The Huge Cost of State Cutbacks

By Yuval Rosenberg

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.

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