A Standing Counter-Cyclical Fiscal Policy Mechanism for State and Local Aid


August 22, 2022 - Author: Mary Schulz and Sarah Klammer

Federal grants-in-aid programs provide fundamental support to state and local government programs in the modern era. The recent Coronavirus Aid Relief, and Economic Security (CARES) Act, enacted in March 2020, allocated $150 billion in federal payments to state and large local governments through the establishment of Coronavirus State and Local Fiscal Recovery Funds (Congress.gov, 2020). A second round of assistance was enacted via the American Rescue Plan Act of 2021, which allocated $350 billion in general assistance payments to state and local units (MI Department of Treasury, 2022). A grant fund of this size and breadth to local governments has not been seen since the  passage and implementation of the State and Local Fiscal Assistance Act of 1972– more commonly known as the General Revenue Sharing program (GRS). In its more than decade and a half run, the United States’ GRS program transferred more than $83 billion in funds from the federal government to state and local governments. Like general revenue sharing, a large proportion of CARES and ARPA money is given to local governments based on population size and other factors (with notably simpler formulas for disbursements of state and local ARPA funds). Unlike revenue sharing, however, expenditures must be related to impacts of the COVID-19 pandemic (and not used to cover budget deficits existing pre-COVID). With changes in the Treasury’s Final Rule for ARPA fund usage, however, local governments can now opt to put $10 million of their funds (or the localities entire allocation, whichever is less) towards “revenue replacement”, a deliberately broad category that puts ARPA money much more in line with the GRS than initially anticipated. How this will play out, however, and whether ARPA funding could spark renewed support for general revenue sharing, remains to be seen. In the following pages we consider the history of the GRS of the 1970s and 1980s, its highlights and criticisms, followed by brief exploration of the potential for a “permanent” new federal revenue sharing program in the wake of COVID-19 related stimulus.


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