The Huge Cost of State Cutbacks

The Huge Cost of State Cutbacks

Printer-friendly version
Plus, Pelosi and Mnuchin clash on Covid relief
Wednesday, August 12, 2020
 

Coronavirus Relief Talks Still ‘Miles Apart’

Democratic leaders Nancy Pelosi and Chuck Schumer said Wednesday that they had turned down an overture from Treasury Secretary Steven Mnuchin for the two sides negotiating a stalled coronavirus relief package to resume talks. The White House, Democrats said, isn’t budging from its demands for a smaller aid package.

"We have made clear to the Administration that we are willing to come down $1 trillion if they will come up $1 trillion," the Democratic leaders said in a joint statement. "However, it is clear that the Administration still does not grasp the magnitude of the problems that American families are facing. We have again made clear to the Administration that we are willing to resume negotiations once they start to take this process seriously."

Mnuchin said Pelosi’s statement was "not an accurate reflection of our conversation," adding that Pelosi was "unwilling to meet to continue negotiations unless we agreed in advance to her proposal, costing at least $2 trillion."

Mnuchin told Fox Business that that Congress could pass a relief plan costing just over $1 trillion now and deal with remaining issues later. "Our view is let’s spend a little over a trillion dollars on areas of the economy that are going to be very impactful now that we can agree on," Mnuchin said, adding that lawmakers could come back for a sixth relief bill later in the year or in January.

"The Administration is willing to move forward with legislation that allows for substantial funds for schools, child care, food, vaccines, hospitals, PPP for small businesses, rental assistance, broadband, airports, state and local government assistance, and liability protection for universities, schools, and businesses," he said in a statement later in the day. "The Democrats have no interest in negotiating."

Pelosi, however, said that a deal needs to get done now and stimulus measures can’t wait. Asked if she thinks Congress can wait until September, when coronavirus relief measures could become part of deadline-driven talks on funding needed to avoid a government shutdown, Pelosi told reporters: "I hope not, no. People will die."

Still, Pelosi made clear Wednesday she doesn’t see any point to negotiating if the White House holds fast to certain positions. "When commentators say to me: why can't you resolve your differences? Because we're miles apart," she told MSNBC earlier in the day, again urging Republicans to meet in the middle. "Until they're ready to do that, it's no use sitting in a room and let them tell us that states should go bankrupt."

Mnuchin indicated that the differences on aid to state and local governments — Democrats are pushing for $915 billion, while Republicans have offered $150 billion — are rooted in very different outlooks for the pandemic.

"I think the issue is the way the Democrats come up with this trillion dollars is they look at the next two years and they project losses," he said, according to The Hill. "They don't think the economy is going to open up — we do. And they look at some of their most problematic states, which had issues before all of this."

The bottom line:
"The high-stakes stalemate now appears likely to drag on for weeks, or even into September," Politico reports, citing lawmakers and aides in both parties.

State and Local Cutbacks Will Cost Millions of Jobs, Reduce GDP: Report

State and local governments are reducing services and laying off workers, and unless the federal government steps in with a substantial aid package the cutbacks will drag on U.S. economic growth and cost millions of jobs, according to Moody’s Analytics data reported by The Wall Street Journal Wednesday.

Moody’s estimates that reductions in spending at the state and local level will total about $500 billion during the next two fiscal years, enough to lower GDP by 3 percentage points. The cutbacks will also reduce employment by about 4 million.

What’s at stake:
State and local governments play an important role in the U.S. economy, employing about 13% of all workers. In 2019, they spent and invested about $2.3 trillion, equal to roughly 11% of GDP.

Providing more federal aid to boost state and local budgets makes sense from an economic standpoint, Michael Strain of the conservative American Enterprise Institute told the Journal. "The more state and local employees who are laid off, the higher the unemployment rate goes and the longer it takes to get the economy back to normal," the economist said.

Trump’s Unemployment Plan Would Provide an Extra $300 per Week: White House

President Trump’s effort to replace a portion of the now-expired $600 per week in supplemental unemployment benefits has produced lots of questions about the size and scope of the program. Following considerable pushback on the plan from state officials, the White House provided some clarifications on Tuesday:

  • Although Trump on Saturday said the plan would provide $400 per week for qualified unemployed workers, the White House said on Tuesday that the weekly aid would top out at $300 per week.
  • Reversing a previously stated requirement that states contribute 25%, or $100, toward the enhanced payment, the White House said Tuesday that there was no requirement for states to cover a portion of the cost.

The clarifications — which clearly involve last-minute rule changes, with White House National Economic Council Director Larry Kudlow saying, "We modified slightly the mechanics of the deal" — mean that the Trump plan would replace half of the lost federal unemployment payments, which will drop from $600 per week to $300.

Questions remain:
It’s not clear how long it will take the payments to arrive, or if all states will participate in the program. The money, which is being drawn from $44 billion in unused disaster relief funds, will not flow through existing state unemployment systems, since it’s technically "lost wages assistance" and not unemployment insurance. Instead, states are required to set up new payment systems, a process that could take weeks or months and further stress already overwhelmed employment offices. Given that the funds are limited, some states may opt not to participate, since the program could run of money after several weeks.

While Kudlow said Tuesday that it would take "about two weeks" for people to start receiving aid, Eliza Forsythe, a labor economist and assistant professor at University of Illinois at Urbana-Champaign, told CNBC that, "It’s not something that’s going to be quick. I don’t think anybody knows how long it will take, but it’s certainly not something any unemployed person can count on within a few weeks."

In addition, it’s not clear how many unemployed workers would actually qualify for the program. Some low-wage workers may not qualify, depending on how states implement their programs. And Forsythe estimates that nearly a third of self-employed workers who received payments through the enhanced benefits program would be ineligible for the new program.

The White House Has Explored Ways to Sidestep Congress to Cut Taxes: Report

The White House has explored whether President Trump has the authority to cut taxes without legislation from Congress, The New York Times reports:

"While such a move is not imminent, Mr. Trump’s advisers have sought legal guidance from White House lawyers about whether the president has the authority to eliminate certain taxes, including income and business taxes, without the approval of Congress."

Daniel Hemel, a tax law professor at the University of Chicago, tells the Times that the administration "clearly can delay pretty much anything for a year." But unlike Trump’s weekend move to defer payroll taxes through the end of the year, White House officials are discussing whether the president can actually "terminate" some taxes, as the president said he wants to do with payroll taxes. Any such effort is bound to run into legal challenges since the Constitution grants Congress the power to enact and collect taxes.

Trump said Monday that he was "looking very seriously at a capital-gains tax cut and also at an income-tax cut for middle-income families." But Mnuchin on Wednesday indicated that congressional action would be needed. "The president would like to do capital gains tax cuts, and we do need legislation to do what we want on that front," he said on Fox Business.

The bottom line:
Trump has a habit of talking tax cuts as elections draw near, and this time is no different, even if the chances of pushing another big tax cut through Congress appear questionable at best. "White House officials believe that temporarily delaying taxes is a powerful political tool for the president," the Times’s Alan Rappeport writes. "It allows him to draw a contrast [with] Mr. Biden, who would raise some taxes if elected. And they believe that it will put Democrats in what will be the uncomfortable position of allowing those taxes to be reinstated when the deferment expires."

Quote of the Day

"COVID is such a potentially transformational experience. If there is a broader reckoning with the failures of our government, then maybe that will extend to how we deal with inequality and poverty, and we'll be entertaining something that looks a little more like a European welfare state."

Martin Gilens, chair of the Department of Public Policy at the UCLA Luskin School of Public Affairs, from a Los Angeles Times article on the political dynamics of the safety net in the U.S.

Tax Day Delay Shrinks Budget Deficit in July

The federal budget deficit dropped sharply in July, coming in at a mere $68 billion, down from the eye-popping $864 billion recorded in June, the Treasury Department said Wednesday.

The huge decline had a simple cause: moving tax day from April 15 to July 15 due to the coronavirus. "We are seeing a huge influx of taxes that would otherwise be paid in April," Marc Goldwein of the nonpartisan Committee for a Responsible Federal Budget told The Washington Post. "The vast majority of the lower deficit is driven by the delay of tax season."

Despite the big drop last month, the annual deficit is still headed for record territory. Now standing at $2.8 trillion, the deficit is expected to top $3 trillion by the end of the fiscal year in September.

Send your tips and feedback to yrosenberg@thefiscaltimes.com. Follow us on Twitter: @yuvalrosenberg, @mdrainey and @TheFiscalTimes. And please tell your friends they can sign up here for their own copy of this newsletter.

News
Views and Analysis