, parks, public health, transit, local services, social programs, and deferred maintenance.

The more resilient states, however, will need to pivot away from belt-tightening and figure out how to best spend this sudden federal windfall. They need to strengthen their capacity – for example, ensuring that local public health authorities are better equipped to handle future health emergencies and helping millions of children who have missed out on schooling get back on track. Contract processes need to be reformed to enable small and minority-owned businesses to participate in the recovery.

Studies show that the economic multiplier for every dollar spent at the state and local level is at least 1.3 times. So this relief package, combined with the billions of dollars it also provides for education, small business, restaurants and other local responsibilities, could make a huge difference in helping the country get back on its feet.  

The risk is that some states will use the federal funds to cut taxes or to add expensive programs that add to long-term operating deficits. The legislation prohibits state governments from using the cash to shore up pension funds or offset new taxes. But money is fungible.  Recovery from the pandemic is only just beginning, with many uncertainties that could jeopardize the revenue picture for states in the year ahead. Getting the full economic benefit from the new spending will depend on whether the majority of state and local officials spend it wisely, and don’t fritter it away.”