Why Coronavirus-Relief Talks Collapsed

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.