On Saturday, the U.S. Senate passed the American Rescue Plan Act, and today the U.S. House of Representatives concurred with the changes the Senate made to the bill. We are still reviewing the bill and its potential impacts on Washington’s budget. (Previous posts on the legislation are here and here.)

To begin, we are particularly interested in the state and local fiscal recovery funds in the legislation. These are two buckets of funding (of many in the bill) that can be used fairly generally, within certain parameters. (They are similar to the Coronavirus Relief Fund in the CARES Act.) The Senate changed the parameters of these funds significantly compared to what was originally passed by the House.

The bill appropriates $350 billion for the state and local fiscal recovery funds. The Tax Foundation estimates that the state of Washington will receive $4.285 billion and (on top of that) local governments in Washington will receive $2.435 billion.

Under the bill, this funding may only be used to cover costs incurred by Dec. 31, 2024,

• To respond to the COVID-19 public health emergency “or its negative economic impacts, including assistance to households, small businesses, and nonprofits, or aid to impacted industries such as tourism, travel, and hospitality;”
• To provide premium pay to eligible workers performing essential work (premium pay is defined as up to $13 an hour, in addition to wages a worker otherwise receives, not to exceed $25,000 per worker);
• To provide grants to eligible employers with employees performing essential work;
• To provide “government services to the extent of the reduction in revenue . . . due to the COVID–19 public health emergency relative to revenues collected in the most recent full fiscal year . . . prior to the emergency;” or
• “To make necessary investments in water, sewer, or broadband infrastructure.”

Two uses of the funding are explicitly forbidden. First, states and local governments may not use the funds “for deposit into any pension fund.”

Second, the legislation forbids states (but not local governments) from using these funds

to either directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.

“Covered period” is defined as the period from March 3, 2021 to the last day of the fiscal year in which all funds received have been expended. So if the state accepts the money, it would potentially not be able to reduce taxes until Dec. 31, 2024.

States must provide periodic reports accounting for their use of the funds, including “all modifications to the State’s or territory’s tax revenue sources during the covered period.” If states don’t comply with the terms, they must repay the funds corresponding to the violation.

Additionally, the Secretary of the Treasury may withhold up to 50% of each state’s payment for 12 months, “based on the unemployment rate in the State or territory as of such date.” It’s not clear if this means that if a state’s unemployment rate improves, it could receive less funding.

One of the allowable uses of the funds is to cover revenue shortfalls compared to the most recent full fiscal year prior to the emergency. I believe they mean FY 2019. (FY 2020 ended June 30, 2020, after the emergency began.) In FY 2019, state tax collections in Washington totaled $25.744 billion. They increased to $26.835 billion in FY 2020.