Why a Federal Funding Deal Matters So Much for States and Localities

This story was updated to note that lawmakers announced a deal Tuesday night on a spending framework.

Congress made progress Tuesday toward legislation that would fund the federal government into next fall, a possible sign states and localities could soon gain more clarity when it comes to how much money they will be able to tap into to address an array of difficult issues, like affordable housing and a shortage of mental health workers, at a time when inflation is putting pressure on their budgets.

But there's still a great deal of uncertainty over how the process on Capitol Hill could play out in the coming days.

In addition to setting spending levels for federal programs, lawmakers have been debating whether to tuck provisions into the full-year "omnibus" spending measure that would deal with a range of other long-standing and controversial policy issues that have implications for state and local governments. For instance, they are discussing rolling back a cap on the federal deduction for state and local taxes and clearing the way for state-regulated marijuana companies to use the banking system.

Meanwhile, funding is also on the line for potentially transformative new programs included in previously passed laws—such as an initiative to create semiconductor research hubs in parts of the country not already known for tech.

House Appropriations Committee Chair Rosa DeLauro, a Connecticut Democrat, said in a statement on Tuesday night that lawmakers had reached an agreement on a 2023 appropriations framework "that provides a path forward to enact an omnibus next week."

"Now, the House and Senate Appropriations Committees will work around the clock to negotiate the details of final 2023 spending bills that can be supported by the House and Senate and receive President Biden’s signature," she added.

Sen. Richard Shelby of Alabama, the top Republican on Senate Appropriations, issued a similar statement.

“If we can get the cooperation from the Republicans to do an omnibus, it would increase the funding that goes to states,” DeLauro said in an interview last week when asked by Route Fifty about the significance of reaching a deal on a larger bill. “It goes to community projects. It goes to health care issues, transportation—the whole nine yards.”

The federal government is currently operating under a stopgap spending measure that expires on Friday. Senate Majority Leader Charles Schumer told reporters Tuesday that negotiators were moving toward passing another short-term bill, known as a continuing resolution, before that deadline to avert a government shutdown. The temporary measure, which the House could vote on as soon as Wednesday, would keep the government funded until Dec. 23. 

That would buy Congress more time to hammer out the specifics of their deal.

"If all goes well, we should be able to finish an omnibus appropriations package by December 23rd," Shelby said in his statement.

But some Republicans appear less than eager to go along with a deal before their party takes control of the House next month. Sen. Rick Scott, a Florida Republican, suggested that going that route would be an “insane" move by the GOP. There's also opposition among House Republicans toward the plan for the short-term spending measure.

Should the momentum toward an omnibus bill stall, it would be significant for state and local governments.

A continuing resolution would leave spending locked in place at current levels, possibly well into next year, and would fail to provide additional funding for programs to cover the cost of inflation, explained Mark Ritacco, chief government affairs officer for the National Association of Counties. 

“In this situation, where inflation is still quite high, it wouldn't allow for an increase in those investments just to keep up with the cost of doing business,” Ritacco said.

Mental Health and Housing

Counties, states and other local governments are clamoring for changes and additional funding in a number of policy areas. One is mental health. A bipartisan group of senators has proposed funding to address a shortage of mental health professionals in rural and underserved areas.

“Across the country, county officials are telling us that a top issue for them is mental health and housing,” said Ritacco. “And those are the two activities that could potentially be harmed the most by lack of congressional action on an omnibus.”

Advocates who were disappointed that funding to build more low-income housing and provide additional rental assistance was dropped earlier this year from the Inflation Reduction Act are now hoping to get billions in an omnibus package. 

A coalition of housing groups, including the National Council of State Housing Agencies, are pushing for an increase in the nation's main formula block grant program to build or renovate affordable housing.

“An omnibus bill is much more likely than a continuing resolution to provide more funding for the construction and rehabilitation of affordable homes and apartments, which is the most pressing housing problem facing the country,” Stockton Williams, executive director of the National Council of State Housing Agencies, said in an email.

The National Low Income Housing Coalition is also hoping that a proposal by House Democrats to increase funding for the housing vouchers program by $1.1 billion is included in a spending bill.

With fiscally conservative Republicans taking control of the House next month, “the omnibus is our last, best chance for a while to give struggling renters with extremely low incomes quick relief,” the group’s president and CEO Diane Yentel said in a statement to Route Fifty.

In addition, Yentel said the group is hoping a bill backed by a bipartisan group of senators to get disaster relief through Community Development Block Grants to communities faster will be included. 

Dispersing the Community Development Block Grant Disaster Recovery funds after hurricanes and other events has been slowed because Congress must first approve the spending. The proposal, however, would create a standing fund so that the aid can be sent quickly without requiring congressional approval.

Ritacco said local governments are also hoping that negotiators will be able to reach a deal that includes funding for the Treasury Department to restore support for state and local governments in handling various pandemic-related programs.

The department shut down a call center that provided state and local assistance in October, frustrating local leaders trying to follow the rules that Congress and Treasury set for the recovery money.

Michael Wallace, legislative director for housing, community and economic development for the National League of Cities, noted that local governments are facing another reporting deadline in April for the pandemic aid. “If we can't get that passed, I think we will have a significant challenge for small rural towns,” he said.

Settling Long-Standing Policy Debates

Raising the stakes of the negotiations is the possibility that an omnibus bill could include various tax measures, including restoring a 2018 increase in federal tax credits to help states build more affordable housing, which expired at the end of last year.

Ritacco said counties are also hoping Congress will increase the amount of state and local taxes people can deduct on their federal returns. 

Republicans capped the so-called SALT deduction at $10,000 as part of their 2017 tax code rewrite. Counties and higher-tax Democratic states have said limiting the tax break made it politically more difficult for them to increase local revenue because residents are able to deduct less. Lawmakers in states like New Jersey have blamed the cap for spurring people to move out of their states to places like Florida.

A spokesman for Sen. Robert Menendez told Route Fifty in an email that the New Jersey Democrat “will continue to look for opportunities to address this at every opportunity he has.”

Schumer, though, didn’t sound sure at a press conference Tuesday that tax measures would be included in an omnibus. He did indicate that restoring expanded child tax credits that research has shown helped to reduce poverty was important to Democrats. But, so far, he said they hadn’t struck an agreement on that issue with Republicans.

States that have legalized marijuana have been watching a proposal that would allow regulated cannabis businesses to access banking services, said Brian Wanko, legislative director for budgets and revenue for the National Conference of State Legislatures. Without being able to open bank accounts, the businesses have to handle large amounts of cash, making them targets for robberies and creating concerns for local officials about public safety, as well as tax evasion. 

Appropriations for Semiconductors 

Also up in the air until the omnibus bill is settled are appropriations for a closely watched program in the CHIPS and Science Act, the law President Biden signed in August that is meant to grow the nation’s semiconductor sector.

The $10 billion initiative aims to create regional technology and innovation hubs around the country, rather than sending money to traditional technology centers in Boston, California’s Bay Area and Seattle. Supporters say the program could transform where innovation happens in the U.S. and give a boost to rural communities and small and mid-sized cities, like Lafayette, Indiana and Columbus, Ohio.

But until lawmakers approve the money for it, the program is in limbo.

“If we don't have an appropriations bill, it doesn't get appropriated," DeLauro said when asked about the program. "It’s as simple as that,