Multistate: States Seek Clarification of Federal Prohibition Against Cutting Taxes

The American Rescue Plan Act (ARPA), which allocates significant revenues to support states and local governments, contains a prohibition on using these funds to reduce taxes. Specifically, such resources shall not be used “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.”  Not surprisingly, state officials are concerned that this prohibition may affect future state tax cuts and incentives and distort state tax policy. A number of state attorneys general and taxpayer groups requested guidance from Treasury Secretary Janet Yellen on how this provision will be interpreted. One of the concerns is the effect on tax cuts that were already planned before the bill was signed. In a written response, Secretary Yellen stated that Congress may place reasonable conditions on how states may use federal funding, and that “nothing in the Act prevents states from enacting a broad variety of tax cuts.” If states lower certain taxes, but do not use funds under the act to offset those cuts, then the limitation in the act would not be implicated. Secretary Yellen also stated that the Treasury Department will be releasing further guidance on this issue, as well as the procedures that Treasury will use for any future recoupment of funds.  Arizona’s Attorney General filed a lawsuit last week against Treasury arguing that the provision was unconstitutional and requesting injunctive relief. It remains to be seen how this provision will affect pending legislation. Please stay tuned to TWIST for future updates.