Legal Challenges Mount Against Tax Cut Prohibition in Covid Relief Law

President Joe Biden signs the American Rescue Plan, a coronavirus relief package, in the Oval Office of the White House, Thursday, March 11, 2021, in Washington.

President Joe Biden signs the American Rescue Plan, a coronavirus relief package, in the Oval Office of the White House, Thursday, March 11, 2021, in Washington. AP Photo/Andrew Harnik

 

Connecting state and local government leaders

Confusion over the tax mandate embedded in the $350 billion direct aid program for states and localities led Kentucky and Tennessee to file suit.

Opposition is heating up against the Biden administration’s prohibition on states using coronavirus relief funds to cut taxes.

Two additional states, Tennessee and Kentucky, filed a lawsuit this week challenging the restrictions on how they can use direct aid allocated to states through the American Rescue Plan. Ohio previously filed litigation challenging the restrictions.

Attorneys general for the two states called the tax restriction “an unprecedented power grab by the federal government.”

“Once a state accepts financial aid under the act—aid that might range from 20 to 40% of the state’s total annual revenue—that state is prohibited from setting its own tax policy if doing so will cause a net decrease in tax revenue,” wrote Tennessee Attorney General Herbert Slatery III and Kentucky Attorney General Daniel Cameron in a complaint filed in federal court. “Congress, in other words, is using the carrot of enormous financial aid to outright prohibit the states from lowering taxes on their own residents.”

The $1.9 trillion American Rescue Plan includes $350 billion in direct funding for state, local, tribal and territorial governments. Tennessee expects to receive about $3.7 billion under the rescue act and Kentucky expects to receive about $2.4 billion, the attorneys general said. 

The law includes several restrictions on how states can spend the money, but the provision stirring up the most controversy says states shall not use the funds “to either directly or indirectly offset a reduction in the net tax revenue” that stems from policy changes that would reduce taxes.

A coalition of Republican attorneys general wrote to Treasury Secretary Janet Yellen to ask her to provide further guidance on the tax mandate, noting that the language included in the act “could be read to deny States the ability to cut taxes in any manner whatsoever.”

Yellen issued a response, saying that “nothing in the act prevents States from enacting a broad variety of tax cuts.” Rather, she said, the law says that funding cannot be used to offset a reduction in net tax revenue.

“If states lower certain taxes but do not use funds under the act to offset those cuts—for example, by replacing the lost revenue through other means—the limitation in the act is not implicated,” Yellen wrote.

The Tennessee and Kentucky attorneys general said the Treasury Department’s response “did not provide clarity about using relief funds to ‘indirectly’ offset a reduction in tax revenue.”

In the complaint, the attorneys general cited specific actions their state legislatures have taken this year that they worry could be called into question by under the tax mandate provision. Kentucky lawmakers passed a tax increment financing plan that would allow homeowners in a disadvantaged minority area to pay the current rate of property taxes on their homes for the next 20 years. A Tennessee bill still under consideration seeks to eliminate the state’s professional privilege tax as a way to attract new businesses to the state.

The Treasury Department intends to release further guidance related to the tax mandate in order to address the concerns raised by GOP lawmakers. Yellen said the department plans to provide that guidance before states are required to provide certifications in order to receive the latest round of Covid aid.

Andrea Noble is a staff correspondent with Route Fifty.

NEXT STORY: ‘SALT’ Saga Flares as Governors Push to Repeal $10,000 Limit

X
This website uses cookies to enhance user experience and to analyze performance and traffic on our website. We also share information about your use of our site with our social media, advertising and analytics partners. Learn More / Do Not Sell My Personal Information
Accept Cookies
X
Cookie Preferences Cookie List

Do Not Sell My Personal Information

When you visit our website, we store cookies on your browser to collect information. The information collected might relate to you, your preferences or your device, and is mostly used to make the site work as you expect it to and to provide a more personalized web experience. However, you can choose not to allow certain types of cookies, which may impact your experience of the site and the services we are able to offer. Click on the different category headings to find out more and change our default settings according to your preference. You cannot opt-out of our First Party Strictly Necessary Cookies as they are deployed in order to ensure the proper functioning of our website (such as prompting the cookie banner and remembering your settings, to log into your account, to redirect you when you log out, etc.). For more information about the First and Third Party Cookies used please follow this link.

Allow All Cookies

Manage Consent Preferences

Strictly Necessary Cookies - Always Active

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data, Targeting & Social Media Cookies

Under the California Consumer Privacy Act, you have the right to opt-out of the sale of your personal information to third parties. These cookies collect information for analytics and to personalize your experience with targeted ads. You may exercise your right to opt out of the sale of personal information by using this toggle switch. If you opt out we will not be able to offer you personalised ads and will not hand over your personal information to any third parties. Additionally, you may contact our legal department for further clarification about your rights as a California consumer by using this Exercise My Rights link

If you have enabled privacy controls on your browser (such as a plugin), we have to take that as a valid request to opt-out. Therefore we would not be able to track your activity through the web. This may affect our ability to personalize ads according to your preferences.

Targeting cookies may be set through our site by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. They do not store directly personal information, but are based on uniquely identifying your browser and internet device. If you do not allow these cookies, you will experience less targeted advertising.

Social media cookies are set by a range of social media services that we have added to the site to enable you to share our content with your friends and networks. They are capable of tracking your browser across other sites and building up a profile of your interests. This may impact the content and messages you see on other websites you visit. If you do not allow these cookies you may not be able to use or see these sharing tools.

If you want to opt out of all of our lead reports and lists, please submit a privacy request at our Do Not Sell page.

Save Settings
Cookie Preferences Cookie List

Cookie List

A cookie is a small piece of data (text file) that a website – when visited by a user – asks your browser to store on your device in order to remember information about you, such as your language preference or login information. Those cookies are set by us and called first-party cookies. We also use third-party cookies – which are cookies from a domain different than the domain of the website you are visiting – for our advertising and marketing efforts. More specifically, we use cookies and other tracking technologies for the following purposes:

Strictly Necessary Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Functional Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Performance Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Social Media Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Targeting Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.