State AGs threaten action over relief package restrictions on tax cuts

Twenty-one Republican state attorneys general demanded answers from the Biden administration on Tuesday about language in the president’s $1.9 trillion coronavirus relief package that limits states’ ability to use the $350 billion in state and local aid to cut taxes.

The attorneys general warned that the language could constitute a massive encroachment on states’ rights and threatened further action absent a clarification from Treasury Secretary Janet Yellen.

The state officials said the language banning states from using the funds to offset reductions in net tax revenue that result from tax cuts could be read to completely ban them from cutting taxes.

“Such federal usurpation of state tax policy would represent the greatest attempted invasion of state sovereignty by Congress in the history of our Republic,” said the letter to Ms. Yellen, led by Arizona Attorney General Mark Brnovich, Georgia Attorney General Chris Carr, and West Virginia Attorney General Patrick Morrisey.

The officials listed examples of recent efforts from state legislatures or ballot initiatives to provide tax cuts or credits to their residents that could arguably fall under banned activities under the newly enacted federal law.

They asked Ms. Yellen to clarify that the language “at most” precludes the express use of the state and local funds for direct tax cuts.

“In the absence of such an assurance by March 23, we will take appropriate additional action to ensure that our states have the clarity and assurance necessary to provide for our citizens’ welfare,” they wrote.

Treasury did not immediately respond to a request for comment on the letter.

The language was added to the Senate version of the $1.9 trillion package before the Senate passed the measure and sent it back to the House for final approval.

A summary of the Senate changes reads simply: “Prohibits states and territories from using funds to cut taxes.”

The summary also specifies that the funds can be used “to replace revenue lost during the COVID-19 crisis, for local economic relief and recovery purposes, including assistance to households, essential workers, small businesses and nonprofits, assistance to hard-hit industries like tourism, travel, and hospitality, and infrastructure investment.”

White House press secretary Jen Psaki said Monday that the state and local funds are intended to keep people like police and firefighters on the job.

“The original purpose of the state and local funding was to keep cops, firefighters, other essential employees at work and employed, and it wasn’t intended to cut taxes,” Ms. Psaki said.

Sen. Mike Crapo of Idaho, the top Republican on the Senate Finance Committee, introduced legislation Monday to strike the language and sent his own questions to Ms. Yellen on Tuesday about how Treasury intends to interpret it.

Sen. Mike Braun, Indiana Republican, announced similar legislation last week.

West Virginia Gov. Jim Justice, a Republican who has been generally supportive of the broader package, was incensed at the new language, saying states have the right to draw down relief money to pay for COVID-related expenditures.

“If we have just happened to run our states better than other states — that are run by Democrats and out of control — if, in fact, we have done that, should we not have the options to do with those monies whatever we want to do with those monies that will only help West Virginians and help us become better?” Mr. Justice said.