Provision Added to Stimulus Bill to Halt State Tax Cuts


The U.S. House of Representatives has joined the Senate in approving the $1.9 trillion stimulus bill, H.R. 1319, the American Rescue Plan Act of 2021. The legislation will now be sent to the White House where President Biden says he will sign it into law on Friday. Section 9901 of the bill sends $350 billion in aid to state and local governments to be made available until 2024, divided into $219.8 billion to state governments and the rest to cities, counties, and local governments.

On page 579 of the bill, a condition is placed on state use of the money:

A State or territory shall not use the funds provided under this section or transferred pursuant to section 603(c)(4) to either directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.

In short: states can’t use this money for tax cuts. The provision is in effect through 2024, and according to the Wall Street Journal was added to the Senate version of the bill by Senate Majority Leader Chuck Schumer (D-NY). The provision appears next to a provision barring states from using the federal aid to shore up public pension systems (added by the Democrats after Republican criticism on that point). In some sense it resembles “maintenance of effort” requirements in federal grant programs, which require states to keep spending the same amount on a program (and not use the grant revenues to shore up a program while shifting revenue that would have been spent on that program to other purposes).

Can Congress place conditions on federal funds provided to states? Yes, to an extent. Congress can “refus[e] to grant the new funds to States that will not accept the new conditions.” Requiring South Dakota to raise its drinking age to 21 or lose 5 percent of highway funds was constitutional as “relatively mild encouragement”; expanding Medicaid eligibility or else lose all Medicaid funds, or about 10 percent of a state’s total budget, was unconstitutional. Congressional legislation that crosses from pressure to compulsion, resulting in “commandeering of state governments,” is unconstitutional. A restriction on using stimulus funds directly for tax cuts would have to be analyzed under these precedents.

Here, this language is very broad. The bill says “directly or indirectly offset a reduction” (emphasis added). What is “indirectly” using stimulus money to cut taxes? It conceivably could cover all state tax cuts from now to 2024. That makes it likely that anyone could challenge any tax reduction on the basis of some attenuated chain of reasoning. If it does, however, such an assertion of federal power would be so all-encompassing as to be unconstitutional commandeering of state policy.

But this will end up in litigation, no doubt.