States can fix their fiscal issues without a federal bailout

Both President Trump and President-elect Joe Biden want another COVID-19 relief package approved before year-end. There are people who could use relief from the harms caused by the pandemic. But state governments aren’t among them, and Congress should reject state lawmakers’ call for a bailout.

State tax revenues took a hit this spring, when people were asked to stay home from work. But it wasn’t as bad as you’d expect.

Property taxes, for example, were unaffected originally, because it takes time for the market to adjust to bad news. Since then, the real estate market has been surprisingly strong.

Income tax collections were partially bolstered by various federal relief plans. The federally funded unemployment bonuses are taxable benefits. And as people went back to work this summer and fall, income tax proceeds came back as well.

Yes, there are ups and downs for state revenue, and each state is affected differently. A look around the country at how states were affected, and what their trends look like now, undermines the case for bailing them out.

In Michigan, lawmakers already approved a budget for the fiscal year that began in October, and there’s more money in it from state taxes than there was before the pandemic. The state can’t be bailed out if it’s not underwater. And administrators expect revenue to increase 6 percent next year.

Ohio administrators say revenue has exceeded expectations, giving them more money than they budgeted for. Other states, such as California and Nebraska, report that they’re going to have more money than previously estimated.

While state budgets are looking better, there are some real fiscal problems in state and local governments; they’re just not caused by the pandemic. Their trillion-dollar-plus pension underfunding problems — where either by accident, neglect or intent, policymakers racked up massive debts to their employees and retirees — predate 2020. And if the market recovery is any indication, the pandemic has not worsened those debts. It would be inappropriate for a COVID-19 relief bill to be used in Washington for longstanding fiscal problems.

Addressing problems that have little to do with the pandemic is even more unjustified when states have the tools to fix their missteps. Some, such as Michigan, have done a lot to prevent additional pension debt. Others, such as Illinois, continue to hope that taxpayers will fix it for them — though, in that case, voters got in the way of their leaders’ plan last month by again rejecting a tax hike. People ought to hold their state lawmakers accountable for their problems without their money being washed through Washington.

The specter of a federal bailout interrupts budget negotiations during this pandemic. Legislators need to agree about their priorities for limited revenues. Those agreements will be taken less seriously if lawmakers can walk away from the negotiating table and instead pray for federal dollars to make the numbers work. That option gets in the way of otherwise fruitful compromises.

The political back and forth within states is important because state solutions ought to be weighed by state voters. States have nearly unlimited authority to cut their expenses or raise taxes to address any problem in making ends meet. The decisions they make are subject to popular and political constraints, which appropriately guide policymaking. So if Illinois voters want their politicians to cut expenses — and the recent defeat of its tax-hike proposal ought to be interpreted that way — the federal government should not interrupt that message.

The same goes for every other state, too. People may need relief. State governments do not.

James M. Hohman is the director of fiscal policy at the Mackinac Center for Public Policy, a research and educational institute in Midland, Mich. Follow him on Twitter @JamesHohman.