Attorneys general from 13 mostly Republican states, including Utah, sued President Joe Biden’s administration on Wednesday over a rule in the federal stimulus that prohibits states from using coronavirus relief money to offset tax cuts.
The lawsuit filed in U.S. District Court in Alabama seeks to strike down the provision in the massive relief package signed by Biden that bars states from using $195 billion of federal aid “to either directly or indirectly offset a reduction” in net tax revenue. The restriction could apply through 2024.
The coalition, which includes one Democratic attorney general, is concerned the provision can construe any tax cut as taking advantage of the pandemic relief funds, according to the Associated Press.
Utah Attorney Sean Reyes was among a group of 21 GOP attorneys general who earlier sent a letter to Treasury Secretary Janet Yellen threatening to take legal action against the Biden administration if it didn’t clarify the provision.
“The Utah Legislature recently passed $100 million in tax relief to families with children, veterans and older residents receiving Social Security,” Reyes said in a statement in mid-March. “But that relief is now at risk because the American Rescue Plan Act potentially denies states the ability to cut taxes.”
The Treasury Department at the time said the provision isn’t meant as a blanket prohibition on tax cuts, the AP reported. States can still offset tax reductions through other means.
“Nothing in the Act prevents states from enacting a broad variety of tax cuts,” Yellen wrote in response to the letter. “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.”
But West Virginia Attorney General Patrick Morrisey, who co-led the lawsuit with his colleagues from Alabama and Arkansas, argues the interpretation of the word “indirectly” in the provision could come back to haunt states that cut taxes.
“This ensures our citizens aren’t stuck with an unforeseen bill from the feds years from now,” he said in a statement.
Alabama Republican Attorney General Steve Marshall said the “federal tax mandate is an unprecedented and unconstitutional assault on state sovereignty.”
Alaska, Florida, Iowa, Kansas, Montana, New Hampshire, Oklahoma, South Carolina and South Dakota also signed onto the lawsuit. Ohio Attorney General Dave Yost, a Republican, earlier this month separately asked a federal judge to block the tax cut provision.
Several state legislatures are weighing tax reform this year, which is partly driving the lawsuit.
West Virginia lawmakers are hurrying to approve a cut to the state income tax before their 60-day session ends on April 10. Montana’s GOP-controlled statehouse is considering several tax cut bills. Its Republican Attorney General Austin Knudsen said “it’s a slap in the face to Montana” to limit how the stimulus funds can be used, according to the AP.
Yellen, whose department declined new comment, had said in her letter that “it is well established that Congress may place such reasonable conditions on how states may use federal funding.”
The nonprofit Tax Foundation said in a new report this week that it’s more likely the Treasury Department would opt for a “narrow interpretation that does not unduly tie states’ hands” in enforcing the provision, the AP reported.
“Most states are likely at minimal risk regardless of the tax policy choices they make,” it said. “For now, however, uncertainty persists, and lawmakers must operate within that uncertainty.”
John Valentine, chairman of the Utah State Tax Commission and president of the Federation of Tax Administrators, earlier told the Deseret News he’s concerned about numerous “ambiguities” in the COVID-19 relief act. In particular, he said the act doesn’t define a time period, throwing into question at what point a state could enact a tax cut without having to return that amount in federal aid.
“So instead of $100 million, which is one year’s worth of (Utah’s tax) reduction, is it now $300 or $400 million?” Valentine said, questioning if the life of the bill is one year, two years, or maybe even three or four years. “We don’t know. This is what we call ambiguities in the law. We just don’t know.”
Valentine noted that Utah’s tax-cut package this year was two years in the making, with $80 million set aside last year. Lawmakers this year added $20 million, all from the state’s own ongoing revenue.
The lawsuit is the second against the Biden administration in which Reyes has involved Utah.
Utah joined a dozen other states last week in a lawsuit against challenging an executive order Biden issued to ban any new oil and gas leasing on federal land and offshore waters.
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