Detailed Colorado Development
On March 11, 2021, President Biden signed the American Rescue Plan Act (ARPA) into law. The Act allocates $350 billion in funds to support states and local governments in managing the public health and economic consequences of COVID-19. Recently, the U.S. Treasury published an Interim Final Rule that implements the provisions of the program. Pursuant to the rule, recipient governments may use the funds to: support public health expenditures; address negative economic impacts caused by the public health emergency; replace lost public sector revenue; provide premium pay for essential workers; and invest in water, sewer, and broadband infrastructure. The rule prescribes that recipients will have considerable flexibility to use the funds to address the diverse needs of their communities; however, the ARPA specifically prohibits states from using the funding to directly or indirectly offset a reduction in net tax revenue. This limitation has sparked concern, and even litigation, from the States over the possible coercive nature of such a restriction on a state’s authority to set its own policy
The interim rule details the manner in which Treasury will assess whether a state or locality violates the tax cut restriction. A reduction in net tax revenues must result from a “covered change” during the “covered period.” The covered period runs from March 3, 2021 through the last day of the fiscal year in which the funds provided have been spent. “Covered changes” include final changes in law, regulations, or administrative interpretations where the phase-in or taking effect of those changes was not prescribed prior to the start of the covered period. Covered changes specifically exclude the following: administrative interpretive changes intended to correct prior inaccurate interpretations, automatic statutorily or regulatory triggered rate changes in effect prior to the covered period, and changes that simply conform with recent changes in Federal law (e.g., federal treatment of PPP loans). To the extent that states utilize the funds to offset a reduction in net tax revenue, the funds will be required to be repaid. To determine if there is a reduction in net tax revenue, a state must measure the difference between its actual tax revenues and its baseline revenue (2019 revenues adjusted for inflation). If there is a reduction, the state must demonstrate that the tax cuts were funded by permissible sources other than funds received under the Act. Such permissible sources include enacted policies that raised other sources of revenue, spending cuts not offset with ARPA funds, and higher revenues due to economic growth. If sufficient funds from other sources cannot be identified to cover the full cost of the reduction in net tax revenue, the remaining amount not covered by these sources will be considered to have been offset by ARPA funds. If this occurs, the deficit funds will be subject to recoupment by the U.S. Treasury.
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