Twentyone state Attorney Generals have written a letter to the Biden Administration threatening to sue them over the language in the 600+ page COVID relief bill that could be interpreted as preventing states that get it from cutting taxes. They began the letter to Treasury Secretary Janet Yellen by saying,
The undersigned State Attorneys General request that the Department of the Treasury take immediate action to confirm that certain provisions of the American Rescue Plan Act do not attempt to strip States of their core sovereign authority to enact and implement basic tax policy. Those provisions, found in section 9901 of the Act,1 forbid States from using COVID-19 relief funds to “directly or indirectly offset a reduction in … net tax revenue” resulting from state laws or regulations that reduce tax burdens—whether by cutting rates or by giving rebates, deductions, credits, “or otherwise[.]”
This language could be read to deny States the ability to cut taxes in any manner whatsoever—even if they would have provided such tax relief with or without the prospect of COVID-19 relief funds. Absent a more sensible interpretation from your department, this provision would amount to an unprecedented and unconstitutional intrusion on the separate sovereignty of the States through federal usurpation of essentially one half of the State’s fiscal ledgers (i.e., the revenue half). Indeed, such federal usurpation of state tax policy would represent the greatest attempted invasion of state sovereignty by Congress in the history of our Republic.
The letter goes on to make clear that while the Biden administration could demand that the money doled out in the bill not be used to cut taxes, they have no right to generally set fiscal policy in the states. Put another way, the Federal Government can raise or lower federal taxes, but they have no constitutional right to try to make federal aid to states conditional on setting fiscal policies that the federal government endorses. The AGs list a number of real-life examples that could potentially be considered grounds for pulling funding under the bill. For example, here are a couple from Georgia.
During the current legislative session and prior to the passage of the Act, Georgia’s House of Representatives passed a bill, now under consideration by its Senate, that would extend a tax credit for families who adopt a child out of foster care.
Also during the current legislative session and prior to the passage of the Act, Georgia’s House of Representatives passed a bill that raises the standard deduction, which would provide Georgians with an estimated $140 million in state income tax relief that largely benefits those of lower to middle incomes.
White House Press Secretary Jen Psaki said that Biden expects the relief funds to not go toward decreasing taxes. “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” she said at a briefing on Monday.
At this point, Yellen can either say something akin to, “We’re not interpreting the bill that way and that sort of thing won’t be a problem” or the AGs take the Biden Administration to court. If it does go to court, chances are the AGs will eventually win. That would be a good thing because the Federal Government is already far too powerful and the last thing we need is one of the worst managed governments in the Western world demanding that some of the best-run states change their economic policies.