Weathering State and Local Budget Storms: Fiscal Federalism with an Uncooperative Congress
55 Pages Posted: 2 Apr 2021 Last revised: 2 Jun 2021
Date Written: 2021
Throughout most of 2020, state and local governments faced severe budget crises as a result of the COVID-19 pandemic. Increased demand for state welfare services and rising state expenses related to controlling the spread of COVID-19 stretched state and local budgets to their breaking points. At the same time, layoffs, business closures, and social distancing measures reduced states’ primary sources of tax revenues. The traditional practice of American fiscal federalism would be for the federal government to step in to provide aid during a national emergency of this magnitude because state and local governments lack the monetary and fiscal powers of the federal government. But during the 2020 national emergency, the majority coalition in control of Congress was skeptical of this traditional practice of the federal government, and federal aid was thus limited and insufficient.
Although partisan control of Congress and the Presidency switched in early 2021, at the time of this writing it remains unclear whether the federal government will act sufficiently to resolve the currently ongoing state and local budget crises. Regardless, due to heightened partisan polarization and related factors, it seems highly likely that future national emergencies will occur during times in which the federal government is again controlled by a majority coalition skeptical of the federal government’s traditional role of providing aid to state and local governments during downturns.
This Article thus proposes a series of innovative state tax reform measures and other related reform proposals for modernizing the states’ outdated tax bases and for crisis-proofing American institutions of fiscal federalism. These proposals were initially designed as reforms meant for mitigating the harmful state and local budget consequences of the COVID-19 pandemic. But a central role of legal academic scholarship should be to develop law-reform solutions for legislatures and for other policymakers, to prepare for possible future emergencies when those solutions may be urgently needed. To that end, this Article elaborates and memorializes proposals initially developed for the 2020 crises, so that these proposals might be further developed to be ready as potential responses for future crises in which the federal government might once again prove unwilling to act sufficiently.
Keywords: COVID-19, Fiscal Federalism, 2020, State Budget Crisis
JEL Classification: G01, H3, H6, K34
Suggested Citation: Suggested Citation