Coronavirus

Federal COVID-19 Bailout Prohibits States From Cutting Taxes

The measure could also make it illegal for states to create new tax credit programs, such as those used for expanding school choice.

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Buried within the $1.9 trillion emergency spending bill that Congress sent to President Joe Biden's desk on Wednesday is a provision that could effectively block states from cutting taxes if they accept federal bailout dollars.

That provision, added to the bill by the Senate last week, could put a halt to several states' plans to cut taxes this year as a way to stimulate economic growth following the COVID-19 pandemic. Depending on how the text is interpreted, the measure could also make it illegal for states to create new tax credit programs like the ones that have become a popular mechanism for expanding school choice. Critics say this expansion of federal control over state policymaking is murky at best, and potentially unconstitutional.

First, the basics: The COVID-19 relief-bill-that-isn't-really-a-relief-bill contains $350 billion earmarked for state governments, local governments, and Native American tribes. That money is supposed to help governments fill temporary budget holes created by the pandemic—even though the funding vastly exceeds actual state and local budget shortfalls, as Reason's Christian Britschi has previously reported. States are in such non-dire straits, in fact, that about $150 billion of the state aid distributed as part of last year's Coronavirus Aid, Relief, and Economic Security (CARES) Act hasn't even been spent yet.

Since the federal government is giving states money that they don't need, there are two things state lawmakers can do: Use the federal money to grow government spending or pass that extra cash along to taxpayers by lowering their tax burdens.

However, the Senate inserted language in the American Rescue Plan expressly telling states that they "shall not use the funds provided…to either directly or indirectly offset a reduction in the net tax revenue," or do anything 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."

That same section of the bill also bans states from depositing the federal bailout into their public pension funds. That's probably a good idea, but it's pretty ironic considering that the American Rescue Plan also contains a completely indefensible bailout of some private-sector pension funds run by labor unions.

The bill doesn't categorically prohibit any changes to state tax policies, but "adjudicating what counts as indirect use to facilitate a tax cut is messy," Jared Walczak, vice president of state projects at The Tax Foundation, a nonpartisan tax policy think tank, tells Reason. "States will receive federal aid regardless of their budget situation, and many potential uses of that funding could theoretically offset the need to spend state dollars. If that is enough to block a tax cut, states could find themselves barred from cutting taxes even though they could have done so without taking a dollar in state aid."

And because the language also forbids states from using the federal bailout to forgo a potential tax increase, it may prohibit using the aid to repair state-level unemployment insurance trusts funds that have been dented by pandemic-related unemployment. Instead, states like Maryland might have to go through with a 600 percent hike in unemployment taxes despite getting a windfall from the federal government.

But the biggest losers are states like Mississippi, New Hampshire, and West Virginia that were planning tax cuts next year and now might have to worry about the feds dragging them into court if they do. "This is terrible, this is absolutely terrible," West Virginia Gov. Jim Justice, a Republican, said Tuesday.

Do states have a choice? They could simply return the bailout dollars to the federal government unspent, of course, and then no restrictions on their use would apply.

Or there might be a legal remedy. The Wall Street Journal editorial board suggests that the provision could violate the Supreme Court's "anti-commandeering" doctrine that prohibits the federal government from dictating policies to states—that was a bit of an issue in the pandemic's early days too, you might recall, but for very different reasons.

Even if this bill passes constitutional muster, however, it's clearly a coercive provision that ties the hands of state policymakers. If Congress doesn't want states to use bailout dollars for certain purposes, it could more easily accomplish that goal by simply not bailing out states that don't need the help.

NEXT: Despite Its Much Stricter COVID-19 Policies, California's Per Capita Death Rate Is Only Slightly Lower Than Florida's

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  1. “Use the federal money to grow government spending or pass that extra cash along to taxpayers by lowering their tax burdens.”

    LOL

    I like how you try to make it seem like it’s even a choice.

  2. Do states have a choice? They could simply return the bailout dollars to the federal government unspent, of course, and then no restrictions on their use would apply.

    I realize that at this point it is customary to laugh at this hoary old joke, but I am genuinely curious to see if perhaps a few states might see the trap being proffered here (hard to criticize a crook when you’re eating his bread) and decline the bribe.

    1. Similar to how some states refused the ACA subsidies for Medicare expansion, if I recall correctly? I hope some do, if only as a signalling measure.

      Time for some secession!

      1. Also, a couple of the flattish western states took a pass on the federal highway money tied to the 55 MPH speed limit.

        So there is some precedent to the Fuck Off option.

    2. ^THIS; But passing on federal bribery money doesn’t fix the ‘real’ issue of federal misusing their tax power…

      Because federal passes unconstitutional policy the policy is still funded by citizens of all states whether they receive the *sell out to communism* unconstitutional bribery check or not.

      I fear this is one of the WORSE situations the USA will have to deal with. How to keep the federal from STEALING more than it’s authorized to ‘TAKE’. And if there’s one principle Democrats live by is the Power to TAKE!

    3. They see the trap, of course. They don’t care though because the decision wasn’t made by them so it can’t be held against them in an election and the impacts of budgets breaking down the road won’t be felt till they are out of office. You get to take credit for spending the money, avoid responsibility for spending the money, and the impacts of spending it are someone else’s problem. What’s not to like?

  3. Federal COVID-19 Bailout Prohibits States From Cutting Taxes

    Something something…Fuck Phil Murphy.

    1. Cutting taxes, of course, is racist and sexist

      1. Inside the mind of the Lefty Poopy-Head, “Not stealing = Subsidizing”. lol… 🙂

  4. So is daylight saving time, since only wealthy white men can enjoy the extra hour of daylight to play golf, tennis, or sail their yachts (I’m not making this up)

  5. I live in CA, so thanks for the bailout, red state suckers!!! I think I’ll go underpay my gardener now…

  6. So Democrats raised taxes. Again.

    1. No no, Joe Biden promised he wouldn’t raise taxes on the middle class.

      If the states raise taxes, well that can hardly be blamed on him now, can it?

      (Of course all of that ignores the fact that his promise to repeal the Trump tax cuts would immediately raise taxes on the middle class.)

  7. $1.9T bailout, sponsored by Reason. You ass biscuits wanted Biden in the White House. Suck it.

    1. Even the ones who voted for Jo Jorgensen?

      1. Yep.

      2. The ones that voted for Jo Jorgensen did so because, in their words, their vote wouldn’t have swung their state one way or another.

        1. Exactly.

          Between Team Blue and Team Libertarianism in a contest that mattered, they would choose Team Blue — but, you know, “strategically” and all. The strategy being, of course, to elect Democrats to positions of power instead of Libertarians.

          ERIC BOEHM
          Reporter

          Who do you plan to vote for this year? I am currently not registered to vote in Virginia, where I live. If I change that before the election, I will vote for Jo Jorgensen—unless I believe there is a chance that Joe Biden will somehow fail to win Virginia, in which case I will vote strategically and reluctantly for Biden.

          https://reason.com/2020/10/12/how-will-reason-staffers-vote-in-2020/

          1. I voted for Jo Jorgensen in Virginia, my other choice was not to vote, even if Virginia was still a swing state. Not that it really matters anymore. I can’t control how other people vote, so to say I helped elect Biden is ridiculous

            1. “[S]o to say I helped elect Biden is ridiculous.”

              My eyesight may be going, but I don’t see a single comment by anybody accusing you of helping to elect Biden.

            2. Were you actively protesting trump and ignoring Biden scandals as a major publisher?

        2. “ The ones that voted for Jo Jorgensen did so because, in their words, their vote wouldn’t have swung their state one way or another.”

          Speak for yourself. I voted for her because she was the best candidate out there.

      3. I voted for Jo. Best choice out there.

        1. Except she promoted anti racism and neo marxism, which is its foundation.

          1. She attended a candlelight vigil.

            1. Oh, and exactly what JesseAz said:

              https://twitter.com/Jorgensen4POTUS/status/1281638042315489284?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1281717713291956224%7Ctwgr%5E%7Ctwcon%5Es2_&ref_url=

              “It is not enough to be passively not racist, we must be actively anti-racist.”

              Wrong again WK.

            2. Dee? Dee? Where’d you go Dee?

          2. So she should have been pro racism.

          3. To call someone who ran on the straight LP platform neo Marxist is to profoundly misunderstand libertarianism and Marxism at the same time.

      4. Which was the majority of those surveyed, by the way.

    2. Trump was insane – as are most people who supported his refusal to accept the election result. I think Reason and most Libertarians and libertarians would prefer any reasonable Republican to Biden.

      1. Too bad that wasn’t one of the options. I would prefer to drive a Rolls Royce, if only they cost $30,000.

      2. So you admit you care more about personality than policy. Fuck right off then. Youre worthless.

        1. Exactly. Trump was and is an unsavory character. But he was quite a good President if you care about results. Biden is kind of a nice guy (whom I met once), but is a terrible President and is helping drive this country to ruin. F that guy. In the ass. With a broken bottle.

          1. Trump did not get any results to speak of.

            1. How does one get to such a state of total dishonesty, WK? I cannot even begin to comprehend.

              1. By assuming that everyone else you encounter is exactly as stupid as you are. WK specializes in this.

            2. Huh so I wasn’t taxed by EO for 4 years? Someone let my accountant know.

              And fuck Biden for his continuation of this illegal unconstitutional cash grab.

          2. And he was a major asshole to boot.

            1. So, you do not care about results or policy.

              Fuck off, clown shoes.

            2. *Politicians* are major assholes. Maybe you can find a few exceptions here and there, but you won’t find them looking in the direction of the Biden/Harris camp. And even if you did, who cares? The effects of the policies politicians impose on us are really the only thing that matters. Trump has never been anywhere near as savage an asshole as many of the policies Team Blue have foisted on the American populace, and what they’ve got lined up for us is degenerate in the extreme.

              Also, to even begin to seriously push back against the deranged (and bipartisan) entitlement that has the government in its zombie grip, I’m beginning to think “major asshole” will be a job requirement.

        2. He can’t even assess personality, he just thinks what the TV tells him to think.

      3. People who challenge a election results are insane. Good to know. I suppose it’s better than getting executed out of hand.

  8. Well, that’s creative.

    1. the word you’re looking for is tyrannical

      no refunds commie

  9. Why are only White people’s taxes expected to pay for their assimilation out of existence by the third-world flooding and integrating into EVERY White country and ONLY White countries? Nobody demands that the Chinese must pay for their assimilation out of existence by breeding with millions of non-Chinese in their own country. Diversity is a code word for White Genocide.

    1. Fuck off and go back to Stormfront.

      1. It’s always nice when some Reddit or Facebook user tries to post here with obviously racist crap right?

        I don’t usually go for the whole flag refresh thing, but fuck those kinds of posts.

      2. Come on! Discuss the ideas. Why go straight to the ad hominem attacks?

        1. It wasn’t enough for Lying Jeffy to be both dumb and dishonest, he has to join sarc in hypocrisy too.

          Come on, address his points Jeff, you COWARD!

        2. There is no point in discussing anything with a racist.

  10. Why are only White people’s taxes expected to pay for their assimilation out of existence from the third-world flooding/integrating into EVERY White country and ONLY White countries? Nobody demands that the Chinese must pay for their assimilation out of existence by breeding with millions of non-Chinese in their own country. Diversity is a code word for White Genocide.

    1. And fuck off again.

    2. Oh Dear Lord, it’s one of those

  11. Joe Biden has never lowered taxes. His state has been in the top three for welfare states during his entire time there. Did anyone expect a tax break?
    If you need some actual news about how well the progressives are running a major city, don’t rely on the mainstream media. For Chicago, check out the heyjackass website and the neighborhood blogs like the CWB blog. There are hundreds of pages of crimes against taxpayers by felons that are out on affordable bail. The crime has spread forth into the liberal Democrat areas, Karen can’t drive her Mercedes without getting jacked. You get what you vote for America.

  12. “The measure could also make it illegal for states to create new tax credit programs, such as those used for expanding school choice.”

    Dammit, I had high hopes for a 2021-2022 school choice wave 🙁

  13. How about retiring bonds? How about buying bonds that are owned by theoretically independent authorities and canceling their obligation?

    1. Go ahead. Do it. Or do you mean you want to force everyone else to do it?

  14. Do you think boehm realizes how ironically stupid he looks to all of us bitching about this NOW?

    1. After conclusively and compulsively making lefties look stupid; One thing about Democratic minds that seems a given. Logic and realization isn’t a priority at all.. [WE] gang affiliation and knee-jerk emotions for the win in all things…

  15. Since the federal government is giving states money that they don’t need, there are two things state lawmakers can do: Use the federal money to grow government spending or pass that extra cash along to taxpayers by lowering their tax burdens.

    There’s a third choice. Tell the federal government to fuck off.

    1. Americans cannot deal with more than two choices.

  16. Hello bill meet our foot in court.

  17. “That provision, added to the bill by the Senate last week…”

    By which Senator, or Senators?

  18. Take the money and use it to sue the Feds. As many times and ways as possible.

  19. Good. This was already putting state borrowing onto the feds’ borrowing. No need to shift any more.

  20. You guys at Reason might as well as have sponsored this bill. With your extreme shallowness you helped elect the people who passed it

  21. But hey, no more mean tweets, right?

    You supported the statists, but we’re paying the price.

  22. Rejoice, this is your ticket to paradise. Don’t take the money and do your tax cut. Show us how great your policies are.

  23. Is it possible to talk out of three sides of your mouth? This argument is so over the top in its bad faith that it’s kind of infuriating.

    States don’t need the federal benefit? Fine! Don’t take the money then. What’s the problem?

    Oh, so you want to accept the money? Fine! Spend it on things that will boost your local economy. A lot of state budgets may be fine, but tons of individuals and businesses are not.

    Oh, so you don’t want to help businesses and individuals who are hurting? You’d prefer to offload some more of your local spending needs to the federal government and other net tax payor states? Well, that doesn’t seem very conservative, libertarian, fiscally sound, or fair, does it? So we’re going to try to stop you from doing that.

    Reason, per the Tax Foundation: Oh noes! We can’t have our cake and eat it too!!!

    It’s impossible to predict how the conservative activists newly-installed in our judiciary will respond to this, but under existing non-commandeering jurisprudence, there should be no problem with conditioning the receipt on federal funds on the notion that you not use it to give yourself a tax break. We have all kinds of restrictions on the use of federal funds for local purposes that pass constitutional muster. It only becomes an issue when the cudgel of federal funding is used to force states to adopt policies unrelated to the funding or that are so punitive as to put states in a bind. When you threaten to yank all Medicaid funding if state’s don’t expand Medicaid eligibility, for instance.

    It would be different if the offer was, “don’t cut taxes or you get no federal funding at all.” But this is a discrete relief/stimulus package, and it makes good policy sense to want to see the money we’re debt-financing to go into community investments and programs rather than yet another round of tax breaks that’ll stimulate exactly nothing.

    1. Again, Feds have zero right to demand states pass tax laws they approve of. Literally none. Fucking fascist.

      These states already have to pay for this boondoggle. If they wish to maintain their independence, they have to give the money and get zero back or allow the Feds to govern their states FOR them?

      1. Don’t waste my time with this argle-bargle nonsense.

        The federal government isn’t “demanding” that states do anything with their tax laws. It’s just saying, if you want federal funding from this bill, you can’t use it to give yourselves a tax holiday. If a state wants to cut taxes, it is totally free to do so. It just can’t then use COVID relief money to shore up its local budgets.

        Everyone pays federal taxes, and some of us pay state and local taxes. We all deserve to get that money back in the form of benefits. The fact of the matter is that some states want to use the cash for the purposes for which we’re allocating it, while others want to use it to fill potholes. That means that my federal tax dollars for COVID relief measures go to build roads for Floridians.

        1. “The federal government isn’t “demanding” that states do anything with their tax laws.”

          Clearly it is.

          “It’s just saying, if you want federal funding from this bill, you can’t use it to give yourselves a tax holiday.”

          Which is demanding they run their tax law by what the Feds want. Do not know why you seemed confused on that in the prior sentence.

          “If a state wants to cut taxes, it is totally free to do so. It just can’t then use COVID relief money to shore up its local budgets.”

          Then give them THEIR part of the money back in full. Simple fix.

          “Everyone pays federal taxes, and some of us pay state and local taxes. We all deserve to get that money back in the form of benefits. The fact of the matter is that some states want to use the cash for the purposes for which we’re allocating it, while others want to use it to fill potholes. That means that my federal tax dollars for COVID relief measures go to build roads for Floridians.”

          Unclear what that has to do with the Feds demanding states run their tax laws as the Feds insist.

        2. The federal government IS demanding that the citizens of those states pay their taxes and subsidize the states that are perfectly willing to sell their own limited sovereignty.

  24. Do they get to avoid paying for OTHER states insane spending?

    Seems like it’s a no.

    Curious where the Feds have the tiniest sliver of a right to demand states handle their taxes through their approved methods.

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  26. More dictates from the federal dictators. States should refuse to send in their revenue sharing monies, or succeed.

  27. Sounds like a good, probably necessary, provision to prevent states from giving federal relief dollars to rich people.

    1. Tony is now opposed to ending the SALT deductions. Shocking.

    2. Given that the feds are inevitably going to force the rich to pay for this monstrosity of a bill, giving the money to rich people now only seems fair.

      1. What seems fair is making them pay for all the free money they were given under the last two Republican administrations at your expense.

  28. After coming to this site for a few months, reading the various articles and the comments posted regarding them during that time, I’ve come to the sad conclusion that, to paraphrase Wm. Jefferson Clinton: “It all depends on what the meaning of “Reason” is.

  29. “Oh goodness no, Dr. Yellen. We haven’t cut taxes! We are just issuing bailouts of 1% of taxable income over the next three years to help people adjust to the ‘new ‘normal’. Isn’t that what you wanted us to do with the money? Bailout the suffering citizens our fine state while stimulating the economy?”

    The people who passed this are the very same who tried to convince the Senate parliamentarian that what private businesses pay their employees was a federal budgetary concern. Defying their will with absurd loopholes is just karma.

  30. But Houston needs that money because we had to spend 8 times more in 2020 for a presidential election than in the past because we needed 24-hour drive-through voting and we need money to sue TXDOT to stop a highway project that had been approved before Hidalgo took office and had a chance to give her opinion so clearly TxDot’s action is illegal.
    How dare Eric claim we don’t need that money!

  31. At first blush, this appears as a usurpation of state’s rights. But think about it for a bit.

    If your college student child calls, claims he is broke, and ask for money for groceries, change to do laundry, and other necessities, you grudgingly give it to him.

    But, if you find out he spent it on concert tickets and video games, you’re irritated.

    Logically, it makes sense for Washington to dole out money to state governments who are begging for help due to unexpected Covid costs and decreased tax receipts, while restricting tax rate reductions.

    If states need money from Washington, then they can’t afford to reduce taxes.

    1. Tell your college student to get a job or cut him/her/it /them off. Our daughter had an AMEX card for emergencies. Several months of $500 charges including Starbucks put an end to that. Here’s your rope, go hang yourself. DC politicians suck. Remember Perot’s giant sucking sound? It just got bigger.

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