Here’s an uncomfortable truth for deficit peacocks: The federal government spending a lot of money on COVID-19 relief has helped state governments so much that they now are having big tax-cutting sprees. Blue, purple, and red states are all looking to cut taxes, to find ways to continue to assist lower-income people, and to do things like replace the monthly child tax credit payments that stopped coming form the federal government.
Okay, those last two things are mostly blue state initiatives. Red states, like Idaho, for example, are doing things like great big tax cuts for rich people, while low- and fixed-income families still have to deal with things like a tax on groceries and rapidly rising housing costs and property taxes.
But still, the boon to states and cities that is a direct result of the COVID-19 stimulus from the federal government demonstrates that spending money to help people ... helps people. The White House is celebrating that, even though tax cuts to wealthy people and corporations isn’t really what they had in mind with the stimulus.
“This plan was designed to both ensure an initial jump start to the economy and that state and local governments had the firepower to overcome predictable and unpredictable bumps in the road,” said Gene Sperling, a senior economic adviser to President Joe Biden and the coordinator of his $1.9 trillion American Rescue Plan (ARP). “The American Rescue Plan succeeded in sparking more growth, more jobs, less unemployment and more revenue.”
“It did not restrict what people could do with surpluses from that growth.” Which is true. The Treasury Department created rules to allow for states to provide tax cuts—just to not use stimulus funds to replace that revenue. The law and Treasury rules allow for the government to claw back money from states that used that money to enact tax cuts. But if the states have enough revenue growth above and beyond that federal assistance, it’s theirs to do with as they please, including tax cuts.
Still, though, the deficit peacocks are grousing about it. “This is the inevitable consequence of sending state and local governments money they didn’t need,” Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget, told Politico. “States literally have more money than they know what to do with.”
He said that like it’s a bad thing.
What he’s cranky about is probably the fact that COVID spending demonstrated that federal fiscal stimulus actually does stimulate the economy. The boon to state and local governments hasn’t just come from the funds they received directly. The stimulus checks sent directly to people, higher unemployment benefits, and monthly child tax credit payments all meant more spending and higher income taxes revenues. The labor shortage has driven up wages, which has driven up income tax payments. Low interest rates and the stock market boom increased capital gains receipts.
To be clear, this stimulus was absolutely necessary, as state and local governments were forced to lay off workers and cut services dramatically in the heat of the pandemic. Without it, there’s no way many states would now be enjoying surpluses.
The result of spending is exactly what Republicans feared, and it’s why they fought so hard to prevent Biden from pushing the ARP. Remember how Mitch McConnell warned about “blue state bailouts”? Turns out it helped red states, too. The problem now is that the largesse in so many states isn’t going where it’s most needed. That, combined with inflation, could spell an end to the boom times.
With the end of monthly child tax credit payments, child poverty has surged again. In the space of one month’s time, 3.7 million children were returned to poverty, all because Republicans and Democratic Sen. Joe Manchin didn’t want to see Biden’s larger Build Back Better plan, which extends the payments, pass.
At the same time the monthly payments to families with children have ended, the pandemic eviction moratorium stopped and back rents are due. All the while, housing costs are are also surging, with rents rising an average 14% last year. Some cities had increases as high as 40%.
“Rents really shot up in the second half of 2021,” Daryl Fairweather, chief economist at Redfin, told The Washington Post. “The pandemic was kind of a pause on the economy and now that things are reopening, inflation is picking up, rents are going up and people are realizing they don’t have as much disposable income as they might have thought they had.”
All of which means that, yes, massive federal intervention does help sustain an economy. It also means that we’re not out of the economic danger zone caused by this pandemic and that without more federal spending, the boom will end and income inequality will only increase. All of which proves that the kind of investment Biden and Democrats want to create through the Build Back Better plan is essential. They need to keep fighting for it.