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State and Local Tax

Treasury Secretary Responds to State AGs on ARPA Restriction

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

· 5 minute read

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

· 5 minute read

U.S. Treasury Secretary Janet Yellen has issued a response to the letter signed by 21 state attorneys general requesting clarification regarding Section 9901 of the American Rescue Plan Act of 2021 (ARPA), which includes language limiting the ability of states to to use ARPA funds to offset certain tax relief measures for a period of time after receiving the federal aid authorized by the act. (Letter from Treasury Secretary Janet Yellen to State Attorneys General, 03/23/2021).

ARPA 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 the last day of the fiscal year that the funds provided pursuant to ARPA have been expended, returned or recovered. The state attorneys general had requested clarification as to the applicability of the restrictions imposed by Section 9901, fearing that a broad interpretation of the provision could interfere with state sovereignty in the area of tax policy.

In response to the concerns of the attorneys general, Treasury Secretary Yellen stated that Section 9901 does not “deny States the ability to cut taxes in any manner whatsoever” and only prohibits the federal funds from being used to offset revenue reductions caused by certain changes in state law. Reductions in revenue resulting from tax cuts that are offset by alternative means would not trigger the Section 9901 limitation.

Secretary Yellen’s letter goes on to point out that the use of federal funds to offset a revenue reduction in violation of the Section 9901 prohibition would not result in a forfeit of the state’s entire grant of relief funds under ARPA, only the portion of funds used to offset the revenue reduction.

The letter promises further guidance from the Treasury Department to address specific concerns raised by the attorneys general and provide details on the administration of the recoupment of federal funds. The guidance will be provided prior to the date states are required to submit the certification required by ARPA Section 9901.


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