Capital Matters

Why Coronavirus-Relief Talks Collapsed

House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer speak to reporters after their coronavirus relief negotiations with Treasury Secretary Steven Mnuchin and White House Chief of Staff Mark Meadows at the Capitol in Washington, D.C., August 7, 2020. (Jonathan Ernst/Reuters)
Whatever electoral harms the GOP may suffer from its refusal to negotiate a pre-election stimulus, they pale in comparison to the possibility of a shift in state and local governance.

Mere weeks before November’s elections, President Trump and congressional Republicans have turned down House speaker Nancy Pelosi’s $2 trillion stimulus package. On the face of it, the bill is a gift to Republicans: Voters receiving generous government transfers should be more inclined to favor the party in power. Indeed, the boost to personal incomes from the CARES Act is a big reason why Americans still approve of Trump’s handling of the economy.

So why would Republicans refuse the deal? It all comes down to the main sticking point: federal assistance to states and cities. Pelosi’s bill provides $500 billion in state and local funding and an additional $225 billion to public-school systems — more than double what Republicans are willing to agree to. And as with previous rounds of negotiations, Democrats have attempted to avail themselves of the recession to eliminate the cap on state and local tax deductions included in the 2017 Tax Cuts and Jobs Act. National Review’s Kevin Hassett, the former chairman of the White House Council of Economic Advisers, estimates that the amount of assistance in the bill totals five times the revenue lost by states and localities from the COVID recession.

Cities such as New York, San Francisco, and Chicago are starting to feel the squeeze. New York’s bonds just received a downgrade from credit-rating agency Moody’s, even after the city cut $1 billion from the police department. California is facing a deficit as high as $54 billion, in addition to the seemingly insurmountable holes in its public-pension system — all while growing numbers of residents leave for low-tax states such as Texas and Arizona. Whereas tax hikes might have been feasible in the days of unlimited SALT deductions, they would now have the effect of accelerating the exodus from coastal cities.

It’s a nightmare scenario for Democratic governors long cleared of fiscal responsibility by the SALT deduction, mortgage deductions, and a handful of other backdoor subsidies to high-income states.

The cultural and political power of major metropolitan centers stems from their unique combination of economic dynamism and progressive governance. In San Francisco, for instance, byzantine zoning restrictions mean that tech investors can live in hermetically sealed, perfectly manicured neighborhoods and be guaranteed that their homes will appreciate in value. This unstable equilibrium, propped up by expensive city services and high-paying municipal jobs, is made possible by federal largesse. It is the relationship between Congress and blue-state legislatures that creates cities like San Francisco, simultaneous powerhouses and basket cases with sufficient political clout to foist their will on the rest of the country.

The Democratic Party is banking on consolidating its strongholds in cities and the suburbs. Chuck Schumer explained the strategy in 2016: “For every blue-collar Democrat we lose in western Pennsylvania, we will pick up two moderate Republicans in the suburbs.” The unraveling of these metropolitan strongholds — which seems already to have begun — could be an existential threat to the Democratic Party as we know it. If high earners are forced to pay up for the policies they support, they may rethink their political preferences — or else relocate altogether.

As New York governor Andrew Cuomo put it, the “SALT [cap] encourages high-income New Yorkers to move to other states.” That’s why reinstating state and local tax advantages is so high on the list of Democratic priorities. During an earlier round of stimulus negotiations, Chuck Schumer pledged, “If I become majority leader, one of the first things I will do is we will eliminate [the SALT deduction cap] forever. . . . It will be dead, gone and buried.”

Whatever electoral harms the GOP may suffer from its refusal to negotiate a pre-election stimulus, they pale in comparison to the possibility of a shift in state and local governance. Blue-state budget woes aren’t going away. Even if Biden wins, Democrats will need a sizeable Senate majority to pass bailouts on the scale Pelosi is pushing for. Should they prove incapable of doing so, Democratic governors and mayors will have to reckon with decades of mismanagement. As a political matter, Republicans are right to press this point.

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