86 Senators Back Repealing Ban on State Tax Cuts

The U.S. Senate this week moved forward with its budget blueprint giving spending instructions to committee chairs, following a night of considering a long series of amendments. This “vote-a-rama,” as it’s called, is free of the normal rules where only prescreened amendments make it to the floor, offering Senators the opportunity to get their colleagues on the record about any topic. Senators cast 30 such votes on topics such as prohibiting the Green New Deal (passed, 99-0), keeping fracking legal (passed, 57-42), preventing changes to step-up basis (passed, 99-0), means-testing electric vehicle tax credits (passed, 51-48), opposing changes to the SALT deduction cap (failed, 48-51), preventing tax increases on the middle class (passed, 98-1), preventing “job-killing tax hikes” (failed, 49-50), and rolling back IRS monitoring of bank accounts (failed, 49-50).

One very important amendment was sponsored by Senator Mike Braun (R-IN), calling for “removing the prohibition on States and territories against lowering their taxes.” This refers to the restriction inserted in March’s American Rescue Plan Act banning states from using federal funds to “directly or indirectly offset a reduction in the net tax revenue…or delays the imposition of any tax or tax increase” through 2024.” While perhaps intended to limit how federal funds are spent, the expansive and ambiguous language has already led 21 states to file 6 lawsuits against the federal government to halt enforcement of the provision.

The good news: 86 senators voted yes on Braun’s amendment, a bipartisan show of support that the provision’s language goes beyond what might have originally been intended. After Braun spoke in favor of his amendment on the floor, Senator Ron Wyden (D-OR) spoke next to express his support and even suggest adopting it by voice vote instead of a roll call. Senator Joe Manchin (D-WV), opposed this and joined 12 other senators in voting no on the amendment.

The bad news: this does not repeal the ARPA language. A budget resolution cannot change a statute and full repeal would also require a House vote and action by the President, so the Braun amendment is merely a temperature check of the Senate’s position on the matter. In other words, the vote reflected the sense of the Senate that Congress overreached, and Congress acting to repeal would be welcome news.

While there was hope the Treasury Department would clarify matters, their guidance on how they plan to enforce the rule envisions requiring every state to explain any revenue reductions, with any drops that are unexplainable (in Treasury’s judgment) resulting in the recoupment of federal funds. The provision will therefore do what critics like NTUF have warned: subordinate state tax policy to what the federal government considers permissible.

So despite the positive news of the Braun amendment, the lawsuits continue. Currently, state governments challenging the ARPA provision have won in one case (Ohio v. Secretary), lost on standing grounds in two (Arizona v. Yellen & Missouri v. Yellen, both being appealed), and things are still pending in the other three (West Virginia v. Department of Treasury, Kentucky v. Yellen, and Texas v. Yellen). NTUF has filed and is continuing to file briefs in each of the cases, making two key points: (1) the provision is so vague and ambiguous that its enforcement will be arbitrary, giving no fair notice as to what conduct is not permitted, and (2) the term “indirectly” is an unconstitutionally intrusive condition on state governments because money is fungible and budget allocations are a post-hoc accounting exercise, which means that any state that accepts federal funds and cuts taxes can be said to have “indirectly” used funds for that purpose.