Americans look to the federal government to keep the economy strong. It is the top concern voters want the president and Congress to address. But the federal government is wholly unsuited to bring about changes that can have a positive effect on the economic fortunes of Americans. In fact, it often makes things worse when it tries to get involved.
For example, President Joe Biden signed the American Rescue Plan Act just a few months into his term. Most of the key features of this legislation flooded the market with cash — direct payments to individuals, expanded tax credits, loans to businesses, and money granted to state and local governments.
An analysis by the Washington Post, however, concluded that federal COVID-19 aid provided billions of benefits to corporate entities and wealthy individuals while only marginally helping the average American. Moreover, Biden’s decision to flood the economy with cash triggered massive inflation, further hurting people struggling due to the economic disruptions of the pandemic.
Other policies that Biden counts as wins over the last few years are the elimination of hidden junk fees and the cancellation of student debt. These are not the key economic concerns of most Americans, especially given the limited legal authority the president has to wipe out student debt. What people want is help addressing the high cost of living (rent, groceries, and healthcare) and inflation.
Whether or not the federal government can address these concerns is debatable. What is not up for debate is that it hasn’t done anything effective thus far.
State governments, however, have been more effective. Fourteen states passed individual tax rate cuts, and five states offered some form of property tax relief that took effect in 2024. Kansas also made the decision to reduce its grocery sales tax rate significantly.
This kind of tax reform is effective because it gives money back to all consumers, which they can use for the goods and services they need. It also helps people directly and does not have to be administered through a government office or program with operating costs that siphon money away from helping state residents.
States are also taking the lead in addressing the cost of housing through regulation changes designed to boost the supply of available housing. For example, in 2023, four states, Montana, Rhode Island, Vermont, and Washington, passed large-scale housing packages, including changes that made it easier to permit accessory dwelling units and multi-unit housing in single-family zones, and which also relaxed minimum lot size and parking requirements. Other states streamlined their permitting processes, reducing the time it takes to bring new housing to market. These are tangible reforms that will address a key component of the high cost of living facing Americans.
Much of the talk about welfare is focused on the federal level, but states actually administer the welfare programs funded by federal legislation, such as Temporary Assistance for Needy Families and Supplemental Nutrition Assistance Program. The states have far more impact than the federal government in setting benefit requirements and creating systems that are coordinated to provide consistent and fair treatment to all. To that end, some states are revamping local systems to eliminate benefit cliffs, the situation where one additional dollar of income reduces aid to $0, and marriage penalties, both of which undermine the goal of getting people back on their feet in a sustainable way.
These reforms provide meaningful relief to Americans who would get no assistance if the federal government acted on the matter by putting more money into an outdated system.
States can and do have a much greater effect than the federal government on the economic well-being of their citizens. More importantly, they can tailor economic policy to the needs of the local population. For example, during COVID-19 states with tourism-based economies needed different support than those with large e-commerce centers, which thrived during lockdowns. Differences in state-specific needs continue to exist today, as they always have, making one-size-fits-all economic policy from the federal government a fool’s errand.
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Instead, the best federal economic policy is to support the states in their efforts to create unique, thriving local economies. The federal government can do that by reducing unclear and unfunded mandates on the states. The federal government can also lower income taxes, keeping more money in consumers’ wallets and communities.
Empowering states to drive their own economic policy is the best federal-level economic policy.
Erin Norman is the Lee Family Fellow and Senior Director of Communications Strategies at State Policy Network.