Facing state and local level fiscal crises as a result of the economic damage wrought by COVID-19, the National Governors Association is calling upon the federal government to provide $500 billion of relief to the states and territories. Congressional Democrats have championed a bill that would provide $1 trillion in aid, but their Republican counterparts are hesitant to pass a federal relief package that amounts to a bailout for some states’ long-running fiscal difficulties. A compromise that already has some bipartisan support would be to offset the cost of the relief bill by ending targeted economic relief subsidies to states.

In their working paper, Michael Farren and John Mozena illustrate the fiscal situation and offer steps for policymakers for implementing a federal relief package, as well as enacting and enforcing antisubsidy rules for states that receive bailouts. Academic research has demonstrated these subsidies do not work. State and local policymakers already want to exit the subsidy arms race but are prevented by the political risk of doing so.