Statement of Principles on ARPA Aid to State Governments

Summary

The American Rescue Plan Act (ARPA) included $350 billion in State and Local Recovery Funds, however, the legislation also prohibited states from using these federal dollars to directly or indirectly reduce net state tax revenue through 2024. These Principles outline the next best uses of these federal ARPA dollars for state governments.

Statement of Principles on ARPA Aid to State Governments

Statement of Principles

Temporary Funds Require Temporary Spending

History reveals that federal spending and bailouts are not a “free lunch” for states. Academic research shows that federal aid to the states increases both state spending and overall tax burdens. If state leaders spend temporary federal funds, the increased spending should also be temporary.

Treasury Guidance on Unemployment Insurance Funds

In May 2020, the U.S. Department of Treasury clarified that federal ARPA funds can be used to replenish unemployment insurance (UI) trust funds up to pre-pandemic levels, if state policymakers choose to use these resources. States should consider this option in order to avoid damaging tax increases levied on employers who pay taxes into their respective UI state trust funds.

Conform to Federal Tax Code

States should conform their tax codes to recent federal changes if they have not already done so. The CARES Act passed by Congress in March 2020 changed the federal tax code for years surrounding the COVID-19 pandemic to offer relief to both individuals and businesses. Provisions like allowing carrybacks and removing the 80% limit for net operating loss (NOL) deductions, extending the business interest expense deductions, and making forgiven paycheck protection program (PPP) loans income-tax-free.

Priority Based Budgeting

State officials should apply principles of priority-based budgeting to all state spending, especially if they accept the ARPA Recovery Funds. As outlined in the ALEC State Budget Reform Toolkit, priority-based budgeting evaluates new spending proposals in the context of all that government does and develops a budget based on essential services and performance measurement. For example, a state could consider using ARPA dollars for high priority infrastructure or cyber security projects.

State and Local Oversight

As states spend the temporary federal funds, policymakers should establish a system to measure the success of spending initiatives. Furthermore, state leaders must implement an accountability system to ensure that local governments and local school districts are spending ARPA funds effectively.