How Much Could Pennsylvania Cut Taxes Under Federal ARPA Restrictions?

The federal American Rescue Plan Act (ARPA) of 2021 includes a provision barring states from using federal funds to cut taxes under certain conditions. While litigation is ongoing over whether the provision is even constitutional – several federal judges have already ruled that it’s unconstitutional – would it stand in the way of a proposed tax cut in Pennsylvania, reducing their highest-in-the-country business tax rate?

It would not. The U.S. Treasury Department has issued rules about how it will enforce the provision, which involves comparing current revenue with Fiscal Year 2019 revenue adjusted for inflation. If current revenue is below that amount, then a state would need to provide an explanation of any permissible sources that “paid for” the tax cut aside from federal funds, such as higher state revenues, tax increases, or spending cuts. A 1 percent difference is ignored as de minimis. If Treasury does not agree with the explanation, a state can request reconsideration. Only if the state’s case at that point is unsatisfactory will Treasury proceed with seeking recoupment of the federal funds.

Pennsylvania’s flush revenue situation will not trigger much of this process, if any at all. Pennsylvania’s FY 2019 revenue was $34.9 billion. Adding inflation of 12.07 percent from 2019 to 2022 (using the GDP price deflator from the Bureau of Economic Analysis, as directed by the Treasury regulation) produces a baseline figure of $39.1 billion. Pennsylvania current revenue remains above this number, at $43.9 billion at most recent count.

Therefore, a proposed tax cut of several hundred million dollars would not run Pennsylvania afoul of the ARPA provision; Pennsylvania’s revenue surplus is large enough that it could repeal the entire corporate income tax outright without triggering the federal provision. Other states have come to the same conclusion that ARPA does not prohibit them from cutting taxes, with reductions being enacted in over a dozen states since 2020 and being actively considered in over half the states. Even if the ARPA provision is ultimately held to be constitutional, Pennsylvania could cut taxes by billions of dollars without triggering it.