Weathering State and Local Budget Storms: Fiscal Federalism with an Uncooperative Congress

Abstract

Throughout most of 2020, state and local governments faced severe budget crises as a result of the COVID-19 pandemic. Increased demand for state welfare services and rising state expenses related to controlling the spread of COVID-19 stretched state and local budgets to their breaking points. At the same time, layoffs, business closures, and social distancing measures reduced states’ primary sources of tax revenues. The traditional practice of American fiscal federalism is for the federal government to step in to provide aid during a national emergency of this magnitude, because state and local governments lack the federal government’s monetary and fiscal powers. But during the 2020 national emergency, the majority coalition in control of Congress was skeptical of this traditional practice, leaving federal aid limited and insufficient. Late in the day, and after a change of Presidents and in partisan control of the Senate, the federal government did eventually step in to provide substantial aid to state and local governments at the beginning of 2021. But, during 2020, it was not at all clear that this would occur. Regardless, due to heightened partisan polarization and related factors, it seems highly likely that future national emergencies will occur during times in which the federal government is again controlled by a majority coalition skeptical of the federal government’s traditional role of providing aid to state and local governments during downturns. This Article thus proposes a series of innovative state tax reform measures and other related reform proposals for modernizing states’ outdated tax bases and crisisproofing American institutions of fiscal federalism. These proposals were initially designed as reforms to mitigate the harmful state and local budget consequences of the COVID-19 pandemic. But a central role of legal scholarship should be to develop law reform solutions for legislatures and for other policymakers to prepare for future emergencies when those solutions may be urgently needed. To that end, this Article elaborates on and memorializes proposals initially developed for the 2020 crises, so that these proposals might be further developed to be ready as potential responses for future crises in which the federal government might once again prove unwilling to act sufficiently.