A Last-Minute Add to The Stimulus Bill Was Meant to Restrict State Tax Cuts so that states could not steal COVID Relief funds from the recipients Congress deemed deserving of aid and use the federal funds to subsidize tax cuts for the usual suspects, i.e., corporations and the wealthy.

A last-minute change in the $1.9 trillion economic relief package that President Biden signed into law this week includes a provision that could temporarily prevent states that receive government aid from turning around and cutting taxes.

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The restriction, which was added by Senate Democrats, is intended to ensure that states use federal funds to keep their local economies humming and avoid drastic budget cuts and not simply use the money to subsidize tax cuts.

The Red State legislatures currently enacting Jim Crow voter suppression and voter disenfranchisement bills are also asserting the Jim Crow battlecry of “states rights!” to challenge this restriction on the use of federal funds for COVID Relief.

Republicans see the move as federal overreach and fear conditions attached to the money will impede upon their ability to manage their budgets as they see fit.

Officials are scrambling to understand what strings are attached to the $220 billion that is expected to be parceled out among states, territories and tribes and are already pressing the Treasury Department for guidance about the restrictions they will face if they take federal money.

Under the new law, $25 billion will be divided equally among states, while $169 billion will be allocated based on a state’s unemployment rate. States can use the money for pandemic-related costs, offsetting lost revenues to provide essential government services, and for water, sewer and broadband infrastructure projects.

But they are prohibited from depositing the money into pension funds — a key worry of [anti-union] Republicans in Congress — and cannot use the funds to cut taxes by “legislation, regulation or administration” through 2024.

Senator Joe Manchin III (D-WV) pushed for the language to secure his vote.

Senator Ron Wyden, Democrat of Oregon, said the funds were meant “to keep teachers and firefighters on the job and prevent the gutting of state and local services that we saw during the Great Recession.”

“It’s important that there are guardrails to prevent these funds from being used to cut taxes for those at the top,” he added.

But some Republican-led states are pointing to the apparent prohibition as a violation of their sovereignty [“states rights!“] and calling for that part of the law to be repealed. They see the requirement that states refrain from cutting taxes as an unusual intervention by the federal government in state tax policy.

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Such questions will largely hinge on how Treasury Secretary Janet L. Yellen interprets the legislation and what guidance the Treasury Department gives to states.

A department official noted that the law says that states and territories that receive the aid cannot use the funds to offset a reduction in net tax revenue as a result of tax cuts because the money is intended to be used to support the public health response and avoid layoffs and cuts to public services. More guidance on the matter is coming, the official said.

The lack of clarity also raises the risk that states use the money for projects or programs that do not actually qualify under the law and then are forced to repay the federal government . . . The Treasury Department will also be setting up a system of monitoring how the funds are being used.

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Before they receive federal funds, states will have to submit a certification promising to use the money according to the law. They could also decline funding or, if they are set on tax cuts, they could offset them with other sources of revenue that do not include the federal funds.

Today, the Washington Post reports, Republican attorneys general threaten key element of the $1.9 trillion stimulus:

Twenty-one Republican state attorneys general on Tuesday threatened to take action against the Biden administration over its new $1.9 trillion coronavirus stimulus law, decrying it for imposing “unprecedented and unconstitutional” limits on their states’ ability to lower taxes.

The letter marks one of the first major political and legal salvos against the relief package since President Biden signed it last week — evincing the sustained Republican opposition that the White House faces as it implements the signature element of the president’s economic policy agenda.

The attorneys general take issue with a $350 billion pot of money set aside under the stimulus, known as the American Rescue Plan, to help cash-strapped cities, counties and states pay for the costs of the pandemic. Congressional lawmakers opted to restrict states from tapping these federal dollars to finance local tax cuts.

Lawmakers included the provision to ensure Washington isn’t footing the bill on behalf of states that later take deliberate steps to reduce their revenue. But the guardrails frustrated many GOP leaders, who said in a letter to the Treasury Department that the law’s vague wording threatens to interfere with states in good financial standing that sought to provide “such tax relief with or without the prospect of COVID-19 relief funds.”

The attorneys general from Arizona, Georgia, West Virginia and 18 other states called on the Biden administration to make it clear that they can proceed with some of their plans to cut taxes, including those that predate the stimulus, in a seven-page missive sent to Treasury Secretary Janet Yellen on Tuesday. Otherwise, they said, the relief law “would represent the greatest invasion of state sovereignty by Congress in the history of our Republic” — and they threatened to take “appropriate additional action” in response.

Some state officials are already discussing a possible lawsuit, according to a person familiar with the matter who was not authorized to discuss the private deliberations.

A White House official late Tuesday said Congress had acted appropriately in seeking to stipulate conditions on the federal stimulus funding, stressing in a statement the law “does not say that states cannot cut taxes at all.” Rather, the official said, it “simply instructs them not to use that money to offset net revenues lost if the state chooses to cut taxes.”

“So if a state does cut taxes without replacing that revenue in some other way, then the state must pay back to the federal government pandemic relief funds up to the amount of the lost revenue,” the official added.

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White House press secretary Jen Psaki said Monday that the stimulus set aside $350 billion in aid for local governments to help “cops, firefighters and other essential employees at work and employed,” adding at her daily briefing it “wasn’t intended to cut taxes.”

In securing the funds, the White House and members of Congress sought to blunt the impact of significant revenue shortfalls in cities, counties and more than half of all U.S. states. State and local governments have shed 1.3 million jobs since the pandemic began last year — a loss of more than 1 in 20 government positions, according to a Washington Post analysis of employment data.

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The [COVID Relief] funds drew bipartisan support from mayors, county leaders and governors, even though Republicans in Congress blasted it as wasteful spending — and falsely contended that it only benefited Democratic-led states. [The bogus “blue state bailout” talking point.]

The aid, however, isn’t unfettered. Local governments can use the dollars to cover the costs of their first responders, provide enhanced pay for essential employees and even make improvements to local infrastructure. But states cannot use the money to address their rising pension costs, nor can they appear to take the dollars and then cut taxes, essentially tapping Washington’s help to make up for any lost revenue either directly or indirectly.

The rules as written could complicate plans in nearly a dozen states where Republicans in control of the governorship or legislature have eyed or already adopted proposals to cut taxes, according to Richard Auxier, a state and local budget analyst at the Tax Policy Center, a nonpartisan think tank. That includes Mississippi, Montana, South Carolina, West Virginia, Arkansas, [and Arizona] where better-than-expected revenue has led policymakers to weigh new rounds of income tax cuts.

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Republican attorneys general blasted the law’s uncertainty in their letter to Yellen sent Tuesday. The GOP leaders said the vague wording of the law could essentially “prohibit tax cuts or relief of any stripe, even if wholly unrelated to and independent of the availability of relief funds.” They demanded the Treasury Department to explain its implementation plans by March 23.

In Washington, meanwhile, Idaho’s two GOP senators introduced a bill this week that would eliminate the tax restriction from the American Rescue Plan. Sen. Mike Crapo (R) said in a statement the stimulus presently “infringes on states’ authority to design their own fiscal policies, and invites partisan politics into federal and state relations.”

What This Is Really All About

The Arizona Mirror reports, Will the latest COVID aid package prohibit Ducey’s tax cuts?:

The Senate added language to the COVID-19 relief package prohibiting states and local governments from using the $350 billion in direct federal assistance “to either directly or indirectly offset a reduction in the net tax revenue” or delay the imposition of any tax or tax increase.

That provision doesn’t entirely prevent state officials from cutting taxes. Some scenarios, such as slashing one tax but offsetting it with a tax increase, wouldn’t be a problem.

But until the Treasury Department offers more detailed guidance on how it will interpret the new law, the provision is causing uncertainty, particularly in places like Iowa, where tax cuts already are in the works.<

Photo from AZEd News

In Arizona, Gov. Doug Ducey urged lawmakers in January to “think big” about tax cuts, and his executive budget proposes $600 million in income tax reductions. A proposal from GOP lawmakers would cut tax collections by more than $1 billion and replace the state’s progressive income tax system, in which the wealthy are charged higher rates, with a flat tax that would impose the same tax rates on all Arizonans.

A really BAD tax policy previously rejected several times even by our Republican controlled Arizona legislature. The GOP flat tax fantasy was pushed in 2009 by then-House Speaker Kirk Adams, who later served as chief of staff to Governor Ducey, and whose name is being floated as a potential candidate for governor in 2022. AZ GOP flat tax proposal will raise average Arizonan’s income taxes, It was floated again in 2011 by Rep.  Steve Court. Tea-Publicans believe in ‘flat tax’ fantasy. Luckily, the ‘Flat Tax’ pulled from a final vote – for now (both bills died). In 2011, former state Senator Paula Aboud (D-Tucson) organized “Ax The Flat Tax” Forums around the state that turned public opinion strongly against the flat tax. This public education campaign may now have to be revived.

Some Republicans in Washington and state capitals have criticized the provision as an unprecedented string attached to the federal dollars. The conservative Neo-Confederate Heritage Foundation has gone so far as to call on states to reject the federal assistance, even though bipartisan leaders of the National Governors Association have said direct aid is “essential” for states.

Potential trouble spot

Tax policy experts describe a range of complex scenarios that could stymie budget officials and cause them to be in jeopardy of having to pay back the federal dollars.

Jared Walczak of the Tax Foundation, a D.C.-based conservative-leaning nonprofit focused on tax policy, said one potential trouble spot is if states use the money to pay the salaries of employees already on the government payroll, such as public health workers.

Offering grants or assistance to businesses and individuals doesn’t affect existing budgetary expenses. But using the money for existing salaries, even related to the pandemic response, would be dicier if that savings is then offset with a tax cut, he said.

Another murky scenario?

If states decide to follow the federal policy change in another section of the new pandemic stimulus bill and make unemployment compensation benefits not subject to taxes.

“Will that count as a tax cut?” asked Kim Rueben, director of the state and local finance initiative at the Urban-Brookings Tax Policy Center, a joint venture of the liberal-leaning Brookings Institution and the Urban Institute.

A defense of limits

Sen. Angus King had offered a defense of limitations on the state and local aid in an interview last month with the Washington Post, in which the Maine senator advocated for “a prohibition against voluntarily diminishing revenues.”

“We could distribute billions to the states, and they turn around and lower taxes — there are governors talking about that, and it’s not the point here,” said King, an independent who caucuses with Democrats.

Rueben said she believes the provision was intended to ensure that the money is being used for the pandemic-related challenges that those dollars are intended to address — and prevent states from having a revenue base that’s in worse shape when the federal aid ends.

Restrictions on federal aid to states aren’t unusual, Walzcak noted.

Some funds require matching state dollars, or even policy changes, such as federal highway dollars that are tied to adopting certain DUI laws. But there’s little case law on how far the federal government can go in such requirements, he added.

“We know the federal government can overreach … but there’s not a clear definition of where that line is,” Walzcak said.

Options for states

States that don’t like the limitation do have options: They could decline to accept the federal money.

Adam Michel, a tax policy analyst with The Heritage Foundation, a conservative Neo-Confederate think tank, has urged states to reject the aid, arguing in an op-ed piece that the “dangers of permanently expanded state budgets and the possibility of the Treasury Department’s micromanagement of states’ fiscal decisions outweigh the benefits.”

States also could file lawsuits. Walczak said he believes the provision could ultimately end up in court, though that may take some time. States have until 2024 to spend the federal dollars.

Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officers, said state officials are in the “information-gathering stage” just days after the bill was signed into law.

Some of the state tax cuts proposed ahead of the bill’s approval were targeted tax cuts for individuals and businesses, while others were broad cuts designed to be phased in over a number of years, Sigritz said.

“The provision will have an impact on some of those proposals but right now, it’s unclear the exact impact,” he said.

It’s not clear how quickly Treasury officials will release any guidance on how states can spend the pending dollars and how exactly the rules against tax cuts will work. An agency spokesman did not respond to emailed questions.

Treasury Secretary Janet Yellen will issue a guidance that straightens out any confusion over this provision limiting COVID Relief funds to the intended purposes and recipients. These Republican AGs are just fishing for talking points to get exposure in the conservative media entertainment complex. It is always about performative politics with them.

UPDATE: Not waiting for Treasury Secretary Janet Yellen to issue guidelines, Ohio’s Republican AG filed a lawsuit today, So Fox News has something to talk about other than Mr. Potato Head, Pepe Le Pew, and Dr. Seuss. Ohio AG sues Biden administration over pandemic bill:

Ohio’s attorney general filed a lawsuit against the Biden administration on Wednesday over a provision of the recently signed pandemic relief bill.

In a complaint filed in federal district court in Ohio, Ohio Attorney General Dave Yost (R) challenged a provision in the legislation that forbids state and local government from using pandemic aid to offset tax cuts.

“Ohio seeks to enjoin federal officials from enforcing the unconstitutional Tax Mandate, and seeks declaratory relief establishing that the State of Ohio, under the Tenth Amendment to the U.S. Constitution, retains the freedom to manage its own tax policy,” the lawsuit reads.

The lawsuit was filed against Treasury Secretary Janet Yellen and the Treasury Department. Neither the White House nor the Treasury Department immediately responded when asked for comment.

Yost argues in his lawsuit that Congress violated constitutional restraints in seeking to control how states set their tax policies.

“By accepting that money, the State must sacrifice its sovereign authority to set tax policy as it sees fit, because changes to tax policy that reduce revenues violate the Tax Mandate,” the lawsuit reads. “Such violations could be used to force the State to return funding received through the Act.”

The provision has drawn ire from conservative state officials concerned that it will get in the way of future efforts to cut taxes.

Yost was not among a group of 21 Republican state attorneys general who sent a letter to Yellen this week expressing concern about the mandate, saying it would “represent the greatest attempted invasion of state sovereignty by Congress in the history of our Republic.”

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Daniel Hemel, a tax law professor at the University of Chicago law school, [says] that the rhetoric from the attorneys general has been overblown … “Attorney General Yost is arguing against a phantom,” Hemel said. “Will he beat the phantom? Well, maybe, if Secretary Yellen came up with an unreasonable interpretation of the provision, that interpretation would be unconstitutional. But you would think that he would wait until at least she had a few weeks to say something before running off to court.”

Yeah, one would think.




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