On Wednesday, President Joe Biden’s administration sued by Attorneys general from 13 states over a rule in the federal stimulus that bars states from using relief money to offset tax cuts.
The wide-ranging relief act signed by Biden that prohibits states from using $195 billion of federal aid “to either directly or indirectly offset a reduction” in net tax revenue is now being a judge to strike down the provision and this restriction could apply through 2024.
The Democrats’ $1.9 trillion relief package to combat the impacts of the CCP (Chinese Communist Party) virus, the American Rescue Plan Act of 2021, carries a provision that says states cannot use relief funds to offset decreased tax revenue that is due to any tax cuts—including by cutting rates, rebates, deductions, credits, or otherwise—and any tax delays.
The federal lawsuit was filed on Wednesday in the U.S. District Court for the Northern District of Alabama by the 13-state bipartisan coalition. According to them that the provision is unconstitutional.
The provision in the relief package is “one of the most egregious power grabs by the federal government in the nation’s history.” According to the lawsuit. It argues that the provision, by stipulating how states use federal funds concerning tax cuts, is akin to forcing states to relinquish control of their taxing authority, which is not allowed under the Tenth Amendment. The lawsuit also accuses the federal government of violating the conditional spending doctrine and the anti-commandeering doctrine.
Plaintiffs in the lawsuit are the states of West Virginia, Alabama, Alaska, Arkansas, Florida, Iowa, Kansas, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota, and Utah. The defendants in the lawsuit are Treasury Secretary Janet Yellen and Treasury Department Inspector General Richard Delmar.
West Virginia Attorney General Patrick Morrisey, a Republican, leads the 13-state coalition.
“Never before has the federal government attempted such a complete takeover of state finances,” Morrisey said in a statement. “We cannot stand for such overreach. The Constitution envisions co-sovereign states, not a federal government that forces state legislatures to forfeit one of their core constitutional functions in exchange for a large check equal to approximately 25 percent of their annual respective general budgets.”
The coalition, which includes one Democratic attorney general, is concerned the provision can construe any tax cut as taking advantage of the pandemic relief funds.
A bigger group of 21 Republican attorneys general earlier this month wrote a letter seeking clarification from Treasury Secretary Janet Yellen, who is named in the new lawsuit. The department at the time said the provision isn’t meant as a blanket prohibition on tax cuts. States can still offset tax reductions through other means.
“Nothing in the Act prevents States from enacting a broad variety of tax cuts,” Yellen wrote in a response on April 23. “It simply provides that funding received under the Act may not be used to offset a reduction in net tax revenue resulting from certain changes in state law.”
But West Virginia Attorney General Patrick Morrisey, who co-led the lawsuit with his colleagues from Alabama and Arkansas, argues the interpretation of the word “indirectly” in the provision could come back to haunt states that cut taxes.
“This ensures our citizens aren’t stuck with an unforeseen bill from the feds years from now,” he said in a statement.
Alabama Republican Attorney General Steve Marshall said the “federal tax mandate is an unprecedented and unconstitutional assault on state sovereignty.”
Alaska, Florida, Iowa, Kansas, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota and Utah also signed onto the lawsuit. Ohio Attorney General Dave Yost, a Republican, earlier this month separately asked a federal judge to block the tax-cut provision.
Several state legislatures are weighing tax reform this year, which is partly driving the lawsuit. West Virginia lawmakers are hurrying to approve a cut to the state income tax before their 60-day session ends on April 10. Montana’s GOP-controlled statehouse is considering several tax cut bills. Its Republican Attorney General Austin Knudsen said “it’s a slap in the face to Montana” to limit how the stimulus funds can be used.
Yellen, whose department declined a new comment, had said in her letter that “it is well established that Congress may place such reasonable conditions on how States may use federal funding.”
The nonprofit Tax Foundation said in a new report this week that it’s more likely the Treasury Department would opt for a “narrow interpretation that does not unduly tie states’ hands” in enforcing the provision. “Most states are likely at minimal risk regardless of the tax policy choices they make,” it said. “For now, however, uncertainty persists, and lawmakers must operate within that uncertainty.”
They said the prohibition on “indirectly” offsetting tax breaks “could also be read to prohibit tax cuts or relief of any stripe, even if wholly unrelated to and independent of the availability of relief funds.”
“After all, money is fungible, and States must balance their budgets. So, in a sense, any tax relief enacted by a state legislature after the State has received relief funds could be viewed as “using” those funds as an “offset” that allows the State to provide that tax relief,” the 21 attorneys general wrote.
On March 23, Yellen wrote her response, “The limitation affects States’ ability to retain only those federal funds used to offset a reduction in net tax revenue resulting from certain changes in state law.”
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