States criticized for spending federal relief funds on tax cuts, prisons

As states plan how they’ll spend the $25 billion remaining in federal COVID relief funds, some also are facing criticism and renewed scrutiny over how they allocated money already received from the American Rescue Plan Act.

Of the $198 billion authorized by Congress in 2021, $173 billion already has been appropriated by states, the District of Columbia and Puerto Rico. Much of the money went — as it was intended — to deal with the COVID-19 public health emergency, including social programs benefiting low-income communities, grants to help small businesses stay open and pay for essential workers.

But civil rights groups and think tanks focused on economic and tax policy have pointed out that the money has gone to build prisons, offset tax cuts, and fund initiatives completely counter to improving public health, such as Arizona’s $163 million program to give grants to schools that didn’t have mask mandates.

The American Civil Liberties Union in a letter earlier this month requested that the Treasury Department investigate the misuse of ARPA funds. The Institute of Taxation and Economic Policy has criticized tax cuts that it says are squandering revenue built up in part by the federal relief funds. And the GOP-controlled House Committee on Oversight and Accountability on Wednesday held the first of what its chair, Rep. James Comer (R-Kentucky), says will be many hearings examining how federal pandemic relief dollars were spent. 

The Center on Budget and Policy Priorities, a nonpartisan research institute, has analyzed the ARPA fund appropriations since 2021, and in a January report says that many have used the funds “constructively” toward economic recovery but it also suggests that states need to use the remaining funds to help the people most affected by the pandemic and prevent long-term damage to health, education, and social services in states.

According to the CBPP’s data, capital construction made up 21% of the allocations — the largest share for all states — through December, with some states like Montana allocating 79% of their funds to capital construction projects. And while many state projects were for broadband and water and sewer infrastructure, some of the spending was unrelated to “an equitable recovery,” according to CBPP policy analyst Iris Hinh, author of the report.

In 2021, Alabama allocated $400 million, almost 20% of its funds, toward the construction of two new prisons. In Arizona, $4.2 million in recovery funds was designated to fund offices for Department of Corrections staff. In its January letter to the Treasury Department, the ACLU urged the Deputy Inspector General to investigate the use of ARPA funds for jail and prison expansions saying such construction “does not mitigate the effects of the COVID-19 pandemic and does not fall under any of the eligible uses of ARPA funds.”

Twenty-three percent of Florida’s funds were allocated to highway construction, according to the CBPP. Colorado, Louisiana and North Dakota also spent a large proportion of their funds on transportation construction. 

Hinh noted in the report that “while spending on highways may help produce a stronger recovery, it is often poorly targeted to the communities that need help the most.” 

Revenue replacement and unemployment assistance 

Another big chunk of the relief funds — 13% across the nation — has gone toward replacing revenue losses from the pandemic, as allowed under the federal guidelines. The CBPP argues that although it makes sense to ensure that services that existed before the pandemic continue, states should use more of the funds to target inequities made worse by the pandemic, such as food becoming even less affordable for many families. In Wyoming, 58.8% of appropriations of these funds went toward revenue replacement, followed by New York at 57.2% of appropriations and Pennsylvania at 56.8%.

States allocated $23 billion to unemployment insurance trust funds, but only a small portion of that, $929 million, went toward upgrading unemployment insurance and improving access through IT changes and other advancements. The rest went toward rebuilding those trust funds after jobless claims increased due to the pandemic-related closures of businesses. 

Nevada, for instance, which had borrowed from the federal government to pay unemployment claims during the pandemic used ARPA funds to pay off its loan rather than raise the unemployment tax paid by employers, according to the Nevada Current.

But Nevada is also using ARPA funds to modernize and streamline its system which buckled under the influx of claims during 2020, according to the Current. Colorado, Delaware, New Jersey, South Dakota, Tennessee, Virginia and Washington are also planning to use ARPA funds to update their systems. 

Hinh said that states that are only choosing to rebuild their trust funds are missing out on opportunities to expand access and should instead raise the unemployment taxes paid by businesses.

Tax cuts

One of the more contentious uses of the ARPA funds has been to offset tax cuts. Since the law was intended to be a stimulus, it included a mandate: States could not cut taxes and then use federal funds to counteract the cuts.

In 2021, 21 state attorneys general, all Republicans, brought legal challenges against that part of the law. In January, the Supreme Court declined to hear Missouri’s case on the issue after a federal district court said the state didn’t have legal standing and the Court of Appeals for the 8th Circuit agreed. In a case involving 13 states, including West Virginia, Iowa, Arkansas and Florida, the Court of Appeals for the 11th Circuit ruled in January that the provision was unconstitutional because there wasn’t clear notice for how to comply with the law.

At least 24 states are considering income tax cuts during their current legislative sessions, including Arkansas, Montana and Utah. Kentucky Republicans are trying to pass another cut in the personal income tax after the income tax rate already fell this year.

In Kansas, North Dakota and Ohio, lawmakers are proposing flat tax rates, and political leaders in Arkansas, Indiana, Louisiana and West Virginia have pushed for getting rid of personal income taxes altogether, according to the Institute on Taxation and Economic Policy. The flat tax proposal in Kansas would slash the budget by $1.5 billion.

These tax policy changes will hurt the people most affected by the pandemic and weaken the impact of the recovery funds, said Hinh and Aidan Davis, state policy director with the Institute on Taxation and and Economic Policy.

“It’s during good times in the economy when states are flush with cash that they feel that they are most able to justify and to push for deep tax cuts,” Davis said. “I do think that they feel that they’ve been able to use that almost as a cover for something that they wanted to do year after year and they continue to push for year after year, but (they’re) not talking about what the long-term implications are, because you’re looking at a one time surplus.”

She added, “It really is a missed opportunity on a lot of fronts because with the legislation under ARPA, the state aid did a lot of good, but it could have done a lot more had much of it not been squandered on tax cuts in the state.” 

Hinh said that in the long term, states can either build off of the benefits of the recovery funds or suffer long-term consequences from cutting taxes.

“From the Great Recession, there were tax cuts that states implemented and I think, in many cases, that they still haven’t recovered from, and that impacts your education systems, your healthcare, and things that are really critical to the well-being of families and communities,” she said. 

“While things like infrastructure improvements are great and needed, and water, sewer, and broadband, it’s also important to think about the long-term consequences, and that can’t be cutting taxes. It needs to be continuously building off of these funds and the programs and services they’ve been providing to people because the pandemic will have very lasting impacts and there are so many opportunities, still, with these funds.”