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State and Local Tax

State Attorneys General Seek Clarification on ARPA Provision

Tom Reese, J.D., LL.M.  Editor, Checkpoint

Tom Reese, J.D., LL.M.  Editor, Checkpoint

The attorneys general of 21 states have released a letter to Treasury Secretary Janet Yellen, seeking clarification regarding a provision of the American Rescue Plan Act of 2021 (ARPA) that, in their view, threatens to encroach on state sovereignty. (Letter from State Attorneys General to U.S. Treasury Secretary, Treasury Action to Prevent Unconstitutional Restriction on State’s Fiscal Policy through American Rescue Plan Act of 2021, 03/15/2021.)

The provision in question, Section 9901, directs states in the permitted uses of federal aid funds received pursuant to ARPA, such as providing aid to households and small businesses, assisting essential workers, and providing government services that may have been impacted by COVID-19 related revenue shortfalls. The provision also contains a limitation, restricting states and territories from using the federal funds “to either directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation, or administrative interpretation during the covered period 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.” The “covered period” is defined as the period beginning March 3, 2021, and extending until that last day of fiscal year that the funds provided pursuant to ARPA have been expended, returned or recovered. It is this limitation which has raised concerns of constitutionality and state sovereignty and has caused the Attorneys General to request clarification.

The letter, citing South Dakota v. Dole and National Federation of Independent Business v. Sebelius, asserts that conditions placed on federal funds “(1) be placed ‘unambiguously[,]’ (2) relate to ‘the federal interest’ for which the spending program was established, (3) not violate other constitutional provisions, and (4) not contain a financial inducement ‘so coercive as to pass the point at which ‘pressure turns into compulsion.'”

Section 9901, argues the letter, creates a “hopelessly ambiguous” situation for any state accepting the federal funds. Several states highlighted in the letter have implemented or are planning to implement programs, such as expanding or extending tax credits and exemptions, decreasing certain tax rates or decoupling from federal provisions that have created higher tax burdens. The provision’s wording is broad enough that there would be no way to know if a given state action, including those enumerated in the letter, undertaken presently or in the future (e.g., offering tax relief in a subsequent year made possible by funds freed up by the receipt of federal aid in the current year) will run afoul of Section 9901.

Without clarification, states cannot be fully aware of the terms to which they are agreeing in accepting the federal aid.

Additionally, a broad interpretation of the section would lead to restrictions, which could require states to refrain from offering any type of tax relief, going far beyond the federal interest underpinning the federal grant of assistance to the states.

The limitation imposed by a broad construction of Section 9901 will bind successor state administrations to the limitations agreed to by current state leadership, arguably robbing voters of the ability to elect an administration in the future that could enact tax relief provisions running afoul of the ARPA restrictions. Such implications, the letter argues, “would violate separation of powers and fundamental democratic principles” and effectively appoint Congress as the sovereign in matters of state tax policy.

Lastly, the attorneys general assert that the provision is unconstitutionally coercive. The dire financial circumstances of many states resulting from COVID-19 related disruptions will force a difficult choice between maintaining state sovereignty and accepting aid that, in some cases, can constitute a large percentage of a state’s annual budget. Such a choice, they say, runs contrary to the notion that the federal government cannot compel states to adopt certain tax policies at the state level.

The letter closes by requesting confirmation from Secretary Yellen that Section 9901 does not prohibit states from providing tax relief generally through the kinds of measures listed in the letter or other, similar measures, and that ARPA, at most, precludes express use of the funds provided under the Act for direct tax cuts rather than for the purposes specified by the Act.

 

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