SALT LAKE CITY — Utah Attorney General Sean Reyes, along with 20 other attorneys general across the country, has signed onto a joint letter threatening the Biden administration with legal action because of an unclear provision included in the latest $1.9 trillion stimulus package. The seven-page letter sent to Janet Yellen, the Treasury secretary, presses the president to clarify stated restrictions on state efforts to cut taxes, arguing the provision strips states of its rights.
Concerns with the stimulus package
The greatest concern for the 21 states is a restriction listed in the stimulus package that prevents states from using federal funds to “either directly or indirectly offset a reduction in the net tax revenue” that may result from tax cuts. If a state violates this provision, federal law would require repayment to the government.
“This language could be read to deny states the ability to cut taxes in any manner whatsoever — even if they would have provided such tax relief with or without the prospect of COVID-19 relief funds,” the attorney general wrote. “Absent a more sensible interpretation from your department, this provision would amount to an unprecedented and unconstitutional intrusion on the separate sovereignty of the states through federal usurpation of essentially one half of the state’s fiscal ledgers.”
Even more concerning to the attorney generals is the lack of explanation on how that provision will be interpreted by the Treasury Department. In their letter, the Republican officials pressed Yellen to clarify how that restriction would be enforced — and in what circumstances.
The letter listed two pages worth of hypothetical — but arguably real, they said — situations in which this provision would negatively impact states who provide tax cuts to residents. These included questions on whether the law would only prohibit states from using federal aid to offset new tax cuts, or if it would also restrict them from cutting taxes at all — even if those cuts were already planned before the stimulus package passed.
“Put aside the gross federal overreach inherent in trying to take state tax policy hostage in this way,” they wrote. “If this expansive view of this provision were adopted, it would represent an unprecedented and unconstitutional infringement on the separate sovereignty of the States.”
The White House responds
A White House official responded to concerns Tuesday, telling the Washington Post the provision does not prohibit states from cutting taxes “at all.” Instead, it merely prohibits states from using federal aid to counteract potential economic losses from subsequent tax cuts.
“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 said.
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