Government Spending

The $1.9 Trillion American Recovery Act Could Have Huge Implications for State Tax Policies

Six different states are already suing over a broad prohibition on tax cuts that was slipped into March's $1.9 trillion COVID relief bill.

|

Like many states, Arizona has emerged from the COVID-19 pandemic unexpectedly flush with cash. Its budget surplus exceeds $1 billion.

But as fears of a pandemic-triggered recession have faded, federal policy has yet to catch up. Arizona got an extra $4 billion as part of an unnecessary federal bailout last month and is scheduled to receive another round of payments later this summer. With state coffers overflowing, Gov. Doug Ducey and state lawmakers are faced with an unexpected dilemma: find new ways to spend a one-time influx of revenue, or risk violating federal law by letting taxpayers keep some of their own money.

That last bit is what's at stake in a series of lawsuits launched by six states, including Arizona. The $350 billion state government bailout included in the American Rescue Plan, the $1.9 trillion emergency spending bill passed in March, included a provision 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."

It's an unusual—and possibly even unconstitutional—rule, and it might trip up Ducey's plans for a sweeping overhaul of Arizona's income tax code. While Congress does have the power to limit how states can use federal funds, the broad nature of the provision in the American Rescue Plan may overstep the constitutional boundaries on congressional power in two key ways, according to Joe Bishop-Henchman, a vice president at the National Taxpayers Union Foundation (NTUF).

The first has to do with legal precedents regarding the conditions Congress can place on states that receive federal aid. Infamously, the Supreme Court in 1987 upheld a federal law that threatened to withhold some highway funds from states that refused to raise the legal drinking age to 21. More recently, however, the Supreme Court struck down a major component of the Affordable Care Act that threatened to withhold Medicaid funding from states that refused to expand Medicaid eligibility. Chief Justice John Roberts described that penalty, which could have cost some states as much as 10 percent of their overall revenue, as an "economic dragooning."

There is a wide grey area between the amount of money that was at stake in the drinking age mandate and the Obamacare Medicaid expansion mandate. But the more important aspect might be how tailored the mandate is.

"Congress can impose conditions on federal funds, but only if the condition is related to a federal interest in a national project or program, the condition is unambiguous, and the condition encourages rather than coerces states to act," Bishop-Henchman, who is also the national chairman of the Libertarian Party, writes. In amicus briefs filed by NTUF, the organization argues that the tax policy mandates imposed by the American Rescue Plan—specifically, the ban on "indirectly" using the bailout money to pay for tax cuts—are both too broad and too ambiguous to meet the standards established by courts.

The second issue is the Supreme Court's "anti-commandeering" doctrine, which prohibits the federal government from dictating policies to states whether money is involved or not. That was the reason why President Donald Trump couldn't order states to "reopen" after the early stages of the COVID-19 pandemic had passed, leaving him to rage on Twitter while governors mostly stayed in charge of state-level pandemic policies. It's also the reason why the Supreme Court recently struck down a 1992 law that effectively banned sports betting in most of the country.

So these lawsuits speak directly to how much control the federal government will be able to exert over state tax policies in the coming years. Under the terms of the American Rescue Plan, states would be barred from reducing taxes through 2024.

That has potentially momentous consequences for a state like Arizona, where the Republican governor is pushing for a total overhaul of the state's personal income tax code to create a flat tax of 2.5 percent. That would give a tax cut to all taxpayers in the state—the lowest of the state's four tax tiers currently is 2.59 percent, while the highest is 8 percent.

Set aside the debate over the merits of those particular tax rates—a debate that continues to rage in the state Capitol, where one vote could swing the bill's passage. Is this a decision that should be made in Phoenix or in Washington, D.C.? That's the question that will be in front of federal courts in the coming months.

"Federal lawmakers have put their state counterparts in an impossible spot, forced to budget under significant uncertainty surrounding an expansive claim of federal power," writes Jared Walczak, a vice president in charge of state projects for The Tax Foundation.

The Treasury Department issued some guidance last month that clarifies a bit of the state bailout provisions, but Walczak says it hardly goes far enough. And it isn't just major overhauls like the one proposed in Arizona that could be affected. Normal policymaking at the state level could be impacted too.

"Imagine if, for instance, a state reduces the size of its drug enforcement budget within law enforcement and corrections agencies following the legalization of marijuana," Walczak suggests. "At the same time, suppose that the Department of Corrections uses federal dollars to treat coronavirus cases in prisons, or the Department of State Police uses funding to offset salaries or provide supplemental pay for officers. In neither case would these federally financed expenditures in any way offset the savings from reduced drug enforcement, yet it appears that the federal government would prohibit using these savings to help finance a tax reduction, since they coexist in the same department or agency."

It's possible that the federal government will simply decline to go after states that break the rules created by the American Rescue Plans. And it's possible that courts will strike down this overly broad attempt at dictating state policy. But it's also possible that state governments will be hamstrung for the next several years by a bailout they didn't need in the first place.

NEXT: Novavax Vaccine 100% Effective Against Both Moderate and Severe COVID-19

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. So, criticism of a bill passed in March has a photo-op of Trump as the lead?

    1. Here are 7 at-home jobs that pay at least $100/day. And there’s quite the variety too! Some of these work-at-home jobs are more specialized, others are jobs that anyone can do.HJG They all pay at least $3000/month, but some pay as much as $10,000.
      GO HOME PAGE HERE FOR MORE DETAILS… Visit Here

    2. Here are 7 at-home jobs that pay at least $100/day. And there’s quite the variety too! Some of these work-at-home jobs are more specialized, others are jobs that anyone can do.HJQ They all pay at least $3000/month, but some pay as much as $10,000.
      GO HOME PAGE HERE FOR MORE DETAILS… Visit Here

    3. Most state salaries are based on a monthly-compensation rate, by job classification, although some temporary positions are based on hourly rates……………..PART TIME JOB

  2. “It’s possible that the federal government will simply decline to go after…”

    Yes and when has that happened especially when there’s a chance to make an example? We are living with a totalitarian democrat majority that loves to virtue signal.

    1. I support the right of the President to tell the executive branch to not enforce immoral laws. On the other hand, selective enforcement of laws isn’t living by the rule of law, and instead regresses to the less free rule by whatever the “king” decides.

      I remember in school, teachers saying, “If you don’t like the law, change it.” Why doesn’t the government change the law if it’s not going to enforce it? Well, that supports rule by man rather than rule by law.

  3. “…or risk violating federal law by letting taxpayers keep some of their own money.”

    let that one roll around a bit.

  4. It’s possible that the federal government will simply decline to go after states that break the rules created by the American Rescue Plans.

    But only after detailed analysis of whether or not the state leaders support the Democratic party.

  5. All the printing will be paid for with the value of your savings and labor.

    Plan accordingly.

  6. “Congress can impose conditions on federal funds, but only if the condition is related to a federal interest in a national project or program, the condition is unambiguous, and the condition encourages rather than coerces states to act,”

    What could possibly have a more direct interest to all federal projects or programs than state income tax rates?

  7. I guess Reason doesn’t have any time for posts about the world laughing at sleepy Joe. Where are Blue Anon to tell us what a swell job he’s doing?
    Queen of England is mentally sharper than that bag of cabbages and she’s 95.

    1. SloJoe was never as sharp as her, even in his prime.

    2. Well, at least they’re not politico:

      “President Biden flourishes on world stage in the absence of trump”.

      No shit.

      1. You can count on the government captured press, to fawn all over their leader. It encourages the fawning they want from the public. Which is why they continually disparaged Trump, with lies about him, because he was exposing their charade.

  8. The goal here is to use the money to increase state spending. State spending is sticky, it’s much easier to increase than reduce. So, if the state takes the money, spends more, when the money runs out the state will have to raise taxes.

    The goal here, quite transparently, is to force low tax, low service ‘red’ states to adopt the ‘blue’ state high tax, high services model, so that the ‘blue’ states will no longer be at a competitive business disadvantage.

    The Biden administration is attempting the same thing internationally with its “Global Minimum Tax”. Force everybody to be high tax, so that levying high taxes won’t result in you being undercut by somebody deciding to try smaller, cheaper government.

    1. If governments return the money to taxpayers, rather than throwing it around it will never get into Democrat Party coffers.

      Can’t have that.

      1. What taxpayers? Not Jeff Bezos. Not Donald Trunp.

    2. Exactly, it’s the political blood sucking leeches class trying to extract more from the productive working class. Trump got rid of the SALT deductions (deducting state taxes from federal income taxes was yet another means to encourage more statism and less freedom) which made high tax states less competitive, as it should and is only fair. The tax and spenders don’t want to compete with government jurisdictions that don’t treat the working class as cows to milk, and instead exists for the people instead of the leeches.

  9. Republicans like to give free money to rich people and their daddy corporations. I don’t think you are really this ideologically obsessed with low taxes. I think it’s a fetish. I think you’d pay high taxes if you thought they were paying for a border wall or a wall around your house. To you, high taxes means somewhere, some black person is being paid to sit on a couch and act with ill manners.

    Any otherwise sane but misguided Ayn Rand fanboy who thinks this is a real thing going on here, you should get out now. You can see it turning into Trumpistan’s latest encroachment. I won’t even remind you that libertarianism has its roots in segregation, or that Ayn Rand’s dreck has Nazi salutes on every page. Just get out and leave the brainwashed to their fate.

    1. “libertarianism has its roots in segregation, or that Ayn Rand’s dreck has Nazi salutes on every page”

      Tony, you just committed a sin by bearing false witness against libertarians, and showed you are a liar. So thank you for showing yourself, so we can just ignore you.

      There is nothing racial about supporting a government that indicts, arrests and jails those who initiate force against others, except that it doesn’t support government racism. Further, Rand denounced the Nazis as totalitarians.

      1. Rand was an uneducated pile of crap.

        If she denounced totalitarians, then why did she write a book about a select group of elites who deserved to rule us all? She was a reactionary against communism. She was on team Nazi all along, and you can tell if you gave a moment’s thought to the plot of Atlas Shrugged. It’s literally a tale of an ubermensch and the undeserving parasites who deserved to die for having the wrong politics.

        Anyway, let’s be clear, libertarianism does start in the left with the early liberals all the way up to anarchists and socialists of the 19th century. This magazine is a part of the fusion libertarian-Koch-conservatism iteration that overwhelmingly dominates libertarian thought now. This came as a reaction to the New Deal, and we all know what that entailed.

        If you don’t want to be associated with that dirty business, simply renounce any identification with or loyalty to the Republican party.

    2. You can’t really be this stupid.

    3. ‘Republicans like to give free money to rich people and their daddy corporations.’ I think you accidentally said Republicans when you meant Democrats, you can edit.

      If you think that my interest in low taxes is a fetish it’s because you didn’t just write the $96k check to the Feds and the $51k to the State. I would love to be in Florida where that second check would have been zero.

      And yes, I also think that people should work for a living, not hang out on their couches, enjoying free to them but taxpayer funded housing, education, health care and spending money.

      1. That’s because you’re a judgmental busybody. That’s a character flaw. You should stop concerning yourself with other people’s lifestyle choices. You’ll be happier.

        Look, taxation is an imperfect tool that exists for the purposes of a) having a stable common currency and b) motivating behavior in society. I’m all ears for suggestions about how to do these things without taxation, as long as they don’t involve the prefix “crypto.”

        We tax incomes because all the other ways we dreamed up to tax people are disproportionately burdensome on the poor. A toll of some sort may be a trifle to a rich person, but a week’s worth of food to a poor person. Income taxes exist not to raise revenue but to motivate the accumulation of less income.

        Reagan and his stupid horse had the bright idea that it was better to motivate a tiny few people to have more income relative to everyone else, and here we are, with you bitching about what remains of the income tax, because political strategists have you convinced that it’s the equivalent of taking money away from you.

        Which it is, but only because of how we choose to do the accounting. I’d be much in favor of a system where people don’t feel the pain of contributing to the commons in this way. It’s a bummer for us all. But you do have to mitigate extreme wealth inequalities that may arise in a state of natural capitalism. That’s a policy choice and a good one.

  10. Discover the best porn videos, images of high quality only on oneworldporn, Browse our various categories lesbian squirting, blowjob, anal, mature, lesbian and many more, so visit our website now.

Please to post comments

Comments are closed.