Better Targeting of Federal Aid for State Fiscal Relief

Note: This is the third in a three-part series on improving the process for allocating federal pandemic aid to where it is needed most.
Part 1: Structure aid so it can automatically adjust based on economic need.
Part 2: Aid to states should not disproportionately favor small states.
Part 3: Target aid so states with higher unemployment rates get more aid per capita

By Tim Bartik

June 3, 2020

We need two significant reforms to federal aid in order to relieve state governments during this Pandemic Recession.

• First, the overall level of federal fiscal aid to states should be made automatic. This can be done by tying the amount to how far above 6 percent the national unemployment rate rises.
• Second, the already-enacted CARES Act and the House-passed HEROES Act both overly favor small states. They provide large minimum aid payments regardless of population or economic conditions. That should change.

How can federal aid be better targeted? State governments should be able to cope with modest increases in unemployment. But federal intervention must assist with large increases in unemployment—those are outside a state’s capability to manage. 

Thus, we should allocate federal funds based on each state’s “extra unemployed”—those beyond a 6 percent unemployment rate. This allocation could occur monthly to make aid responsive to changing state economic conditions.

If we used this approach, states with higher unemployment rates (shown for April in the figure below) would get more aid per capita.

The figure shown here differs from the one in my previous post, which shows almost no relationship between state unemployment rates and projected per capita state aid under the HEROES Act.

Is my suggested allocation unfair to small states? No. Smaller states with high unemployment rates—Vermont and Rhode Island are two—would still get per capita federal aid well above the national average.

So if the goal is to help state economies, allocation based on need is critical. Every additional unemployed person means lower state revenues, and thus fewer services or higher taxes. Both of these slow any economic recovery. South Dakota should thus receive no more money per unemployed person than Michigan. Rhode Island should get no more aid per unemployed person than Nevada.

As the Pandemic Recession continues, unemployment rates across states will change from their April numbers. The automatic formula means aid can adapt as circumstances change, rather than being set in advance.

We cannot pick precisely which states will gain or lose compared to their allocation in the HEROES Act. But we know what we need to know: the formula will target aid each month to states based on economic need.