The $1.9 trillion COVID-19 spending plan enacted by President Joe Biden includes an additional $350 billion to states and localities on top of the hundreds of billions they have already received from other packages. Unfortunately for taxpayers, Senate Democrats found a way to make this blue state bailout even worse. The spending plan, disingenuously named the American Rescue Plan Act (ARPA), contains an unconstitutional amendment that attempts to scare states out of providing much-needed tax relief. The amendment states:
“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 response to this unprecedented infringement on state sovereignty, which is partially an attempt to protect Democrat-run states from competition with low-tax states, 21 state attorneys general sent a joint letter to U.S. Treasury Secretary Janet Yellen in March seeking confirmation that ARPA does not strip states of their well-established sovereign authority to set their own tax policy.
“Absent a more sensible interpretation from your department, this provision would amount to an unprecedented and unconstitutional intrusion on the separate sovereignty of the States through federal usurpation of essentially one half of the State’s fiscal ledgers,” the AGs wrote in their joint letter to Yellen. “We ask that you confirm that the American Rescue Plan Act does not prohibit States from generally providing tax relief through the kinds of measures listed and discussed above and other, similar measures, but at most precludes express use of the funds provided under the Act for direct tax cuts rather than for the purposes specified by the Act.”
In response to the letter, Secretary Yellen wrote that Congress does have the authority to place conditions on how states use federal funding. Having deemed this response from Yellen to be insufficient, multiple state attorneys general have filed lawsuits.
“We will now take the final steps necessary to meet the Biden administration in court,” said West Virginia Attorney General Patrick Morrisey on March 24. “West Virginia cannot accept the statute’s ambiguity, and given the administration’s failure to correct this problem, we are left with no option other than seeking a court order to protect West Virginia’s interests.”
A lawsuit was filed by Morrisey and 12 other attorneys general on March 31. A similar lawsuit had already been filed by Arizona Attorney General Mark Brnovich.
“Arizona needs clarity on the legality and meaning of this provision,” Attorney General Brnovich said. “Policymakers in the state have real and present interest in tax policy which could potentially decrease net tax revenue against some baselines. Those policymakers need to know how their decisions could interact with their use of funds under the Act.”
Prior to Attorney General Brnovich’s action, Ohio Attorney General Dave Yost had filed a similar lawsuit against the Biden administration as well.
“Ohio’s argument with the federal government is not about cutting taxes; it is about whether the federal government may use its disbursal of funds to dictate state policy — about this or any other subject that is not the province of the federal government under the Constitution,” Attorney General Yost explained in a column for National Review. “The Supreme Court has held that, when the federal government wants to attach strings to the money it sends back to the states, a few thin strings are okay; coercion is not.”
Ironically, this unconstitutional restriction on state tax cuts inhibits ARPA from actually achieving its intended purpose: helping millions of Americans recover from the pandemic. If Democrats in Congress really wanted a strong and speedy economic recovery, they would allow and encourage states to provide much-needed tax relief to individual taxpayers, families, and businesses. It’s telling that congressional Democrats sought to prevent states from providing tax relief, while green lighting states to raise taxes further despite being showered with federal cash. In fact, lawmakers in Hawaii, Maine, and other blue states are pushing forward right now with tax increases despite state coffers being awash in federal cash.
Senator Mike Braun (R-Ind.) and Congressman Dan Bishop (R-N.C.) have filed bills that would repeal the unconstitutional amendment to ARPA blocking state tax cuts. Democrats are unlikely to support it, however, so it will take a court ruling to remove this federal restriction. In the meantime, expect lawmakers in many states to proceed as though this unconstitutional provision, added at the last minute at the request of Senator Joe Manchin, will ultimately be struck down by a judge.