Politico

Yellen: Treasury faces 'thorny questions' about restrictions on state tax cuts


Treasury Secretary Janet Yellen said on Wednesday the department has “a host of thorny questions” to work through before it can give states guidance on a provision in the $1.9 trillion Covid relief package that prohibits them from using federal aid to subsidize tax cuts.

Two issues she singled out: How to treat tax exemptions that states may provide for unemployment benefits, like the federal government is doing, and exactly how to determine whether a state is using federal money for a tax cut.

“We will have to define what it means to use money from this act as an offset for tax cuts. And given the fungibility of money, it’s a hard question to answer, but that’s what we’re required to do, and we will — we will do our best to offer guidance on it,” she told the Senate Banking Committee.

Republicans are up in arms about the provision, which says states, the District of Columbia, territories and tribal governments can’t use the $220 billion in aid that Congress gave them to “indirectly or directly” offset the cost of tax cuts.

Ohio has already sued the Biden administration over the provision, saying it’s unconstitutional, and more suits could follow, likely from other red states. West Virginia Attorney General Patrick Morrisey tweeted Tuesday, “We’re now getting ready for Court,” saying the Biden administration’s response to a request for clarity on the issue “is unacceptable.”

Sen. Mike Crapo (R-Idaho) told Yellen that states are “hamstrung” and “this is an issue that needs immediate clarity.”

Yellen noted that Treasury has 60 days from enactment of the law, which President Joe Biden signed March 11, “to complete that work to get the money to distribute to the state and local governments, and there are a host of thorny questions that we have to work through to connect with the issue that you just mentioned.”

“We simply are going to have to try to craft guidance in that period of time,” she said. “We’re working on it 24/7 to get it out as rapidly as we possibly can.”

Crapo, who is co-sponsoring legislation to remove the restriction on tax cuts from the law, told Yellen, “I’m going to encourage you to do everything you can in developing this guidance to answer those thorny questions in a way that gives maximum flexibility to the states and local communities.”

Treasury officials have noted that the federal government often attaches conditions to funding it provides to states. They also have said states are still free to cut taxes, but not to pay for them with federal pandemic relief money.

Still, Crapo said it’s not a cut-and-dry issue. For instance, he noted that some states may follow the federal government’s lead in exempting some unemployment benefits from taxes. He asked Yellen whether that would “be a penalty that the state would have to pay for if it did that?”

Yellen said Treasury has “been asked this question by a number of states,” and “we are examining that question carefully.”

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