MORGANTOWN – West Virginia Attorney General Patrick Morrisey and his colleagues from Arizona and Georgia have their answer from U.S. Treasury Janet Yellen about the interplay of American Rescue Plan COVID relief money and state tax cuts, and they don’t like it.
“That’s why next week we’re going to court, we’re going to try to wipe away this tax mandate,” Morrisey said in a short video released Wednesday. “You cannot force a state to eliminate its core constitutional function to reduce taxes in exchange for a large check. That won’t stand up in court.”
The three attorneys general headed a March 16 letter to Yellen signed by 18 other attorneys general seeking clarity on tax cut prohibitions in the American Rescue Plan.
Part of the American Rescue Plan is devoted to various COVID-19 relief measures. The bill forbids states from using COVID-19 relief funds to “directly or indirectly offset a reduction in … net tax revenue,” whether by cutting rates, giving rebates, deductions, credits, “or otherwise.”
They took issue with the word “indirectly” because it could effectively bar any tax-cut legislation this year or for years to come, they said. “This language could be read to deny States the ability to cut taxes in any manner whatsoever — even if they would have provided such tax relief with or without the prospect of COVID-19 relief funds.”
Yellen wrote back to Arizona Attorney General Mark Brnovich Tuesday. It’s well established, she said, that Congress may place reasonable restrictions on the use of federal funds and Congress does it routinely.
“Nothing in the act prevents states from enacting a broad variety of tax cuts,” she said. “It simply provides that funding received under the act may not be used to offset a reduction in net tax revenue resulting from certain changes in state law.” Replacing lost funds by other means isn’t part of the prohibition.
Any possible misuse wouldn’t affect a state’s entire COVID relief under the act, she said, just the portion used to cover tax-cut losses. Treasury is crafting further guidance on the topic.
Morrisey said in a Wednesday press release, “West Virginia cannot accept the statute’s ambiguity, and given the administration’s failure to correct this problem, we are left with no option other than seeking a court order to protect West Virginia’s interests. … Federal spending power has clear limitations, and Congress may not micromanage a state’s fiscal policies.”
West Virginia has two rival plans to phase out the state personal income tax in play, one from the governor and one from the House of Delegates Finance Committee. The governor’s plan, in particular, it’s been said, could be viewed as indirectly relying on Rescue Plan money to shore up the budget.
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