The Biden administration is defending controversial provisions in Democrats’ coronavirus relief package that put new restrictions on states’ ability to cut taxes, as Ohio’s attorney general asked a federal court to rule it unconstitutional.
The legislation stipulates that states, the District of Columbia, territories and tribal governments receiving assistance through the plan — it offers about $220 billion in aid to them — cannot use that money to offset “indirectly or directly” the cost of cutting taxes.
“It is well established that Congress may establish reasonable conditions on how states should use federal funding that the states are provided,” said Treasury Department spokesperson Alexandra LaManna on Wednesday.
“Those sorts of reasonable funding conditions are used all the time — and they are constitutional.”
Her comments come as Republicans erupted at the provisions, with the state of Ohio filing suit to throw them out. Almost two dozen Republican attorney generals wrote to Treasury Secretary Janet Yellen denouncing the provisions as “the greatest attempted invasion of state sovereignty by Congress in the history of our Republic.”
Democrats added the restrictions amid concerns that, even as they were providing the states coronavirus aid, many states’ tax revenues were bouncing back from pandemic lows — which might lead some to use the money to cut taxes.
The legislation forbids state officials from using the assistance to “directly or indirectly offset a reduction in new tax revenue” arising from “a change in law, regulation or administrative interpretation” that “reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit or otherwise) or delays the implementation of any tax or tax increase.”
If they do, they have to pay Treasury back for the cost of the cut.
Said LaManna: “States are free to make policy decisions to cut taxes — they just cannot use the pandemic relief funds to pay for those tax cuts.”
“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,” she said.
It’s not uncommon for the federal government to put strings on assistance to aid — highway funding, for example, has long come with conditions.
But Republicans say this goes well beyond that, with some contending Democrats are potentially banning any tax cuts.
“Money is fungible, so any revenue lost from a tax credit, deduction, rebate, delay, or decrease that Ohio legislators or executive officers may implement would be ‘indirectly’ offset by the $5.5 billion the State expects to receive,” Ohio said in its lawsuit, filed in a district court there.
“Any state that reduces taxes, and that experiences a loss in tax revenue, is subject to having billions of dollars in federal funding recouped by the Department of the Treasury,” the suit said.
Besides the legal quandaries, the restrictions come with plenty of implementation questions.
It’s unclear for example whether the rules apply to reductions in overall state tax receipts or drops in individual provisions such as income or sales taxes. It’s also uncertain how revenue drops would be measured or what is meant by states “indirectly” offsetting tax cuts.
Sen. Mike Crapo, the top Republican on the tax-writing Finance Committee, wants to know if the provision would ban states from cutting their own taxes on jobless benefits, as Congress did for federal taxes as part of the relief package, or if they would be penalized for moving their tax-filing deadline in response to the IRS delaying the federal deadline, as the agency is expected to do.
“Will Treasury withhold or recoup funds from a government if that government decides it is in the best interests of its citizens to delay tax receipts because of a delay in federal tax filing dates?” he asked in a letter to Yellen.
Many are now waiting for Treasury to fill in details of how the restrictions will work. Aid is supposed to begin flowing later this month, which means the department will be under pressure to work quickly.