Preliminary Details and Analysis of State and Local Aid Under the Bipartisan State and Local Support and Small Business Protection Act of 2020

On Monday, members of the bipartisan Gang of Eight negotiating an end-of-year pandemic relief package announced that they had settled on language and had divided the package into two bills: a pandemic aid package and a $160 billion state and local support package. Full language is not yet available, and some of the data on which allocations would be made will not be forthcoming for some time, but it may be helpful to provide a summary of what we do and don’t know, and to offer a preliminary sense of what it will mean for states.

Under the bill, $91.2 billion would flow to states and $60.8 billion to local governments ($152 billion total), plus $8 billion to tribal governments. It is unclear at this time whether any aid is provided to territories; for now, our analysis assumes otherwise, based on silence on that point in documents we have seen. If territorial aid is intended, this would have a small impact on our calculations (provided below). The $152 billion for state and local governments would be distributed in three tranches, beginning with $90 billion intended to go out the door within 30 days of enactment, and the subsequent tranches (anticipated to be $52 billion and $10 billion, respectively) likely arriving in the summer and fall of 2021, judging by the data on which they would be based. States would actually receive all $152 billion but would be obligated to share 40 percent ($60.8 billion) of it with localities, based on (1) population, (2) revenue losses, or (3) some combination of both.

One-third of the $152 billion would be distributed proportionally based on population; this amount ($50.66 billion) would all go out in the original tranche. The remaining two-thirds is to be allocated according to revenue losses, in three tranches of $39.4 billion, $52 billion, and $10 billion, respectively. The first $39.4 billion, which would be distributed in Tranche 1 concurrently with the population-based assistance, would be allocated proportionally on the basis of each state’s share of the total decline in tax revenue from April 1 to September 30, 2020, compared to the same six months (calendar quarters two and three) in 2019. Tranche 2 would be based on losses from October 1, 2020 to March 31, 2021, relative to the same period in 2019, and the final small tranche would be another needs-based allocation based on losses from April 1 to June 30, 2021, relative to the same period in 2019. Each state would be guaranteed a minimum of $500 million.

The following table summarizes this allocation. Disbursement dates have not been disclosed for the second and third tranches, but within 30 days of the availability of the relevant quarterly tax data from the U.S. Census Bureau is a reasonable assumption.

The amounts each state would receive in the second and third tranches will not be known for some time, but a reliable calculation of the first tranche’s distributions will be possible by Thursday, December 17th, when the U.S. Census Bureau releases quarterly state revenue data for the third quarter of calendar year 2020. In the absence of that data, it may be interesting to consider what the first tranche’s distribution would look like based exclusively on population and revenue declines in the second quarter (March through June). The table at the end of this analysis shows these calculations, which will necessarily be biased in favor of states which suffered revenue losses earlier in the pandemic over those in which losses accrued later. For that reason, these estimated allocations are only mildly instructive, and will be revised once July through September revenue data are released Thursday.

As we have noted previously, $160 billion in aid, while well short of the amounts contemplated in the HEROES Act introduced by congressional Democrats in the spring, would be nearly enough to cover likely revenue declines for state and local governments in aggregate across FYs 2020 and 2021 (an estimated $178 billion in losses compared to FY 2019 collections), though aggregate figures can disguise steep losses experienced in a handful of states. While some states are running modest surpluses, several—particularly California and New York—have experienced dramatic revenue losses, or project doing so. Distributing relief based on revenue losses is designed to target some of these needs, though overall levels sufficient for many states may seem inadequate in a few, however allocated.

The Gang of Eight has smartly chosen to use a calendar year 2019 baseline for revenue losses and actual revenues in the relevant periods as the measurement, avoiding the disparities that would be created if states’ revenue projections were used as the baseline instead, as this approach would reward states that made overly optimistic projections while penalizing those that project revenues more conservatively, regardless of their actual economic performance. However, allocating relief on the basis of revenue losses still has its complexities and disadvantages.

For one thing, it doesn’t take states’ revenue decisions or non-pandemic revenue changes into account. Tax cuts and tax increases may have affected revenues independent of the pandemic, and declining energy prices reduced severance tax collections even before anyone had heard of COVID-19. At the same time, by focusing on revenue losses rather than a metric like employment levels, it tends to reward states with more volatile revenue streams, which overperform in years of economic growth but swing sharply downward during an economic contraction. States with income taxes concentrated heavily on high earners, for instance, likely had a very strong 2019 but a weak 2020 compared to states which relied more heavily on consumption taxes, which tend to be more stable.

Because $62 billion would be distributed based on losses that have not yet been realized, moreover, the legislation could incentivize states to adjust revenue receipts. Knowing that $52 billion hinges on receipts by the end of March, for instance, states might delay collections into April or beyond—much as they did when they almost invariably pushed back the income tax filing and payment deadline from April 15 to July 15, but this time with the intention of reducing receipts during the measured period and collecting them after. (They could be pushed to April, when far less is on the line, or all the way to July.) States might also attempt to offer temporary tax relief in early 2021, offset by commensurate temporary tax increases thereafter. Delayed deadlines could be provided to both individual and business taxpayers; more complicated shifts in collection timelines would likely only work for business taxpayers.

Of course, it may be that none of this matters quite yet, as the state and local aid component is far from a done deal. And if it does happen, we will need to wait until Thursday to fully calculate the first tranche allocations. Nevertheless, the following table is offered as an extremely preliminary estimate, with the following assumptions and limitations:

1. In lieu of data on April through September 2020 revenue losses, not yet available, allocations are made on the basis of April through June 2020 losses;
2. The $500 million minimum is assumed to be prorated across the period, such that states are guaranteed a minimum of about $296 million in the first tranche; and
3. The District of Columbia is assumed to be included and guaranteed $500 million, but territories are not separately funded.

Original Article Posted at : https://taxfoundation.org/bipartisan-state-and-local-support-and-small-business-protection-act-of-2020/