(Bloomberg Opinion) -- Two months ago, as Congress considered its initial legislative response to the economic crisis caused by the coronavirus, speed was of the essence. Now a more deliberate pace is called for. That’s why congressional Republicans are right to be hesitant about the $3 trillion coronavirus relief bill that House Democrats unveiled on Tuesday.
The first coronavirus relief bill was remarkable for the bipartisanship and compromise involved. President Donald Trump relented on the suspension of the payroll tax he had championed in favor of the Paycheck Protection Program. House Democrats entrusted the Federal Reserve with a huge lending package for big business. Senate Republicans acquiesced to an unprecedented increase in unemployment benefits.
Each of these programs has seen some of its skeptics’ fears come true. That has understandably increased resistance to the House’s sweeping legislation, which includes funding for rural broadband expansion and a bailout for the U.S. Postal Service. Remarks from some state leaders, about how they intend to use Covid-19 aid to pursue long-standing objectives unrelated to the current crisis, also haven’t helped.
None of this is to say that relief is unnecessary. Another round of aid is almost certainly called for, on both humanitarian and economic grounds. State and local governments are facing large budget shortfalls due to the pandemic. Not only are they spending more to combat Covid-19, they are also seeing declines in sales and income tax revenue from the social distancing that began in March.
These revenue losses are due not to irresponsible budgeting, but to efforts to contain the loss of life. Moreover, without some sort of federal support, states are likely to turn to drastic budget cuts and large tax increases. Both strategies would increase immediate hardship and slow long-term economic recovery.
It’s important, however, to put in context the size and urgency of the support being asked for.
During the Great Recession, Congress provided about $290 billion in aid to states. That covered only about 40% of state budget gaps, with the rest being made up by budget cuts and spending increases that slowed the national recovery. So far in response to Covid-19, the federal government has appropriated $535 billion in relief to state and local governments. In addition, the Federal Reserve has created a $500 billion municipal lending facility.
For all of 2020, combined state and local tax revenue was expected to be about $1.84 trillion. More than half of that has already been offered in some form relief. If Congress appropriated another $1 trillion, federal aid to state and local governments this year would actually exceed their expected tax collections.
Some more context: Moody’s latest estimate is that states will see a combined revenue decline of $160 billion in 2020 and 2021. Even the most pessimistic forecasts put the shortfall at $500 billion over the next three years. That’s less than a quarter of the $2 trillion in aid that would, under the House Democrats’ plan, be appropriated over the course of a few months.
The temptation for states to take advantage of congressional generosity to fund a wish list of projects is understandable. Indeed, if any one state is doing so, it would almost be political malpractice for other states not to try.
Fulfilling those wish lists, however, will undermine public trust and could create a backlash that threatens future aid — not only for this crisis but also for future ones. Congress therefore has responsibility to provide aid that is sufficient but appropriate to the situation.
That may mean some funding now, but at levels far lower than proposed. Then, as the full extent of revenue shortfalls becomes clear, Congress should be prepared to do more. The pandemic is affecting every state differently, but it is in the national interest that all states be able to provide essential services, maintain reasonable tax rates and contribute to America’s economic recovery.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Karl W. Smith, a former assistant professor of economics at the University of North Carolina and founder of the blog Modeled Behavior, is vice president for federal policy at the Tax Foundation.
©2020 Bloomberg L.P.