State and Local Aid Will be a Windfall for Government, and a Potentially Massive Tax Hit for Business
The nonpartisan Tax Foundation provides more insight into the $350 billion in aid to state and local governments embedded in the $1.9 trillion “American Rescue Plan.”
The major takeaway: the “cash infusion for state and local governments has become a solution in search of a problem.”
The state and local government windfall comes on top of the $100 billion in aid sent their way in December for education, transit, roads and much more.
Overall, state and local government budgets are doing fairly well:
Forty-three states and the District of Columbia have now published revenue data for all 12 months of 2020; in those states, revenues are up $3.2 billion in aggregate compared to the previous calendar year, thanks to robust gains in financial markets and federal assistance that has kept businesses afloat and provided benefits to individuals. Some of those are, indeed, taxable benefits, in the case of enhanced and expanded unemployment compensation benefits.
And with the federal aid package, some states are going to make out like bandits. Illinois, for example, had a $443,209,773 revenue decline last year. The estimated $13,122,080,345 in state and local aid on the way will make up 1665% of the shortfall, or about $1,036 per resident.
That’s quite a windfall. And Illinois isn’t alone. Red states and blue states alike will cash in big on the relief bill. But there’s a huge downside surprise, too.
States will have to replenish their depleted unemployment compensation systems. Doing so could require big tax hikes on businesses:
…[states] will have to raise employment taxes drastically—with taxes potentially going up by thousands of percent. To meet an immediate state need and fend off ruinous tax increases on rehiring, the federal government could consider shifting from a system that provides general aid on the basis of unemployment to one that offsets some of the states’ unemployment compensation costs. Short of this, states receiving federal aid well in excess of general fund needs would do well to consider depositing the money into their unemployment compensation trust funds.
This would be the prudent and far-sighted thing to do…something state and local pols aren’t noted for, even in the best of times.
Image Credit: By Jericho [CC BY 3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons