By Kate Davidson
WASHINGTON – A last-minute provision added to the $ 1.9 trillion coronavirus relief package last month is creating a showdown between the state and the Treasury Department over the boundaries of the federal treasury.
The package, known as the American Rescue Plan, gave state governments $ 195 billion to offset rising costs associated with the pandemic and fill budget gaps resulting from the economic downturn. Democrats added an important condition: States cannot use the money, either directly or indirectly, to lower taxes.
Republican lawmakers and attorneys-general argued that the provision, which would last for three years, was too vague, unconstitutional and wrongly penalized states in good financial health. Five states have filed lawsuits against the provision – the first hearing is scheduled for later this month – and Republicans in Congress have passed laws to repeal the provision.
Meanwhile, state officials and tax experts are urging Treasury Secretary Janet Yellen to clarify how far her agency will interpret the legislation and what will happen to states that violate the law. For many countries that have to finalize their budgets before the start of the fiscal year on July 1, there is an urgent need for advice.
“It may be a significant limitation by the state finance agency, and some of it may be due to guidance from the Treasury Department,” said Jared Walczak, vice president of state projects at the conservative tax foundation. “If this has become a comprehensive restriction, it raises serious constitutional questions.”
As the virus spread last year, widespread lockdowns triggered business closings and millions of layoffs that weighed on government tax revenues, while spending on unemployment benefits, health care and other social services increased.
But not all countries experienced the revenue shortfalls that were originally most feared. About half of respondents have seen increases in tax revenues, partly due to the strength of property and stock markets, which increased property and income tax revenues, as well as increases in state aids such as stimulus measures and improved unemployment benefits, which supported consumer spending.
Some strong revenue states, including Idaho, Utah, Arizona, and North Carolina, are considering tax cuts for the coming fiscal year. These plans are now complicated by the US bailout plan, which states that any state that accepts state aid cannot use it “to offset, either directly or indirectly, a reduction in that state’s net tax revenue.” Some states argue that the provision affects their right to determine their own fiscal policies.
One question is how the federal government defines “indirectly”. For example, when states pay police officers and firefighters with federal aid, they use the savings to lower taxes, which could be viewed as an indirect tax cut, Walczak said.
It is unclear to what extent this logic would extend. Among the questions that states have asked: Would policy changes such as new tax incentives for companies be viewed as indirect tax cuts?
West Virginia law has considered a bill to extend a charitable donation tax credit to nonprofits and increase the annual cap from $ 3 million to $ 5 million – a change that would reduce state revenues.
“So far, we’ve been very unhappy with the Treasury Department’s response,” West Virginia attorney general Patrick Morrisey said in a statement. He raised his concerns in a letter with 20 other attorneys general last month.
Mr. Morrisey has filed a joint lawsuit with several other attorneys general in federal court in Alabama to block the provision.
“West Virginia is a sovereign state with the power to independently reduce the tax burden of its citizens and decide how taxpayer dollars are spent,” he said.
In response to the attorneys general’s letter last month, Ms. Yellen said nothing in the law prevents states from enacting “a variety of tax cuts”. Rather, it says that federal aid money cannot be used to offset a decrease in net tax revenue, she said in a March 23 letter. If states cut taxes but found some other way to replace the lost revenue, it wouldn’t break the provision, she said.
However, Ms. Yellen has recognized that it is difficult to define what it means to use the aid as revenue compensation. “Given the fungibility of money, this question is difficult to answer,” she told the Senate Banking Committee on March 24th.
The Treasury Department made it clear last week that states taking steps to comply with changes to federal tax law – including recently enacted tax breaks for the unemployed – have not violated the tax cut ban. Ms. Yellen said the Treasury Department was working quickly to provide additional guidance.
Phil Berger, the North Carolina state Senate GOP chairman, said he had no concerns, based on Ms. Yellen’s March 23 letter, that tax cuts proposed by Republican lawmakers would run into problems under the new federal law would. Republicans in North Carolina want to lower the personal income tax rate, increase the amount of non-taxable income, and increase the tax credit for children. According to the Urban Institute, the state’s tax revenues have increased between 2.5% and 5% since the pandemic began.
“We are fully in a position to cut taxes as we proposed,” said Berger, “and we don’t have to rely on the federal dollars to do so.”
Tax policy experts and Congress Republicans want more security. Sens. Mike Crapo (R., Idaho) and Mike Braun (R., Ind.) As well as Representatives Kevin Brady (R., Texas) and Dan Bishop (R., NC) have each introduced separate measures in Congress to upset the language .
Joe Bishop-Henchman, vice president of tax policy and litigation at the National Taxpayers Union Foundation, said the Treasury Department’s guidelines should clarify the basis on which the agency will determine whether net tax revenue has been reduced and who will make the decision. The foundation is a non-profit research group affiliated with a conservative organization.
Mr. Bishop-Henchman also urged Ms. Yellen to clarify that changes to state tax law announced or entered into force prior to the adoption of the US bailout are not subject to determination and to indicate what action the Treasury Department will take if there is a state violated the provision.
“If you do all of the things that we recommend in the letter, everyone will likely be satisfied, but it may not change the fact that this provision is likely beyond what Congress can constitutionally do,” he said. “And there’s nothing the Treasury Department can do about it.”
Write to Kate Davidson at email@example.com
(END) Dow Jones Newswires
Apr 14, 2021 12:04 PM ET (4:04 PM GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.