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US States Need Federal Funding to Combat the Pandemic

With US state governments facing massive budget shortfalls as a result of the COVID-19 crisis, most will have no choice but to raise taxes or slash spending, further compounding the recession. If Congress and the White House do not step in with additional funding, they will have effectively manufactured another crisis.

BERKELEY – The COVID-19 pandemic has catapulted federalism to the top of the political agenda in America. Confronted with the glaring lack of leadership from the Trump administration, state governments on the front lines have taken charge of the response. But with budget deadlines for the new fiscal year rapidly approaching, many states face unanticipated shortfalls as a result of the crisis. In a recent letter to congressional leaders, the National Governors Association requested an additional $500 billion or more in flexible federal funding, in addition to the $150 billion that was granted for restricted uses under the recent $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act.

In weighing this request, Congress and the White House must determine whether there is a valid macroeconomic rationale for a significant additional tranche of flexible state funding and whether the federal government can afford it. The answer to both questions is a resounding yes.

But US Senate Majority Leader Mitch McConnell, a Republican, has suggested that additional federal funding would amount to a bailout for predominantly “blue” (Democratic-controlled) states, and has argued that states in fiscal crisis should instead consider declaring bankruptcy. McConnell’s insinuation that state budget shortfalls are the result of profligacy is misleading and politically divisive. Both red and blue states confront huge budget shortfalls that stem from declining revenues, not excess spending.

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