Was the State Aid Bill a Bailout?

More than 30 governors — Republicans and Democrats alike — supported the state aid bill, granting $26.1 billion in fiscal relief to local governments facing yawning budget gaps and signed into law yesterday. Yet only four Republicans — Sens. Susan Collins and Olympia Snowe of Maine, and Reps. Anh “Joseph” Cao (La.) and Mike Castle (Del.) — ended up voting for the deficit-neutral bill.

Rather, many Republicans, including governors of states in dire need of funds, are bashing the state-aid bill as a “bailout.” (See here and here.) But in doing so, they are perpetuating a few myths.

One could characterize the bill as a “bailout” for states: It is a transfer of funds from the federal government to state governments. But the bill contains no new spending. It raises one tax — closing a loophole that encouraged big companies to hire overseas workers — and otherwise rescinds funds from federal programs, including the Supplemental Nutrition Assistance Program, or food stamps.

But it is not really a bailout, a la Ford or Bear Stearns: The government is not rewarding states that have been fiscally irresponsible. Before the recession, states held record rainy-day funds to use in the event of a dip in revenues. (All states except for Vermont are required to run balanced budgets every year.) When the recession hit, states ran through their savings — but still had to increase taxes and fees, cut back services and layoff workers. The issue is not that states did not save enough, but that the Great Recession has created the worst employment crisis since the 1930s.

Other Republican talking points are just obviously false. Gov. Tim Pawlenty (R-Minn.) — in line to receive $167 million to save the jobs of 2,800 teachers in his state — slammed the bill: “The federal government should not deficit spend to bail out states and special interest groups. Minnesota balanced its budget without raising taxes and without relying on more federal money. The federal government’s reckless spending spree must come to an end.”

This is inaccurate. There is no deficit spending in the bill — not one penny of it. The “reckless spending spree” amounts to less than half of what many Republican governors asked Congress for. The tax increase is minor, and stops encouraging big companies to ship jobs overseas. And states are hardly “relying” on Congressional money. This will close about a fifth of their budget gaps this year, meaning the bill will staunch the bleeding but won’t come close to healing the wound.