This is a familiar challenge. American federalism has been about money and not just power from the very beginning—when, under the Funding Act of 1790, the new federal government assumed all the debt the states had incurred to help finance the American Revolution. Federal borrowing has since frequently served as a backstop for state budgets in hard times. And by now, large portions of our welfare, social-insurance, health-care, and public-education systems are run by the states but funded at least in part by the federal government.
That has often led to tensions. The states have sometimes gamed the rules to squeeze Washington for more money, and the federal government has sometimes treated states as subsidiaries rather than sovereign members of a complex federation. Wealthier states often resent sending money to poorer ones, while states with less leverage over Congress have felt put upon by those with more.
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But the breadth and depth of the disaster we are now living through mean such stresses will grow especially intense. The pandemic has hit some states harder than others, and the economic ruin unleashed by necessary economic shutdowns will fall unevenly too. Moreover, some states were better prepared for hard times, while others have long been fiscally reckless (especially regarding state-employee pension and health-care obligations) and might now see an opportunity to pass long-standing problems off as costs of the emergency.
Interstate disputes will translate into disagreements within Congress, because representation follows geography. It is already clear that such discord will complicate the next pandemic-relief bill, which is now being formulated. State governments are calling for aid, and most members of Congress are eager to provide it. But some are wary of giving their constituents’ tax dollars to states that will divert a portion of them to fill fiscal holes dug over years of irresponsible spending.
They’re not wrong to worry. In late April, for instance, Illinois officials asked Congress for billions to bail out the state’s perennially underfunded pension system, presenting the request as a response to the pandemic. If such cynical opportunism succeeds, other states with pension troubles will surely follow suit. Yet concerns about such ploys shouldn’t blind Congress to its crucial role in assisting the states through the genuine pain of this national catastrophe.
To prevent disputes on this front from derailing the Phase IV bill, Congress needs to clarify some key distinctions. Members should establish three separate categories of problems to be addressed by three distinct forms of aid to the states.
First, Congress should use federal grants to cover state costs for direct pandemic response—things such as testing and tracing, hospital and health-system needs, and public-health infrastructure. This is a national emergency, and the federal government’s far greater capacity to borrow means it should assume the direct costs involved. For the same reason, Congress should also consider providing some help to reinforce state unemployment trust funds, as the American Enterprise Institute’s Matt Weidinger has argued.