Republican senators have introduced legislation to eliminate a provision in the American Rescue Plan that prevents states from using federal emergency relief funds to cut taxes through 2024.
Idaho Sens. Mike Crapo and Jim Risch, were joined by seven of their GOP colleagues in introducing their State Flexibility Act on Monday. The provision blocking tax cuts troubles some state and local groups who say it's unclear what the law prevents a state from doing.
“This infringes on states’ authority to design their own fiscal policies, and invites partisan politics into federal and state relations,” said Crapo, the ranking Republican on the Senate Finance Committee.
Last week, Republican Sen. Mike Braun of Indiana announced he is introducing a similar bill he calls the Lets Let States Cut Taxes Act.
Both bills would rescind a provision added to the stimulus bill by Senate Democrats which critics say could undermine the ability of states to determine their own fiscal policies if they accept a portion of the bill’s emergency state aid.
Several Republican governors have complained the provision represents federal overreach and infringes on state sovereignty.
The problem is that while many states have experienced significant revenue losses and increased expenses related to the COVID-19 pandemic, others finished 2020 with revenue gains.
Idaho Gov. Brad Little issued a statement Monday in support of the Republican senators who want to rescind the prohibition on tax cuts.
“Under the Democrats’ illogical plan, Idaho would potentially subsidize poorly managed states simply because we are using our record budget surplus to pursue historic tax relief for our citizens,” said Little.
The National Governors Association has not taken a position on the issue, but officials in several states have joined in the criticism.
In Georgia, Republican Gov. Brian Kemp said last week, “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’s Republican House Speaker David Ralston has written to President Biden and Treasury Secretary Janet Yellen asking them to not block a state tax cut for Georgians who use the standard deduction when they file their state income tax returns or a state tax credit for families who adopt a child out of foster care.
The Georgia House Democratic Minority Whip, David Wilkerson, downplayed those concerns to the Atlanta Journal-Constitution as an example of “grandstanding” with a partisan talking point.
“The whole intent is that states don’t take federal money and then give out tax cuts to the rich,” Wilkerson told the newspaper. “If it is smart tax policy that helps people, (the feds) are not going to push back.”
But state government groups such as the National Association of State Budget Officers and the Government Finance Officers Association say there is enough ambiguity in the legislation to warrant guidance from the U.S. Treasury Department.
“The language appears to indicate states cannot use the newly approved funds for tax cuts, but we are awaiting further guidance and clarification from the Treasury Department,” said Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officers. “States are also awaiting further guidance on the eligible use of funds.”
Emily Brock, director of the federal liaison center for the Government Finance Officers Association, said her members have expressed a similar concern.
“We think it could use some clarity to make funds usable,” Brock said in an email. “We have asked the Treasury for guidance on the matter.
The problem largely involves only state governments and not local governments, according to Brock, many of the eligible expenditures are more easily applied at the local level for items such as COVID expenditures, premium pay, or water and sewer infrastructure.
“The states are relying much more on the revenue replacement clause, which complicates matters when that can neither apply ‘directly or indirectly’ to offset net tax revenues or delays in increases or credits,” Brock said. “Another interesting question we are seeking clarity on is a single audit question – are the non-entitlement funds that flow through the state sub-recipients? And if so, are they subject to the same restriction?”
In Arizona, Republican Gov. Doug Ducey’s executive budget has proposed $600 million in income tax reductions.
In West Virginia, Republican Gov. Jim Justice wants to reduce the state personal income tax paid by households by 60% while raising sales taxes as well as taxes on tobacco, alcohol and soda.
In Nebraska, the Open Sky Policy Institute last week warned state lawmakers that proposals to phase out state taxes on Social Security income and eliminate taxes on military pensions, among other things, trigger a federal repayment request, the Lincoln Star Journal newspaper reported.
Sigritz of NASBO agreed that a number of questions remain on how the bill will be implemented. “States are in the information gathering stage and are seeking clarity on allowable expenses, revenue replacement, the reduction of taxes, and other areas,” he said.
“A number of the tax cut proposals we have seen so far have been aimed at helping individuals and businesses impacted by the pandemic, while many of the broader tax cuts would be phased-in over a number of years,” Sigritz said.
There have been two focuses among the states: helping people and small businesses that are hurting because of the pandemic, and helping the economy to recover.
“While many states have seen revenue improvements compared to dire forecasts made in the spring of last year, a number of states are still projecting less revenue than what they were pre-COVID,” Sigritz said. “States aren’t completely out of the woods yet and are facing increased spending demands brought on by the pandemic and slower long-term revenue growth.”
The $350 billion in direct state and local aid, as well as other aid education, transit systems and others are stabilizing their overall financial outlook.
Matt Fabian of Municipal Market Analytics wrote in his weekly municipal market outlook report released Tuesday that the American Rescue Plan “is a major stabilizing factor for many municipal sectors over the next 12-18 months, meaning a better operating environment and revenue generation plus fewer downgrades, impairments, and defaults.”
Moody’s Investors Service said last week the legislation is “credit positive across public finance sectors, most prominently state and local governments set to receive funding to cover lost revenue because of the pandemic.”
“The new aid is substantial, ranging between 10% and nearly 30% of some states’ fiscal 2020 operating revenue and slightly smaller shares for some large cities,” Moody’s said. “It will help stabilize state finances and, coming amid most states’ legislative budget sessions, likely allow them to avoid downstream funding cuts for local governments, colleges and universities, and other programs.”
