MORGANTOWN – State Attorney General Patrick Morrisey and two other state attorneys general are leading a 21-state push to seek 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.”
Morrisey and the attorneys general of Arizona co-authored a seven-page letter, also signed by their colleagues from 18 other states, sent Tuesday to U.S. Treasury Secretary Janet Yellen spelling out the problems with the prohibition and seeking clarification on the bill’s intent.
Morrisey explained the letter and the states’ concerns during a Wednesday virtual press conference.
“None of us have seen anything like this over the last few decades,” he said. “It may be one of the greatest invasions of state sovereignty.”
They don’t take issue with the word “directly,” Morrisey said, but the word “indirectly.” That’s because any tax cuts viewed by the feds as indirectly tied to COVID relief are subject to federal clawback.
The letter says, “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.”
The letter cites 17 examples of tax cuts the signatory states are contemplating. Georgia is looking at a tax credit for adopting a child out of foster care. West Virginia is considering increasing the annual Neighborhood Investment Tax Credit from $3 million to $5 million. Indiana is eyeing a credit or donations to public school foundations.
None of them are tied to COVID relief, the letter says, but each lead to a revenue reduction that the feds would view as being offset by American Rescue Plan money and be subject to clawback.
Not only is it ambiguous, the states say, it is “beyond Congress’s spending power to forbid States from providing tax relief of any kind, for any reason, merely to ensure that federal funds are spent for their intended purpose.”
The issue is even more confusing in West Virginia, where Gov. Jim Justice has proposed, as part of his income tax reduction plan, placing any surplus created by federal forgiveness of any relief money spent on unemployment benefits into a new Rainy Day Fund to offset any losses created by his plan.
This could be viewed as direct or indirect offsetting and be subject to the prohibition. Justice’s plan has been a source of friction between him and Sen. Joe Manchin, D-W.Va., who opposes the idea and, it’s been reported, played a role in shaping the prohibition.
The letter was sent Tuesday and gives Yellen until next Tuesday, March 23, to reply. If she doesn’t, the letter says the states will take “appropriate additional action” to ensure clarity and certainty of state sovereignty over tax policy.
Morrisey said Wednesday that the additional action would be legal action. All 21 signatories believe this provision would fall in court. They’re already working on a complaint and the various mechanics of filing the suit. “We will stand up, we will fight and we have a pretty good chance of winning,” Morrisey said.
State Senate President Craig Blair, Senate Finance chair Eric Tarr and House Finance chair Eric Householder all joined Morrisey at the press conference to support the effort.
“Being able to hold us hostage is a detriment in itself,” Blair said.
Householder said of the prohibition, “It hampers our ability to provide tax reform, tax relief to our citizens.”
Tarr said that the state Constitution requires passage of a balanced budget. “This is a destruction of federalism, the worst I’ve ever seen it,” he said. (Federalism is a division and of power between the federal and state governments.)
The legislators said they are working with Justice and his revenue team on this issue and he supports this effort. They named Manchin and called on him to get clarity on this problem.
Meanwhile, Blair said, “We’re going to keep moving as if we’ve already won.”
Morrisey summed up their thoughts with a quote from the letter: “Congress may not micromanage a state’s fiscal policies in violation of anticommandeering principles nor coerce a state into forfeiting one of its core constitutional functions in exchange for a large check from the federal government. Such “economic dragooning” of the States cannot withstand constitutional scrutiny.”
“Dragooning” is a word not often used and means coercion.
Tweet David Beard@dbeardtdp Email dbeard@dominionpost.com
