The American Rescue Plan Act is providing $40 billion to the state of Texas and a panel discussion examined how that money should best be used.
Jonathan Williams, chief economist and executive vice president of policy for the American Legislative Exchange Council, said big government spending is a more serious concern than ever as “gushers” of cash flow to states.
Williams took part in an Oct. 7 discussion on the federal program with Texas Public Policy Foundation chief economist Vance Ginn and Patrick Gleason of Americans for Tax Reform.
Ginn noted that President Joe Biden’s Build Back Better agenda calls for $6.2 trillion in spending, but add another $4.5 trillion of national debt. Spending all that money is a major responsibility and state officials carry a lot of that burden.
Gleason said Texas has a massive impact due to the size of its economy and its “outsized importance in terms of national economic health,” meaning the decisions made by lawmakers in Austin are being closely watched.
“It’s also important to get this right in Texas because other states, lawmakers and governors in other states, look to Texas as a model for sound governance,” he said. “That’s its reputation for a long time, whether it’s tax policy or criminal justice reform. A lot of states look to Texas as a leader and a model for best practices and how to do public policy right in a pro-growth manner.”
Williams said the ALEC is encouraging legislators and governors to avoid funding ongoing expenditures. A better way to use these dollars, he argued, is to refill their unemployment insurance trust funds.
“We need it because just before the COVID-19 pandemic hit in March of last year, combined all state unemployment insurance trust funds or aggregate was just over $72 million.”
Gleason said there are smart ways to spend this money without placing potential fiscal land mines for future years.
“In Texas and other states, those all got driven down thanks to the shutdown-driven downturn we suffered last year,” he said. “All those unemployment insurance trust funds get driven down to zero in a lot of cases. Eleven states, Texas being one, had to take out some debt from the federal government to cover on the unemployment insurance.
“Replenishing those trust funds is very important as one of the best things you can do for a couple of reasons,” he added. “One, it’s important to shore up your finances so you can begin building that back up so you’re well situated for the next downturn, however many years out that will come on, so you put yourself on sound financial footing. Also it’s very important to prevent, protect and prevent payroll tax increases that will hit employers automatically if unemployment insurance trust funds dip below a certain level or debt is still maintained with the federal government. We need to protect employers from this automatic payroll tax increase.”
He said the last thing governments want to do is make it more expensive to hire new workers, which will be the result of payroll tax increases that will be automatically triggered unless unemployment insurance debt is paid out to the federal government and unless unemployment insurance trust funds are replenished.
“Good news is we’re seeing a lot of states take the right response to this with the CARES Act,” Gleason said. “Last year we saw 23 states use those federal funds to replenish their unemployment insurance trust funds. Now with the CARES Act we’ve seen fewer states utilize that to replenish UI trust funds. So far 15 states have utilized $8 billion worth of federal funds to replenish their unemployment insurance trust funds.
“However, there’s much greater need to replenish these, and these federal funds that are still there is a great opportunity to replenish these,” he added. “We have about $95 billion in remaining ARCA funds that states can use to replenish these unemployment insurance trust funds. We are encouraging them to do so.”
Gleason says Texas can set a key example.
“It’d be great for Texas because you prevent and block payroll tax increases on employers, that’s good in its own right,” he said. “You track your finances so you’re getting prepared for future years, which is great. But it would also make it more likely that other states will take that course of action. If they see Texas take that course of action, they will get the signal.”
He noted that Illinois, New Jersey, two states not often compared to Texas, also took out debt from federal government to pay for unemployment insurance costs.
“Unlike Texas there is no interest really in the governing majorities in those states to utilize these existing federal funds to replenish their UI funds or to pay off their federal debts, which means their employers are going to be hit with some automatic payroll tax increases because they’re not using this money that’s available,” Gleason said. “I think we’ll see the likes of New Jersey and Illinois serve as an example for what not to do, to the detriment of their constituents and businesses in their states who are going to be hit with automatic tax hikes.”
Property tax relief or any other tax relief are also wise moves, in his view.
Ginn said Texas was hit hard by the “shutdown recession” in 2020.
“The unemployment rate rose dramatically across the nation and here in Texas,” he said. “We’re back down to about 5.9%. But it’s taken a while for us to get back to that level. I think what we really need to see is more pro-growth efforts moving forward. We’ve done a good job so far in Texas this year. We passed another conservative Texas budget to keep spending within the average taxpayers’ ability to pay for government spending.”
More work is needed to reduce the heavy property tax burden, Ginn said, and return surplus tax dollars to citizens. In addition, Texas is dealing with the border crisis, which will have a major economic impact.
The state also must scrutinize proposals to use the federal dollars to pay for university construction and other projects.
“Milton Friedman, one of my favorite economists, always said that the ultimate burden of government is not by how much it taxes but how much it spends,” Ginn said. “And so we’ve really got to keep an eye on spending and make sure that it’s restrained over time.”
Williams said states have a duty to resist federal overreach, including efforts to overturn right-to-work laws in 27 states, and the right of each state to run their own elections.
“But the federal government almost always encroaches on states through its dollars,” he said. “So that’s why it’s so important to use these federal dollars in a way that does not get you more tangled with more federal mandates and regulations and the costs associated with that. So again, replenish your rainy day fund, pay off any debts. You can buy down property tax relief. You’ll be in good shape and you’ll be showing the rest of the nation the best way to use these federal funds.”
Ginn said the Texas Public Policy Foundation, which describes its mission as promoting “conservative public policies,” is urging the state to use best practices by trying to separate these funds out into a separate article of the budget.
“That way we don’t fall into the fiscal cliff that we had after the American Rescue American Recovery Reinvestment Act during the Barack Obama administration, where we had received all these funds for education,” he said. “And then when those went away, people said that we cut education, which isn’t true.”
Williams said he wanted to thank Texas for serving as a model for sound governance on a variety of areas, and hopes to see that remain the case in deploying these federal funds.
“Even before the pandemic hit, we had a major problem with the increase in federal funds that comprise the share of all state budgets,” he said. “It’s grown drastically in recent decades in every state, even relatively well-run states. As Jonathan mentioned, it has a lot of negative side effects with how it gets higher overall state spending and then the strings that come attached with it, how federal government uses those federal funds and the increased share.”
“We want to ensure that this problem is not exacerbated by the gusher of federal funds that have been showered upon states,” Williams added. “Alexander Hamilton got it completely wrong in Federalist 17 when he said it would always be more likely that the states would encroach on the federal government’s authority than vice versa.
“That’s, obviously, been completely wrong, as we’ve seen from recent years and this year, given how much of the entire progressive agenda involves federal encroachment on states rights,” he added. “We need to make sure that this blast of federal revenue that was sent out to the states over the past year is not used as a tool for further federal encroachment on states’ rights, states’ decision-making.”
