NTU on Phase 4: The Good and Bad of Policy Recommendations to Support States

Ahead of Congressional debate over the next phase of COVID-19 relief and recovery, National Taxpayers Union is publishing a series of recommendations for policymakers on Capitol Hill and the Administration. We are hopeful that these briefs will guide lawmakers to consider the taxpayers’ perspective as they consider spending another $1 trillion or more to tackle the public health and economic impacts of the coronavirus.

This is the third of a three-part series, and covers policies and programs that can best support states during the crisis. The first two parts covered workers and employers.

As NTU stated in our Phase 4 recommendations in June, we urge Congress to abide by the following principles as it responds to the ongoing crisis:

  • Relief efforts should be temporary, and targeted at the workers, businesses, and families most impacted by the pandemic and economic downturn;

  • Recovery efforts should make broad changes to the tax code that do not seek to benefit one industry or interest over others and have a material effect that spurs economic activity;

  • All efforts in a fourth COVID-19 bill should come with prudent guardrails, to prevent taxpayer dollars from flowing to unrelated or unproductive causes or to projects that have nothing to do with the pandemic and recession.

Direct Aid to States and Localities

House Democrats’ Plan: Too Big, Too Lax

Thus far, Congress has provided approximately $765 billion to state and local governments to help with their response to COVID-19. As lawmakers consider the next legislative package, they should proceed cautiously and be mindful of the fiscal implications of our massive $26.5 trillion national debt. Any additional funds to state and local governments should be accompanied by strict guardrails to ensure resources are not used for purposes other than the current public health and economic crises.

The HEROES Act, which passed the House in May, takes an inadvisable approach to providing aid to states and localities. It would appropriate nearly $1 trillion without establishing the necessary guardrails to prevent these funds from being used to address fiscal mismanagement that is unrelated to COVID-19. The ongoing crisis should not be used as an opportunity to bail out poorly run governments. 

It’s not only the lack of guardrails that makes the HEROES Act problematic. In NTU’s Phase 4 issue brief, we noted:

It also contained numerous other state benefits that have little to do with the crisis, such as suspending the $10,000 limit on the state and local tax (SALT) deduction (which mostly benefits wealthy taxpayers) and adding $15 billion to state highway funding.

Congress should scrap the HEROES Act and pursue an entirely different approach to helping state and local governments. 

A More Modest, Reasonable Approach Is SMART

A better alternative is the State and Municipal Assistance for Recovery and Transition (SMART) Act from Reps. Tom Reed (R-NY) and Mikie Sherrill (D-NJ), which restricts states’ use of federal funding to items that were not in their budgets prior to the pandemic. It also explicitly prohibits the use of federal aid to shore up public pension funds. The bill proposes a total of $500 billion in federal support, which NTU believes is too generous at this time, but it is encouraging to see legislation that takes a more prudent approach to restricting the usage of federal dollars. This is a much better blueprint for policymakers to follow.

Additionally, Congress should follow the basic guidelines set forth by a group of 31 free-market organizations (including NTU) in an early July coalition letter. The principles recommend that, in dispensing any aid to state governments, federal policymakers should: 1. Be Direct; 2. Be Transparent; 3. Be Fair; and 4. Be Responsible.

Increased Medicaid Funds

Expanding Medicaid Is Costly and Poorly Targeted

The Families First Coronavirus Response Act, which was enacted in March, increased the federal medical assistance percentage (FMAP) for state Medicaid programs by 6.2 percentage points, thus shifting a larger share of the costs for the program to the federal government. This additional federal reimbursement to states will continue through the end of the quarter in which the public health emergency ends, so as of yet there is no defined end date. 

House Democrats included in the HEROES Act an additional FMAP reimbursement of 7.8 percentage points, which would boost the total FMAP increase to 14 percentage points through the end of June 2021. According to the American Action Forum, this change would increase federal spending by an additional $45.2 billion. Combined with FFCRA, states would receive at least $117 billion through the end of June 2021, according to the Center on Budget and Policy Priorities.  

In addition to the enormous cost of the proposed expansion, policymakers should also be concerned that an additional increase to FMAP would be poorly targeted and that funds would be distributed inequitably. As former White House health care advisor Brian Blase wrote in a recent op-ed:

In short, an across-the-board FMAP increase is not the smartest use of resources to respond to this public-health emergency. Congress should provide funds to help, but it should do so separate from existing state Medicaid expenditures, which would reward states with larger and higher-spending programs. Moreover, we should be sending more federal funds to poorer states and those with more uninsured — precisely the opposite of what House Democrats are proposing.

Congress should help address the needs of the uninsured and vulnerable populations during the pandemic, but additional aid to the states via an FMAP increase is not the best way to do so. 

A Better Way To Help Insure the Uninsured

A May study by the Kaiser Family Foundation estimated that 12.7 million Americans could become eligible for Medicaid due to the pandemic. Instead of enrolling in Medicaid and exacerbating the strain on state and federal budgets, these individuals and families would be better served by policies that helped them obtain higher-quality private insurance. To that end, NTU has proposed the creation of Pandemic Health Accounts (PHAs), which would function similarly to Health Savings Accounts (HSAs). However, unlike with HSAs, PHA funds could be used to pay for health insurance premiums. The accounts would be funded with $2,000 for individuals and $6,000 for families, which should help cover premiums for approximately four months. Instead of sending more money to states to enroll displaced workers in Medicaid, Congress should enact PHAs to help these individuals obtain higher-quality, private coverage. 

Unemployment Insurance

States Facing Depleted Trust Funds, Administrative Woes

The CARES Act provided $263 billion to states for expanded unemployment benefits. This expansion included broader eligibility criteria, an additional $600 per week in benefits, and a longer eligibility period for individuals who have exhausted their benefits. All of this was layered on top of the existing state unemployment systems. 

The massive uptick in layoffs has placed a large strain on the administrative capabilities of state unemployment offices, and depleted unemployment insurance trust funds in many states. While this was partially alleviated by the CARES Act, which allowed states to draw from the $150 billion in state aid to shore up their trust funds, many states have completely exhausted their trust funds and have had to borrow money from the Federal Unemployment Account to pay out standard unemployment insurance claims. 

In addition, states must administer the newly created Pandemic Unemployment Assistance (PUA), which is federally funded. While PUA is intended to create a safety net for individuals who are typically ineligible for traditional unemployment benefits such as gig workers and the self-employed, this also creates a hazard for state unemployment systems who lack the ability to integrate state integrity measures with the new program. These infrastructure challenges have resulted in delayed or entirely missing benefits for workers, and highlights the need for further reforms to state unemployment systems.

Congress Should Assist with Solvency and Administrative Backlogs

The debate over unemployment insurance in the next COVID package has primarily revolved around whether or not Congress should renew, reduce, or eliminate the $600 per week supplemental unemployment benefit. Regardless of what happens with the supplemental insurance, an equally important issue for Congress to consider is the solvency of state trust funds, which are used to finance standard unemployment claims. As Senate Majority Leader Mitch McConnell said recently, “Basic unemployment insurance, which is a shared responsibility with the states and the federal government, is important… We need to help the states make sure basic unemployment insurance is still there for quite a while.” Congress should extend liquidity -- through additional lending authority or grants -- to ensure that standard unemployment insurance is available to displaced workers through the duration of the pandemic. 

Additionally, Congress should consider the need to help states better process an overwhelming surge in claims for unemployment insurance. This unprecedented demand has not only slowed the processing of legitimate claims, it has also opened the door to fraud. Sens. Todd Young (R-IN) and Ben Sasse (R-NE) have introduced legislation that would help states modernize unemployment insurance (UI) systems, process claims more efficiently, and root out fraud: 

The Unemployment Insurance Systems Modernization Act would require states to upgrade their state UI systems to be better prepared to handle a surge in claims, adjust wage replacement levels, be able to vary benefits over time, as well as automate a number of processes which are currently done manually in many states. It would also include a number of program integrity provisions that include requiring the use of the electronic system states use to detect and prevent fraud and those employers use to communicate with the state UI agency, and providing the Department of Labor with additional authority to hold states accountable for performance.

The bill would appropriate $3 billion, which is a considerable sum, but a portion of this investment might be returned to the Treasury as a result of program integrity reforms. For comparison, the president’s 2020 budget proposed similar reforms that could generate $2.5 billion in savings over 10 years “by allowing the use of additional funds to fight improper payments and by ensuring that States are using all available tools to ensure that benefits are only going to eligible claimants.”


The next COVID-19 bill will certainly contain billions of dollars in support for state governments. This makes sense as they are on the frontlines of the fight against coronavirus. While a great deal of attention will be focused on how much funding is provided, policymakers should also pay close attention to how the money is allocated. As we described in our guiding principles, funds should be targeted to the programs and individuals that need these resources the most. Additionally, funds should be accompanied by prudent guardrails that help maximize accountability to the public. Following these principles will help ensure that taxpayer dollars are well-spent and state governments are well-prepared for the challenges ahead.