What Surplus? Assessing State-Local Government Aid after a Decade of Austerity

As early as spring 2021, states were reported to have excessive amounts of revenue as a result of the federal aid distributed during the pandemic. This has led conservative groups like the Committee for a Responsible Federal Budget (CRFB) to argue that the amount of federal funds transferred to state and local governments under the American Rescue Plan Act (ARPA) was unwarranted. In March 2022, Republican members of the United States Congress proposed rescinding some of the aid, and have raised the subject again more recently. At the subnational level, many state governments have begun—or are considering—using the funds to justify personal income tax cuts.

In “What Surplus? Assessing State-Local Government Aid after a Decade of Austerity,” Amanda Page-Hoongrajok and Mariam Majd argue that the federal aid distributed during the pandemic should be assessed as addressing a decade-long shortfall in state-local spending, and not only as a response to the pandemic. State and local governments should treat current budget surpluses not as unexpected windfalls, but as a means to fill spending gaps left by the Great Recession and the inadequate recovery that followed.

In this context, taking back the aid at the federal level or implementing state-level tax cuts doesn’t make sense. The authors argue that the federal transfers from the CARES Act and ARPA should be allocated to historically underfunded public sectors, particularly infrastructure and employment. Not only would these investments be more equitable than regressive tax cuts but they would help support critical state and local government spending in areas that never recovered from the Great Recession—and were made even more fragile by the pandemic.

In this brief, Page-Hoongrajok and Majd:

• Demonstrate the shortfall in state-local spending from 2009 to 2019;
• Identify areas where state-local spending declines were most significant and in some cases are still depressed; and
• Recommend that state and local governments allocate their remaining ARPA funds to build public infrastructure and directly support public employment, rather than enact further tax cuts.