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Blue States Should Set Their Own Houses in Order

The CARES Act, passed in late March, contained several Covid-19 relief provisions, including direct payments to individuals designed to keep households afloat, and the PPP program, which was designed to help businesses retain employees despite government shutdown orders and the falloff in business.

But those measures were designed to provide 2-3 months’ worth of relief, and that was seven months ago. The PPP program specifically provided only 2 ½ months of average payroll relief per business. Yet the ability of many businesses to function is still being limited by government shutdown orders and the natural consequences of the Covid-19 pandemic.

Struggling businesses are frustrated that there is still $130 billion in unspent funds appropriated for the PPP program that could be providing much-needed support. Both Republicans and Democrats acknowledge that congressional action is needed. What is holding up a deal? Pure politics.

One of the major holdups is the insistence by Nancy Pelosi and Chuck Schumer that the package include billions in relief to bailout high-spending, high-tax states like New York and Illinois that struggle with seemingly perpetual budget problems because of their poor governance.

Republicans are right to resist bailing out poorly governed states. Why should federal taxpayers subsidize the lousy decisions made by profligate state governments? Especially since those states could set their own houses in order if they had to.

According to an analysis by Jonathan Williams and Dave Trabert, if New York and Illinois spent like Florida and Texas, they would solve their fiscal problems. The problem, as always, is overspending.

In 2018, Florida spent $2,327 per resident, while New York spent $5,231—more than twice as much. If New York spent like Florida, it would save New York $56.7 billion annually. Similarly, if Illinois spent at the same rate as Texas ($2,585 per resident), Illinois would save $22.3 billion annually, and California could save as much as $64.6 billion.

If federal taxpayers bail out these states, there will be no internal political pressure for them to set their houses in order and start behaving with more fiscal prudence. This, by the way, was the same logic behind limiting the federal tax deduction for state and local taxes (SALT). Why should taxpayers in low-tax states subsidize high-tax states?

Connecticut, Delaware, Hawaii, Iowa, Maryland, Oregon, Pennsylvania, Vermont, Virginia and Wisconsin ALL spend at least 2x as much per resident as do Florida and Texas. There’s plenty of spending for those states to cut before they come pleading to the federal government. Provide direct relief to households and businesses harmed by the pandemic, but don’t bail out profligate, high-spending states.