[MarignyBywater] IF STATES FAIL TO USE STIMULUS FUNDS AS INTENDED, EFFORTS TO STRENGTHEN ECONOMY COULD BE UNDERCUT

[nolarussell at bellsouth.net]

cpbb

February 24, 2009
IF STATES FAIL TO USE STIMULUS FUNDS AS INTENDED, EFFORTS TO STRENGTHEN ECONOMY COULD BE UNDERCUT 
by Iris J. Lav and Nicholas Johnson    
Afew governors and legislative leaders have suggested that their statesmight not accept the full amount of fiscal relief in the new recoverylegislation or might use the funds to finance tax cuts or build upreserves, rather than spend them as Congress intended.[1] Such actions could weaken the new law’s impact, and possibly evenprolong the recession, by reducing the amount of stimulus injected intothe economy. 
 
Fiscal Relief Helps States Avert Budget Cuts That Would Further Slow Economy
The legislation provides states withroughly $135 billion to $140 billion to help close operating budgetshortfalls, most of it in the form of increased Medicaid funding and a“State Fiscal Stabilization Fund” aimed primarily at ongoing educationcosts.  These funds will help the economy recover by averting cuts instate expenditures.  The sooner the states use the money, the fasterthe economy is likely to improve.
When states cut spending, they lay offemployees, cancel contracts with vendors, eliminate or lower paymentsto businesses and nonprofit organizations that provide direct services,and cut benefit payments to individuals.  In all of thesecircumstances, the companies and organizations that would have receivedgovernment payments have less money to spend on salaries and supplies,and individuals who would have received salaries or benefits have lessmoney for consumption.  As a result, budget cuts directly remove demandfrom the economy.
Moody’s Economy.com estimates that everydollar of federal fiscal relief that is used to avert state budget cutsincreases economic activity by $1.38.    
A state that refuses the stimulus money,delays the use of the money by putting it into a reserve fund, or usesthe stimulus money for purposes other than maintaining programs andservices is weakening its economy.  It also is undermining federalefforts to turn the economy around. 
 
Arguments Against Using Aid As Intended Do Not Withstand Scrutiny
The arguments against using the fiscal relief as Congress intended are based on several myths:  
Myth: It is inappropriate to use temporary federal stimulus funds to support ongoing state programs.  

Reality:  Supporting ongoing programs is the primary purpose of the funds. 
Innormal economic times, government should avoid paying for ongoingspending needs (or permanently cutting taxes) based on a one-timerevenue windfall.  But these are not normal times.  State revenues haveplummeted as a result of the recession; the federal stimulus funds areintended to fill in for a portion of the missing revenues, therebypreventing deep budget cuts that would further drag down the stateeconomy.  
 
Myth:States will be stuck with higher caseloads and expanded services tofund from their own resources when the stimulus period ends.  

Reality:  States will have flexibility to make necessary choices when federal funds expire. 
Whilestates must meet certain “maintenance-of-effort” requirements toqualify for the Medicaid and education funding in the recovery bill,those requirements will disappear when the stimulus funding runs out. If a state cannot afford to — or simply chooses not to — maintain thelevel of services it provided during the stimulus period, it will befree to cut back those services when the federal stimulus fundingends.  
Also, with theireconomies and budgets deteriorating, states’ top priority should bereversing these damaging trends.  This is not the time to worry aboutwhat will happen two years from now.  If the economy has improvedsignificantly by then, state revenues will have improved as well,helping states cover the cost of providing services.  A strongereconomy would also mean fewer people needing services.  If the economyis significantly worse two years from now, Congress might extend someor all of the federal stimulus provisions — though it would be muchless likely to do this if states do not use the initial stimulus fundsas it intended.  
 
Myth:States could stimulate their economies more effectively by using thefiscal relief to finance tax cuts than to help cover Medicaid andeducation costs.  

Reality:  Spending is better for the economy than tax cuts.  
Directstate spending on public services — through state-run programs,programs that businesses or nonprofits operate under state contract, orpayments to private vendors — creates more of a stimulus than taxcuts.  As noted above, every additional stimulus dollar the statespends on programs and services increases economic activity by $1.38.
Tax cuts provideless of an economic stimulus than direct state spending because some ofthe tax cuts will be saved rather than spent.  This is particularlytrue of tax cuts for higher-income taxpayers, since they save a largershare of their income than less affluent households.  But evenrefundable tax cuts for lower-income families, such as those in thefederal stimulus, have less of a positive economic effect than statespending.  
 
End Notes:
[1]For example, Governor Sanford of South Carolina has stated, “I thinkthere are a number of wrinkles that have caused a number of us to say‘Wait a minute, let’s take a look — a long look — at whether or notthis really makes sense for our state.’ ”  (“Sanford on the stimulus,”Atlanta Journal-Constitution, February 19, 2009.)  Governor Freudenthalof Wyoming has said, “If it is simply money that is available, but itis not money that works with the agenda that works in Wyoming, I’m notgoing to take it.”  ("Governor Says He’ll Scrutinize Stimulus Funds,”Casper Star-Tribune, February 19 2009.)  Georgia’s legislature hasalready approved using nearly $500 million in state Medicaid fundingfreed up by the fiscal relief to continue a program that reduceshomeowners’ property taxes.  In addition, Governors Jindal of Louisianaand Barbour of Mississippi have said they do not plan to accept the newoption in the law to reform their states’ unemployment insurancesystems in order to cover more low-income and part-time workers.   Document Resources:  PDF of full report (2pp.)  E-mail to a friend  Print
Report Categories:  All Reports by Date  Recession and Recovery  State Budget and Tax
Excerpts:

 "South Carolina should reconsider this highly risky proposal, which could cause considerable harm to many of the state’s most vulnerable residents, before it proceeds further."-->CBPP Services:  E-mail Notifications  RSS Alerts
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