Economic downturns hit state and local governments particularly hard as they rely heavily on cyclical revenue sources like income and sales taxes while being required to balance their budgets. When these governments are forced to cut spending or raise taxes during recessions, it worsens economic conditions—a problem known as "procyclical fiscal policy." Unlike the federal government, which has automatic stabilizers like unemployment insurance, there is no equivalent system to support subnational governments during tough economic times.

How Automatic Revenue Sharing Could Work

One way to address this gap is by creating a system where federal funds are automatically shared with state and local governments when key economic indicators signal a downturn. This system could work similarly to unemployment benefits, expanding automatically when needed. Key components might include:

• Predefined triggers (e.g., unemployment thresholds or GDP declines) to determine when aid begins and ends.
• Use of existing federal-state transfer mechanisms (like Medicaid's FMAP) to distribute funds quickly.
• Safeguards to ensure states don’t reduce their own spending, such as maintenance-of-effort requirements.

This approach could help stabilize government budgets, protect essential services, and reduce the economic severity of recessions without requiring repeated political intervention.

Benefits and Key Stakeholders

Primary beneficiaries would include state and local governments, public sector workers, and vulnerable populations who rely on public services. For policymakers, the automatic nature of the system could make it more politically feasible than ad hoc stimulus measures.

An implementation strategy might begin with expanding existing countercyclical programs (like Medicaid’s FMAP adjustments) before designing a broader system. Challenges—such as ensuring funds aren’t misused—could be addressed through structured triggers and oversight mechanisms modeled on successful stabilizers like unemployment insurance.

While direct revenue generation isn’t applicable here, successful adoption could create opportunities for consulting or policy evaluation services to help governments optimize the use of automatic funds.