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, emphasizing 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.
The legal wrangling reflects early, widespread confusion — and the lingering partisan schisms — that surround one of the more contentious elements of the $1.9 trillion stimulus law. It only adds to the political challenges facing the Biden administration as it begins to dole out aid under one of the largest, most complicated economic rescue packages in U.S. history.
This week, the president tapped Gene Sperling, a former top White House aide, to oversee the government’s efforts to bring the stimulus online. And Biden joined Vice President Harris on Tuesday to start selling the new law to voters nationwide as part of a broader messaging tour.
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.
While the losses did not result in the early doomsday scenarios, leaving cities and states financially insolvent, the mixed data and political rancor still muddied the debate on Capitol Hill — repeatedly preventing lawmakers from reaching a deal on the aid until late December.
This year, Biden ultimately sought — and lawmakers later approved — $350 billion in new stimulus spending to help local governments steady their finances and pay for the costs of responding to the crisis. The 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 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 and Arkansas, where better-than-expected revenue has led policymakers to weigh new rounds of income tax cuts.
Legislators in other GOP-held states have explored modest measures, such as a plan to curb property taxes in Idaho and to reduce business taxes in New Hampshire, that similarly may be incompatible with the stimulus rules. Even a bipartisan attempt to approve rebates for low-income families in Maryland threatens to imperil local governments’ ability to take advantage of a key portion of the relief package under a strict reading of the stimulus law.
“The more you study it, the more unclear it becomes,” said John L. Valentine, the tax commissioner of Utah, where lawmakers earlier this month finalized a series of tax cuts.
Top Republican attorneys general similarly 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 that the stimulus “infringes on states’ authority to design their own fiscal policies, and invites partisan politics into federal and state relations.”