The coronavirus crisis has become a crisis of federalism, as states face plummeting revenues and soaring entitlement obligations. Despite $340 billion in emergency funding through the CARES Act and a $50 billion hike in federal assistance for Medicaid, states remain deep in the red. The National Governors Association has called for an additional $500 billion in “unrestricted fiscal support” to help meet budgetary shortfalls, and House Democrats have made further assistance for states a centerpiece of their proposed $3 trillion HEROES Act.
The state fiscal crisis is so acute because it exposes structural flaws in federalism’s current model, whereby the federal government provides partial funding for states to manage entitlements such as Medicaid and unemployment insurance. This arrangement has led to program funds being inequitably distributed, inadequately focused on those who most need assistance, and destined to fall short in recessions, when they are most needed. The prospect of generous federal matching funds for certain entitlements has led states to prioritize them at the expense of responsibilities for which they bear the full cost—putting at risk their ability to finance education, infrastructure, and police.
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