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Guidance Is Needed to Prevent ARP From Overriding State Fiscal Policy

The reaction has been immediate and intense to the provision in the American Rescue Plan Act that attempts to ban states from using federal funds “directly or indirectly” to reduce net tax revenue or delay a tax increase:

  • Republican House members wrote to Treasury Secretary Janet Yellen, asking her to narrow the potential breadth of the language with immediate regulatory guidance. They asked a number of pressing questions, such as whether states could follow the federal government in exempting $10,200 of unemployment benefits from tax, or replenish depleted unemployment funds to stave off automatic tax increases on employers, or provide property tax abatements or delay tax or fee increases for struggling retailers, without running afoul of the provision.

  • Attorneys general from 21 states also sent a letter to Secretary Yellen, listing 14 specific tax proposals that now face uncertainty because of the provision. Their letter zeroes in on the “net tax revenue” language, asking if a state projects a 10% increase in revenue but adjusts tax policy to make it only an 8% increase, whether that violates the provision. The letter requests a reply by March 23.

  • Ohio Attorney General Dave Yost took a step further and has sought a preliminary injunction in federal court to suspend the provision pending further litigation. Yost argues that the provision places an unconstitutionally coercive condition on the receipt of federal funds, and is too ambiguous. The case is Ohio v. Yellen, 1:21-cv-00181, in the U.S. District Court for the Southern District of Ohio.

  • In response to the Ohio suit, a White House spokesperson told the Washington Post that the provision just mandates that states replace revenue from tax cuts from sources other than stimulus funds, which constitutes “reasonable conditions on how states should use federal funding.”

  • Similarly, on the U.S. Senate floor on March 17, Senator Joe Manchin (D-WV), defended the provision as not banning tax cuts but rather saying that states “just can’t use this money to backfill tax cuts if they want to do that. That is pretty simple because there is not a need for it. If you can reduce your taxes, then you don’t need Federal dollars to backfill to show that you are in good shape.”

  • Senator Manchin was debating with Senator Mike Braun (R-IN), who has introduced S. 730 to repeal the provision. S. 743 to repeal the provision has also been introduced by Senator Mike Crapo (R-ID). On the House side, H.R. 2002 to repeal the provision has been introduced by Rep. Dan Bishop (R-NC). All have numerous co-sponsors.

  • Finally, on March 17, an Associated Press story gave some hope that the Treasury Department is working on guidance to narrow the scope of the provision. An unnamed Treasury spokesperson was quoted as saying that “states are free to make policy decisions to cut taxes – they just cannot use the pandemic relief funds to pay for those tax cuts.”

Clear and flexible guidance from the Treasury Department may help reduce the burdens facing state governments, but ultimately a legislative solution may be what is needed. The terms “indirectly” and “net tax revenue” are not narrow language, as NTUF is expressing in our own letter to Secretary Yellen.

Stay tuned.