Treasury: Some state tax cuts under Biden relief act are OK
JEFFERSON CITY, Mo. — Responding to concerns from state officials, the U.S. Treasury Department said Wednesday that states can cut taxes without penalty under a new federal pandemic relief law — so long as they use their own funds to offset those cuts.
Republican governors, lawmakers and attorneys general have expressed apprehension about a provision in the wide-ranging relief act signed by President Joe Biden that prohibits states from using $195 billion of federal aid “to either directly or indirectly offset a reduction” in net tax revenue. The restriction could apply through 2024.
Republican attorneys general from 21 states wrote to Treasury Secretary Janet Yellen seeking clarification on the prohibition, which they said could be construed “to deny states the ability to cut taxes in any manner whatsoever.”
A treasury spokesperson told The Associated Press that the provision isn’t meant as a blanket prohibition on tax cuts. States can still offset tax reductions through other means.
“In other words, states are free to make policy decisions to cut taxes — they just cannot use the pandemic relief funds to pay for those tax cuts,” the Treasury Department said.
The treasury’s application of the law could provide clearance for some tax cuts, such as Missouri legislation that would expand online sales taxes to offset proposed income tax reductions in 2023. Republican Sen. Andrew Koenig said he thinks his legislation
is OK but has asked the state attorney general for guidance on whether it could run afoul of the federal law.
“To say that we’re cutting taxes because of the (federal) money would be a ridiculous argument,” Koenig said Wednesday, “because this is an entire package that is completely separate.”
Arkansas Gov. Asa Hutchinson said formal guidance from the Treasury Department will be critical in determining how much flexibility exists for states. The Republican governor, however, wants lawmakers to move forward with his proposal to set aside $50 million for tax reductions, including a cut to sales taxes on used vehicles.
“We should not let federal restrictions weigh in on that direction we’re going as a state,” Hutchinson said.
The nonprofit Tax Foundation said in an analysis last week that state tax cuts financed by natural growth in state revenue or new tax hikes likely are fine under the federal law. But it said questions could arise if states use the federal aid to pay public health workers, freeing existing state revenue and contributing to a surplus that helps finance a tax cut.
Legislatures in numerous states are considering tax cuts this year.
Under the law, states that use part of their aid to offset tax reductions could have to repay an equal amount to the federal government. Because of uncertainty over what could trigger that, the Republican chairman of South Carolina’s House budget-writing committee said he plans to move slowly in using the federal money.