The next big battle on Capitol Hill concerns aid to states and localities

The next big battle on Capitol Hill concerns aid to states and localities
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Speaker Nancy Pelosi (D-Calif.) has floated a $1 trillion plan, a non-starter for Republicans. Sen. Mitch McConnellAddison (Mitch) Mitchell McConnellCoronavirus talks collapse as negotiators fail to reach deal Pelosi, Schumer say White House declined T coronavirus deal COVID-19 bill limiting liability would strike the wrong balance MORE (R-Ky.) has suggested that any aid package be linked with liability protections from COVID-related lawsuits for employers who have acted responsibly. The Trump administration has sent mixed messages on the topic but is likely to support some form of state and local aid.

States and localities perform critical public functions for education, law enforcement and infrastructure. States also partner with the federal government in the Medicaid program, providing health care to the poor and the elderly. 

The shutdown of the national economy has triggered mass unemployment, business stoppages and closure of schools. It has also meant significant declines in revenue for state and local governments. The National Association of State Budget Officers estimates that states have suffered revenue declines of at least 20 percent. 

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An analysis by Moody's Analytics estimates that only five states have enough reserves to absorb the revenue losses caused by the economic shutdown fully. State income and sales tax collections are dropping precipitously, which is why many governors are pushing hard to reopen their state economies gradually.

There seems no doubt that some form of federal assistance is in the offing. The question is, what is the most equitable form of aid and how should such aid be calculated? The General Revenue Sharing program, which existed between 1972 and 1986, distributed funds to states and localities based on a formula that considered population, tax effort and per capita income

Part of President Richard Nixon's "New Federalism," the program provided unrestricted aid with few strings attached. Such a formula could again be used, but that plan was complicated due to the need to also provide funds to thousands of local governments. 

A more efficient way to address state revenue loss would be to allocate aid based upon the proportion of total federal income taxes paid by residents of each state. This information is readily available from the IRS. 

Due to data anomalies connected to the 2017 tax reform legislation and the timing of tax payments in 2017/18, data from 2016 provides a better base from which to determine state-level calculations. Basing allocations on federal income taxes paid is a simple, straightforward way to determine reasonable shares for each state.

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Unlike the prior revenue sharing program, states would be responsible for directing a portion of their assistance to localities and school districts. Each state has existing mechanisms to assist local governments and school districts and Congress would be foolish to attempt to reinvent that wheel. Such a task, and the political responsibility, should be left to governors and state legislatures as part of their existing budgeting process.

A $200 billion program of state/local assistance would provide significant aid to support critical state and local government programs, including education. Such assistance, while not covering all state revenue shortfalls, would cushion the financial shock caused by the economic shutdown. 

The state hardest hit by the crisis, New York, has experienced an estimated revenue loss of $15 billion, with billions more lost to localities. New York State taxpayers pay approximately 8.7 percent of federal income taxes and would receive $17.4 billion were $200 billion were allocated nationally. If the legislation provided that a minimum of 40 percent of such aid be allocated to local entities, New York localities and school districts would receive at least $6.9 billion from the state. 

Under this plan, for instance, Illinois would receive $8.8 billion, California $29.6 billion, Kentucky $1.68 billion, Texas $15.4 billion and Florida $12 billion. Regardless of whether states rely upon income, sales and other levies, significant revenue declines are occurring. 

Just as Washington has acted to shore up hospitals and small businesses, it will become necessary to help remedy state and local finances. No allocation formula is perfect but using income taxes paid by residents of each state is a fair and efficient method of allocating emergency financial assistance. 

A $200 billion program of financial assistance is necessary to keep essential services going at the state and local levels. It does not reward states, such as Illinois or New Jersey, for recklessly underfunding state pension systems. Those problems will still need to be addressed in Springfield and Trenton. 

The steep revenue declines at the state and local level will largely need to be addressed with a quick infusion of unrestricted aid to the states. Given the financial emergency, Congress needs to act soon. 

Former Rep. John J. Faso (R-N.Y.) represented New York's 19th congressional district from 2017-2019 and currently practices law.