Congressional Failure on State Aid Would Carry Heavy Cost

May 28, 2010 at 5:31 pm

At the last minute, the House yesterday dropped an extension of Recovery Act assistance for cash-strapped states from jobs legislation, which it then passed, in order to help satisfy congressional critics who complained about the legislation’s impact on the deficit.  These critics are effectively saying that the cost of increasing today’s budget deficits outweighs the benefit of helping states avert massive cuts in services and tax increases.

In fact, the opposite is true.  Extending state fiscal relief is the right course from both an economic and a fiscal standpoint.

Most economists agree that the nation’s real budgetary threat isn’t our current deficits, which are necessary to help the economy recover from a deep recession, but, rather, the projected deficits over the next decade and beyond, which pose a significant risk to the economy.  Extending fiscal relief for states would have virtually no impact on those longer-term deficits because it would be strictly temporary, boosting the long-term budget gap by just a fraction of 1 percent.

And extending fiscal relief would have a significant positive impact on jobs and the economy.  Here’s why:

Almost every state has cut deeply into education and other services in the last two years to help deal with an unprecedented, recession-driven drop in state tax revenues.  The Recovery Act’s fiscal relief has prevented a difficult situation from getting even worse, preserving hundreds of thousands of public- and private-sector jobs over the past year by closing a portion of state shortfalls.

One major piece of the federal fiscal relief has been additional Medicaid funding, which has reduced the cost to states of meeting the rise in health care needs during the recession as people lose their jobs and employer-sponsored coverage.  These funds have also helped states’ overall budgets by freeing up funds for education and other priorities.

But without congressional action, the money will expire by the end of December — halfway through states’ new fiscal year (which starts July 1 in most states).  For that reason, and because state tax revenues are still depressed and will take years to recover, states still face an estimated $260 billion in shortfalls over the next two years that they’re required by law to close, most likely with budget cuts.

The House and Senate have passed separate versions of jobs legislation that included a much-needed six-month extension of this Medicaid funding.  So, quite understandably, most states’ budgets for next year assume that those funds will be available.  But it now appears Congress may pull the rug out from under states by failing to enact final legislation to implement the extension.  If that happens, many states will have to institute massive new budget cuts and tax increases beyond those they are already planning.

To cite just one example:  Without the extended Medicaid funding, Pennsylvania plans to cut funding for domestic violence prevention in half, eliminate all state funds for addressing substance abuse and homelessness, cut funding for child welfare by one-quarter, and cut payments to private hospitals, nursing homes, and doctors across the state —  among other steps.

These cuts would come at a particularly bad time, with unemployment currently near 10 percent and the economy still fragile.

Without additional federal help, state budget cuts could cost the economy 900,000 jobs — not only teachers, firefighters, and other public employees, but employees of private firms that contract with states to provide health services, repair roads, and the like.  Additional federal help would save a substantial number of those jobs.

Large-scale job losses like these would ripple through the broader economy, seriously weakening the recovery.  When people lose their jobs, they sharply reduce their spending.  That hurts local businesses, which in turn reduce their own hiring and order less from national suppliers, putting jobs at those firms at risk, and so on.

It’s not too late to stop that from happening.  Congress can extend the additional Medicaid funding as well as the Recovery Act’s other main form of fiscal relief, education assistance.  This would greatly ease the pressure on state budgets and help them avert actions that will damage the economy.  (Congress should also extend COBRA health insurance for unemployed workers, another temporary provision the House dropped from the jobs legislation yesterday.)

But Congress needs to act fast because states’ new fiscal year will begin in a matter of weeks.  Without further help, they’re going to have to take actions that will threaten the fragile economy—and the nation as a whole will feel the pain.

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More About Robert Greenstein

Robert Greenstein

Greenstein is the founder and President of the Center on Budget and Policy Priorities. You can follow him on Twitter @GreensteinCBPP.

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