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WASHINGTON — Republican attorneys general from 21 states are attacking the $1.9 trillion pandemic relief law as an “unprecedented and unconstitutional infringement” on state sovereignty because it restricts tax cuts by states.
The attorneys general in a letter to the Treasury Department threatened to take action against the Biden administration over the law’s tax cut provision. The group includes attorneys general from Arizona, Florida, Georgia, Kansas, Louisiana, Missouri and Montana.
They are criticizing a section of the bill that prohibits states and local governments from using $350 billion in direct federal assistance “to either directly or indirectly offset a reduction in the net tax revenue” or delay the imposition of any tax or tax increase.
The broad phrasing has spurred confusion over what exactly states can and can’t do to their tax rates without jeopardizing the billions in federal assistance, particularly in states where tax cuts already are in the works.
In the sharply worded, seven-page letter to Treasury Secretary Janet Yellen, the attorneys general called for federal officials to clarify that a range of tax scenarios would be allowable, and that the provision will be interpreted only to ban the express use of the federal dollars for direct tax cuts.
The state officials set a deadline of March 23 to receive such assurance, vowing that they would otherwise “take appropriate additional action to ensure that our states have the clarity and assurance necessary to provide for our citizens’ welfare through enacting and implementing sensible tax policies, including tax relief.”
Republicans in Washington and state capitals have criticized the provision as an unprecedented string attached to the federal dollars. Idaho’s two GOP U.S. senators have introduced a bill to repeal that section of the law.
The Iowa Senate on Wednesday unanimously approved a tax-cut bill despite the potential roadblock. “The federal government will not trounce over states’ rights and freeze tax policy for the next two years here in Iowa,” Sen. Dan Dawson, R-Council Bluffs, said.
Democrats have defended the tax cut language as necessary to keep states from voluntarily reducing their revenues, but Republicans argue they went too far.
“Congress should have no say or control over Missouri’s ability to cut taxes, and the American Rescue Plan should not hinder Missouri’s ability to cut taxes,” state Attorney General Eric Schmitt said in a statement.
He added that the attorneys general’s aim was to “get a clarification from the Treasury Department and ensure that the federal government isn’t overreaching into state tax policy.”
The conservative Heritage Foundation has gone so far as to call on states to reject the federal assistance, a stance that the GOP attorneys general described in their letter as unlikely to occur.
The White House has defended the provision, which was added during Senate consideration at the same time as a prohibition on states using the dollars to shore up pension funds.
Press Secretary Jen Psaki said during her press briefing Monday that “the original purpose of the state and local funding was to keep cops, firefighters, other essential employees at work and employed, and it wasn’t intended to cut taxes.”
In Tuesday’s letter, the GOP attorneys general blasted the provision’s scope as “unclear, but potentially breathtaking.” They argue the section could be read to prohibit any tax cuts, even if those changes are unrelated to the federal aid dollars.
“After all, money is fungible, and states must balance their budgets,” the letter argues. “So, in a sense, any tax relief enacted by a state legislature after the state has received relief funds could be viewed as ‘using’ those funds as an ‘offset’ that allows the state to provide that tax relief.”
The letter lists examples of tax changes already underway or under consideration in a number of states that they argue could potentially force a state to have to repay the federal dollars, including proposals in Arizona and Georgia.
Kansas also is weighing changes to its income tax, along with property or income tax deferrals or credits to small businesses affected by the pandemic, the letter notes. It also cites proposals in Montana to tweak income taxes and education tax credits.
“Not one of these common changes to state tax policy has any real or direct connection to the state’s potential receipt of COVID-19 relief funds, yet each of them could be deemed a tax ‘rebate,’ ‘deduction,’ ‘credit,’ or ‘otherwise’ that could result in a ‘reduction in the net tax revenue’ of the state,” the letter argues.
Treasury officials did not respond to a message seeking comment.
But agency spokeswoman Alexandra LaManna defended the provision to the New York Times, telling the paper that it is “well established” that Congress can set requirements on how states spend federal dollars.
“The law does not say that states cannot cut taxes at all, and it does not say that if a state cut(s) taxes, it must pay back all of the federal funding it received,” LaManna told the New York Times.
“It simply instructed them not to use that money to offset net revenues lost if the state chooses to cut taxes. So if a state does cut taxes without replacing that revenue in some other way, then the state must pay back to the federal government pandemic relief funds up to the amount of the lost revenue.”
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