WASHINGTON — President Joe Biden’s massive pandemic stimulus law pumps a welcome infusion of federal aid into state and local government coffers — but one brief section is raising questions about whether states are barred from cutting their own taxes if they accept the federal help.
The Senate added language to the COVID-19 relief package prohibiting states and local governments from using the $350 billion in direct federal assistance “to either directly or indirectly offset a reduction in the net tax revenue” or delay the imposition of any tax or tax increase.
That provision doesn’t entirely prevent state officials from cutting taxes. Some scenarios, such as slashing one tax but offsetting it with a tax increase, wouldn’t be a problem.
But until the Treasury Department offers more detailed guidance on how it will interpret the new law, the provision is causing uncertainty, particularly in places like Iowa, where tax cuts already are in the works.
Some Republicans in Washington and state capitals have criticized the provision as an unprecedented string attached to the federal dollars. The conservative Heritage Foundation has gone so far as to call on states to reject the federal assistance, even though bipartisan leaders of the National Governors Association have said direct aid is “essential” for states.
“Democrats in Washington and in the White House are not going to tell me, or the Georgia General Assembly, that we can’t cut taxes for hard-working Georgians,” Georgia Gov. Brian Kemp, a Republican, said at a press conference Wednesday, according to the Georgia Recorder.
Sen. Pat Toomey, (R-Pa.), who opposed the overall bill and sending more direct aid to state and local governments, said in a Fox Business interview, that the provision is a “dramatic expansion in the size of state and local governments that the federal government will control.”
Potential trouble spot
Tax policy experts describe a range of complex scenarios that could stymie budget officials, potentially requiring them to pay back the federal dollars.
Jared Walczak of the Tax Foundation, a D.C.-based conservative-leaning nonprofit focused on tax policy, said one potential trouble spot is if states use the money to pay the salaries of employees already on the government payroll, such as public health workers.
Offering grants or assistance to businesses and individuals doesn’t affect existing budgetary expenses. But using the money for existing salaries, even related to the pandemic response, would be dicier if that savings is then offset with a tax cut, he said.
Another murky scenario?
If states decide to follow the federal policy change in another section of the new pandemic stimulus bill and make unemployment compensation benefits not subject to taxes.
“Will that count as a tax cut?” asked Kim Rueben, director of the state and local finance initiative at the Urban-Brookings Tax Policy Center, a joint venture of the liberal-leaning Brookings Institution and the Urban Institute.
Neither White House officials nor a spokesman for Senate Majority Leader Chuck Schumer, (D-N.Y.), responded to requests for comment on the criticism and confusion surrounding the provision.
A defense of limits
Sen. Angus King had offered a defense of limitations on the state and local aid in an interview last month with the Washington Post, in which the Maine senator advocated for “a prohibition against voluntarily diminishing revenues.” Read more