States, territories, tribal governments, counties and cities can now request their share of the $350 billion in COVID-19 aid allocated to them by the massive federal relief law President Joe Biden signed in March.
Biden said Monday that the funds will boost the economy by helping governments hire more workers.
“We’re talking about 1.3 million state and local employees out-of-work,” he said. “The money we’re going to be distributing now is going to make it possible for an awful lot of educators, first responders, sanitation workers to go back to work.”
Local governments will receive half their funds now and half in a year. States where the unemployment rate has increased by more than 2 percentage points since February 2020 will get all their funds now, the Treasury Department announced. Other states, like localities, will receive the money in two equal payments.
The Treasury also on Monday published its interim final rule that more fully explains how governments can spend the federal money.
The law requires states and localities to use the funds to respond to the pandemic and its economic fallout, such as by helping small businesses or by funding government services. The law also says governments can’t use the funds to pay for tax cuts or to shore up pension funds.
One Democratic and 12 Republican state attorneys general sued the Biden administration in March over the tax cut provision, arguing that it was unconstitutional and infringed on states’ rights.
The Treasury rule provides many specific examples of spending allowed under the law, such as providing mental health services, paying public health and public safety employees, and replenishing unemployment insurance trust funds.
The rule also clarifies the tax provision. Governments must show the Treasury that tax cuts within the covered period—March 3, 2021, through the last day of the fiscal year in which funds were spent—were paid for with money other than the federal relief dollars, the rule says.
The rule explains which tax changes are covered by the law (for instance, cuts automatically triggered by changes in the federal tax code don’t count) and how governments must calculate their net tax revenue.
It also says states and localities cannot use the federal funds to pay for debt payments, legal settlements or deposits into rainy day funds.
Some analysts on Monday criticized parts of the rule. It may prevent states from paying for tax cuts by cutting services, Jared Walczak, vice president of state projects at the Tax Foundation, a conservative-leaning nonprofit based in Washington, D.C., tweeted.
“Essentially, if a department or agency receives federal aid, ANY spending cuts in that department (even if in a completely different program and totally unrelated) used to offset a tax cut would be considered off limits and lead to recoupment,” he wrote.