New Senate Majority Means Blue State Bailout on Horizon

New Senate Majority Means Blue State Bailout on Horizon

While Chuck Schumer, Joe Biden, and Democrats across America were cheering their party’s victories in the Georgia senate runoffs, no one was probably cheering louder than Gov. Gavin Newsom and his fellow blue state governors (plus scores of Democratic mayors).

Once the two new senators are sworn in and Californian Kamala Harris becomes vice president, Democrats will take the majority in the U.S. Senate.

Topping their legislative priorities will be another Covid relief measure that includes the elusive state and local bailout that Newsom and Democratic state and local leaders have been seeking for months.  In his so-called “American Rescue Plan,” President Joe Biden has proposed $1.9 trillion in new spending, including “$350 billion in emergency funding for state, local, and territorial governments,” according to the New York Times.

Debate over a state and local bailout package was a key obstacle in finalizing the Covid relief package enacted in December.  As the San Francisco Chronicle reported last month, “despite months of maneuvering by Democrats on Capitol Hill and pleas by state and local officials, Republicans blocked aid that they argued would amount to a bailout for poorly run governments.”

But state and local governments did not come up empty-handed.  Jared Walczak of the Tax Foundation, a past Next Round podcast guest, notes “the bill contains over $100 billion in state aid that can be used by state governments to backfill revenue losses, if needed.”

In his Dec. 21 press conference, Newsom estimated that California would receive an additional $8.5 billion in education dollars, $1.3 billion for testing, tracing, and vaccines, $1 billion for childcare, $2 billion for transportation and $2 billion for rental assistance – plus billions in small business relief and additional Paycheck Protection Program dollars.

Additionally, the Covid relief legislation extends $300 per week unemployment checks for 11 weeks, which would bring in $20 billion in aid to Californians, and $600 in stimulus checks, which would bring another $17 billion.  States were also given additional flexibility to spend federal CARES Act dollars over an extended period through the end of 2021.

While state and local governments have been negatively impacted by Covid – thanks to the economic downturn and Covid-related spending – their budget pictures have sharply improved.

The Tax Foundation’s Walczak reports that “combined state and local tax collections were down only $7.6 billion across the period, representing a total state and local tax revenue decline of 0.7 percent compared to the first nine months of 2019.”

Here in California, thanks to soaring capital gains tax revenue and a “V-shaped” recovery, the state has amassed $34 billion in what Newsom calls “budget resiliency,” or savings in the Rainy Day Fund and various state reserves plus a $15 billion surplus.  He proposed a record $227 billion state budget plan.

While the $350 bailout for state and local governments is less than what Pelosi proposed over the summer, the New York Times reports “Mr. Biden also plans to unveil another set of spending proposals in February,” which is “expected to be centered on job creation and infrastructure, including hundreds of billions of dollars in spending on clean energy projects like electric vehicle charging stations, along with health care and education spending.”

Also expect Schumer, the soon-to-be Senate Majority Leader, to again try to repeal the state and local tax deduction cap, which PRI’s Wayne Winegarden has shown amounts to taxpayers in low-tax states subsidizing higher taxes and spending in states like California and New York.

Despite the good news, the state is projecting a structural deficit starting next year, which the Associated Press reports could grow to more than $11 billion by 2025.  While things aren’t as bad as imagined, you can bet that Newsom will welcome whatever amount of cash will be raining soon from Washington to keep California’s budget balanced and his priorities funded in the years ahead.

Tim Anaya is the Pacific Research Institute’s senior director of communications and the Sacramento office.

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