The United States Treasury cannot prevent states from using pandemic relief funds to offset any tax cuts, according to a new ruling from a U.S. District Court judge.
U.S. District Judge L. Scott Coogler affirmed that the federal government had overstepped its authority. He wrote that the policy was “a federal invasion of State sovereignty” and was “unconstitutionally ambiguous” that did not clearly define what would trigger a repayment of the funds.
Attorney Generals representing more than 13 states sued the federal government in April over a provision of the act that would prohibit states from using the $195 billion of flexible federal relief funding to offset new tax cuts.
The lawsuit was led by West Virginia Attorney General Patrick Morrisey as well as the AGs from Alabama and Arkansas. Alaska, Florida, Iowa, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota and Utah also signed on to the suit.
“Never before has the federal government attempted such a complete takeover of state finances,” Morrisey said in a statement announcing the legal action. “We cannot stand for such overreach."
One problem, according to Morrisey, was the use of the word indirectly.
The law reads that allocated federal funding cannot be used “to either directly or indirectly offset a reduction in the net tax revenue."
“Morrisey argued the word ‘indirectly’ in the law could be interpreted in a way that prevents states from implementing tax reductions,” per Fox Business.
“This ensures our citizens aren’t stuck with an unforeseen bill from the feds years from now," he said.
After 21 AGs sent a letter requesting clarification, Treasury Secretary Janet Yellen said states could lower taxes if they did not use the stimulus to fund the reduction.
“Nothing in the Act prevents States from enacting a broad variety of tax cuts,” Yellen wrote in response on Mar. 23. “It simply provides that funding received under the Act may not be used to offset a reduction in net tax revenue resulting from certain changes in state law."
In his Nov. 15 decision in favor of the 13 states, Coogler wrote, “The Tax Mandate’s restriction on direct or indirect state tax cuts pressures States into adopting a particular — and federally preferred — tax policy.”
“That ‘may disincentive’ states ‘from considering any tax reductions for fear of forfeiting ARPA funds,’” the judge wrote.
As a result of the ruling, the Treasury Department cannot enforce the provision. The rest of the American Rescue Plan Act remains in place.
