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The Case for COVID-19 Fiscal Transfusions for an Odd Couple

Rural America won't like it, but there are good arguments for Congress to provide direct aid to public transit systems and to municipalities that rely heavily on the hospitality taxes vacationers pay.

In an April column, I quantified the ballpark for state and local income and sales tax revenues likely to be lost to the COVID-19 pandemic's stay-home response. I also discussed various ways that Congress could allocate federal relief to states and their subdivisions. In doing so, I skipped over two other segments of our economy where local-government revenue shortfalls will be especially problematic: public transit and vacation destinations. The public-policy issues they present are almost polar opposites, but they have two things in common: They are ill-suited for simplistic, broad-brush solutions, and the Farm Belt couldn't care less about urban problems.

Back in April, it was too early to calibrate the fiscal stresses that now face public transit systems, which warrant their own federal bailout given their importance to metropolitan economic recovery. The perceived contagion risks of mass transit mean that too many urban workers and shoppers are unable to return to city centers, and social distancing precautions make it virtually impossible for transit systems to balance their budgets until a vaccine or immunity become widespread. Given the polarity of American politics, this will likely become a partisan issue, as many red-state senators will resist subsidizing the spinal cords of mostly blue metropolitan regions.

In the grand scheme of things, the roughly $15 billion in annual passenger-fare revenues for public transit amounts to just 2 percent of total state and local revenues. But those fares are keystones in many transit agencies' operating budgets.

The fiscal problems facing mass transit in Chicago, New York, San Francisco and Washington, D.C., will be greater than those in Albuquerque, Louisville and Spokane, Wash., so it's hard to devise a formula that works equitably for all. Perhaps the best Congress can do would be a separate tack-on appropriation with distributions based on service-area populations, ridership levels and historical shares of operating budgets funded by fares. Sales- and income-tax effort for transit districts should be included in a general municipal relief formula.

The new stimulus package passed by the House, the $3 trillion HEROES Act, includes a $15 billion transfusion for mass transit, though it arguably needs a more frugal two-year allocation formula. For perspective, this will be less than half the direct payroll subsidies already given to airlines, which also received corporate loan guarantees, even though mass transit had 10 times the airlines' average daily ridership before the pandemic. The House bill is a reasonable starting point for future conference-committee negotiations with stingier senators.

An equally unique but mostly ignored problem is posed by the hospitality tax revenue shortfalls now facing cities that attract disproportionately large tourist traffic and depend on those lodging taxes. Coastal beach communities, as well as inland tourism centers such as Anaheim, Calif., Las Vegas and Orlando, Fla., now face severe revenue shortfalls that are unique to their tourist tax bases. They have logically built their budgets on the premise that the visitors who flock there should pay the lion's share of expenses for additional public safety, sanitation and other services required to support the nonresidents during their stays.

But what happens when travel and tourism evaporate because of pandemic rules and fears? A case in point is Santa Monica, Calif. (population 91,000), which has already chopped its budget by $200 million, laying off 400 employees. For historical comparison, inland Stockton, Calif., with over three times the population, cut its budget by only half that dollar amount in its 2012 bankruptcy era.

Skeptics can argue that layoffs are reasonable measures when there are fewer tourists on the streets, but this is a classic fixed-cost vs. variable-cost problem. The sewer systems in these towns still need to operate with capacity for the visitors who will eventually return. Their fire stations can't be closed until the tourists come back. And many of their health departments will actually need more workers, even with reduced tourist activity, to control contagion that could quickly infect the hometowns the visitors return to. Without a champion in the Senate and a united front from the nation's municipal associations, these communities will be orphaned fiscally.

Nobody can justify a 100 percent bailout. A defensible number is probably closer to half the hospitality-specific tax revenues lost this year by cities that derive more than 15 percent of their total tax revenues from this source, with a per-capita limit. Eventually, these places will bounce back with pent-up demand. Families who skip Disney parks in 2020 will likely reschedule to go there in 2022 or maybe even 2021. And as a matter of principle and politics, Congress should not replace casino gaming tax revenues. But to help span the tourism meccas' fiscal abyss with minimal cost to Uncle Sam, a partial cash-flow bridge could be provided through access to the Federal Reserve's new municipal lending facility, either directly or potentially through a state bond bank.

And what about those flyover-country skeptics? Even though many farmers, especially the younger ones, regularly travel to these tourist towns and big cities for vacations and entertainment, most will see no need to chip in for these particular pandemic revenue shortfalls, and their representatives in Congress will feel likewise. Meanwhile, however, rural residents collect billions directly and indirectly each year in farm subsidies, averaging almost $20 billion this year and last. Without those subsidies, hundreds of small towns across rural America would shrivel economically. The non-recurring federal bucks needed to underpin mid-sized, tourist-centric municipalities and to keep public transit viable won't come anywhere close to the continuing annual tab for farm aid.

Every day in this stressful year, TV commercials jingle the concept that "we're all in this together" in our war with the coronavirus. Let's remind members of Congress of that when it comes time to provide overlooked pandemic financial relief to our uniquely impacted municipalities.

Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.

Girard Miller is the finance columnist for Governing. He can be reached at
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