Federal Aid Should Come with a Caveat: No Tax Hikes From States Receiving It

With each passing day of this prolonged public health and economic crisis, pressure mounts for a robust federal aid package to the states. Illinois Gov. J.B. Pritzker has warned of “severe, damaging cuts” to education, social services, and public health services if Illinois doesn’t receive a federal bailout, and California Gov. Gavin Newsom has said first responders would be the first to be laid off without federal money.

Although House Democrats passed legislation that includes $1 trillion for state and local governments, Senate Republicans have stood firm against a "blue-state bailout."

If Washington ultimately decides that federal taxpayers should bail out states, then the aid should come with a caveat: the states that receive federal aid cannot turn around and raise taxes on their residents. 

Some federal lawmakers have already pursued this idea. Illinois' Republican congressional delegation, in response to a $44 billion bailout request from Illinois' Senate President, wrote that the state's leadership would first need to withdraw from the November ballot an amendment to the state's constitution that would allow income to be taxed at progressive rates and would result in higher taxes for Illinois families and businesses.

The delegation was even more specific in a letter to congressional leadership, in which they wrote: “Congress should consider prohibiting Illinois from raising income taxes on small businesses as a condition of state aid.”

The idea that aid should be tied to forgoing tax increases has bi-partisan origins and credence at both the federal and state levels. In arguing for “direct, unrestricted federal aid” to keep states solvent, New York Comptroller Thomas DiNapoli said a bailout would mean states can avoid tax increases that would hurt working families and small businesses.

That only makes sense, and should Washington move forward with a bailout for state governments, lawmakers should formalize this idea and make federal aid conditional on a prohibition against raising state taxes, including income tax rates, through 2022.

The fiscal irresponsibility of states seeking bailouts simply cannot be ignored. Since money is fungible, a federal bailout of Illinois, California, New York, or any other state that accepts the funds must include a no-tax-increase provision, or else Washington is simply providing cover for spendthrift politicians to double down on the same failed policies that made certain states especially ill-prepared for this crisis in the first place.

Washington must do its part to protect families and businesses. The federal government must guarantee that taxpayers aren't both over-leveraged and subject to higher taxes at the same time. 

The novel coronavirus has required an unprecedented response from the federal government, both in terms of its public health and economic response. Americans tolerated stay-at-home orders that shut down businesses and curtailed civil liberties for months, and as state economies begin to re-open and we work toward restoring a sense of normalcy, the federal government must act responsibly to ensure state governments don’t abuse taxpayers and use COVID-19 as a pretext to cover up bad behavior.

A federal bailout isn't a panacea for state governments. But if Washington ultimately decides to leverage federal taxpayers to bail out state governments, the states that receive those funds must be prohibited from raising state taxes. A no-tax-increase provision is as a prudent taxpayer protection.