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SPN State COVID-19 Relief Guide


February 15, 2021

A guide to understanding how federal aid is impacting states

The research in this guide shows that federal aid exceeds revenue losses experienced in most states. State and local governments now need to adjust their finances for a different economic reality than existed pre-pandemic. With enough aid already provided, federal lawmakers can now focus their efforts on policy changes that will spur economic recovery and growth.

Research Highlights

  • State and local governments are expected to experience $140 billion in revenue losses from Q1 2020 through Q2 2021.
  • Congress has already allocated approximately $400 billion in state and local aid.
  • 48 of 50 states have received more aid than their anticipated revenue loss.
  • State and local governments started the pandemic recession with over $200 billion in rainy day and other fund balances.
  • States are incurring additional expenditures due to increased Medicaid enrollment. The costs are more than offset by temporarily increased federal Medicaid support but states are prohibited from removing ineligible individuals from the program.
  • Additional funds to state and local governments are not needed. Instead, Congress should focus on policies that will spur economic recovery.

Read the full report here.

Page Contents
  • Summary
  • Spending Recommendations
  • Map: Aid vs. Revenue
  • Vaccine Funding by State
  • FAQs

Five Ways State and Local Governments Can Use the Latest COVID-19 Stimulus Package

The latest COVID-19 stimulus package, the American Rescue Plan Act (ARPA), allocated $350 billion to state and local governments and another $175 billion for education, with the majority going to K-12. These funds come with spending parameters that have yet to be clearly defined. This policy menu covers five ways state and local governments could spend the money without creating long-term financial problems or higher burdens on taxpayers:

  1. Unemployment insurance
  2. Deductions and expensing
  3. Local taxes
  4. Education
  5. Healthcare

See the full policy menu.

Network Calls for Treasury Guidance to Give States Flexibility

Unfortunately, any strings attached to the latest round of COVID-19 stimulus funding will prevent state policymakers from spending the excess funds in ways that meet their communities' unique needs and avoid a budget crisis.

SPN and Network think tanks have circulated a coalition letter to the US Treasury, asking Treasury Secretary Yellen to issue guidance that is deferential to state authority and allows for increased flexibility in using these funds.

Federal Aid in Excess of State Tax Revenue Shortfall

Data as of February 15, 2021

The latest revenue projections show that states are not experiencing as much of a shock from lost revenues as anticipated. The projected $140 billion in lower revenue is more than made-up for with approximately $400 billion in various form of federal aid to state and local governments. In fact, 48 out 50 states received more federal aid than anticipated revenue lost.

What are the risks of sending more federal aid to the states?

Our system of government grants states significant control over their budgets. For the American people, this approach is extremely beneficial because it keeps spending decisions closer to home. Government leaders and programs are more accountable to taxpayers and more responsive to the needs of the communities they serve.

Additional federal aid could harm the long-term financial health of states by:

  • Overwhelming state and local governments with more money than they can realistically spend.
  • Making it more difficult for states to maintain balanced budgets.
  • Incentivizing states to rely on the federal government for financial support in future crises instead of their own fiscal responsibility.
  • Making spending decisions based on directives from DC instead of the local needs of constituents and communities.
  • Funding new and expanded programs that require future tax increases in order to sustain.
  • Enlarging state and local governments to a point where they cannot adjust accordingly and become a larger portion of the economy while the private sector contracts.

Vaccine Funding Allocation by State

The Consolidated Appropriations Act allocated $4.29 billion to state, local, and territorial governments for the procurement and distribution of COVID-19 vaccines. This map shows the dollar amount going to each state.

The Consolidated Appropriations Act indicates that $4.29 billion will be allocated to state, local, and territorial governments based on the Public Health Emergency Preparedness (PHEP) formula. State Policy Network attained the 2020 PHEP grants from the Centers for Disease Control (CDC) website and applied the same allocation proportions to the $4.29 billion total.


FAQ: The Impact of Federal COVID-19 Aid on the States

How has state revenue been impacted?

State and local governments are expected to experience only $140 billion in lower revenue through the first six quarters of the pandemic recession, from Q1 2020 through Q2 2021.

Were states prepared for this unexpected crisis?

State and local governments entered the pandemic recession with over $200 billion in rainy day and other fund balances to cushion against financial stress.

Has federal aid helped the states?

Initial federal aid long ago accomplished the early goal of preventing sudden layoffs and reductions in core services. As more federal aid packages have been distributed, state budgets have begun to see federal aid amounts exceed their revenue losses. Some of the funds are more flexible, but much of the money can be used to cover expenses that would otherwise be funded by state tax collections and reduce their own-source revenue contributions.

What has been the impact to Medicaid?

States are incurring additional expenditures due to increased Medicaid enrollment. Between March and September 2020, about 5.8 million individuals joined the Medicaid rolls, resulting in an estimated $30 billion in additional state expenditures during the pandemic. These costs are more than offset by increased federal Medicaid support, but states are prohibited from removing ineligible individuals from the Medicaid program.

What are the risks of sending more federal relief to the states?

Our system of government grants states significant control over their budgets. For the American people, this approach is extremely beneficial because it keeps spending decisions closer to home. Government leaders and programs are more accountable to taxpayers and more responsive to the needs of the communities they serve.

Additional federal aid could harm the long-term financial health of states by:

  • Overwhelming state and local governments with more money than they can realistically spend.
  • Making it more difficult for states to maintain balanced budgets.
  • Incentivizing states to rely on the federal government for financial support in future crises instead of their own fiscal responsibility.
  • Making spending decisions based on directives from DC instead of the local needs of constituents and communities.
  • Funding new and expanded programs that require future tax increases in order to sustain.
  • Enlarging state and local governments to a point where they cannot adjust accordingly and become a larger portion of the economy while the private sector contracts.

What should policymakers do next?

There is good news out of the latest state revenue projections: Most states are not in dire financial conditions.

In the long run, state and local governments will need to adjust, especially since the full economic impact of the pandemic will not be realized until 2021-2022. States can expect lower revenues, so budgets and planned expenditures will have to be revisited.

If state and local governments keeping growing at their pre-pandemic rate, they will need more revenue than will be available in the post-pandemic economic environment. This policy outcome will be even more likely if the federal government continues to support pre-pandemic spending projections.

Federal lawmakers have provided state and local governments with more than enough aid and should instead focus their efforts on policy changes that will spur economic growth.

Read the full report

About This Data

The revenue projections for Q3 2020 through Q2 2021 are based on an updated analysis published by American Enterprise Institute on February 2, 2021. Authors Stan Veuger and Jeffrey Clements forecast an overall state and revenue loss of $130 billion for the five quarters from Q2 2020 to Q2 2021. One third of this revenue loss—about $43 billion—was attributable to Q2 2020.  The remaining $87 billion is their expected revenue loss for Q3 2020 through Q4 2021, which is equivalent to the 2021 State Fiscal Year in most states.  Since first quarter of this fiscal year are available from the Census Bureau, projection is based on three quarters of the state fiscal year or $65.25 billion. The projected loss was allocated across states using proportions obtained from an analysis published by the Cleveland Federal Reserve last May.

Download a full list of data sources here.

About the Authors

This data and analysis was developed in partnership with Marc Joffe, Senior Policy Analyst at Reason Foundation, and Michael Lucci, Senior Policy Advisor at State Policy Network.