“These types of reasonable financing conditions are used all the time – and they are constitutional.”
His comments come as Republicans explode with the provisions, with the state of Ohio filing a lawsuit to expel them. Almost two dozen Republican attorney generals wrote to Treasury Secretary Janet Yellen, denouncing the provisions as “the biggest attempt by Congress to invade state sovereignty in the history of our Republic”.
Democrats added restrictions amid fears that, even while providing states with coronavirus aid, tax revenues in many states were recovering from pandemic casualties – which could lead some to use the money to cut taxes.
The law prohibits state employees from using assistance to “directly or indirectly offset a reduction in new tax revenue” due to “a change in law, regulation or administrative interpretation” that “reduces any tax (by providing for a reduction in a fee, a rebate, a deduction, a credit or other) or delays the implementation of any tax or tax increase. ”
If they do, they will have to pay the Treasury the cost of the cut.
Said LaManna: “States are free to make political decisions to cut taxes – they simply cannot use pandemic relief funds to pay for these tax cuts.”
“If a state cuts taxes without restoring that revenue in any other way, then the state must return to federal government pandemic relief funds up to the amount of lost revenue,” she said.
It is not uncommon for the federal government to impose restrictions on assistance – road financing, for example, has long been accompanied by conditions.
But Republicans say it goes far beyond that, with some contending Democrats potentially banning any tax cuts.
“The money is fungible, so any revenue lost from a tax credit, deduction, rebate, delay or reduction that Ohio lawmakers or executives can implement would be compensated ‘indirectly’ by the $ 5.5 billion that the state expects to receive” , Ohio said in its lawsuit, filed in a district court there.
“Any state that cuts taxes and suffers loss of tax revenue is subject to having billions of dollars in federal funds recovered by the Department of the Treasury,” the suit said.
In addition to the legal dilemmas, the restrictions come with many implementation issues.
It is unclear, for example, whether the rules apply to reductions in general state tax revenues or falls in individual provisions, such as income or sales taxes. It is also uncertain how revenue drops would be measured or what is meant by states that compensate tax cuts “indirectly”.
Senator Mike Crapo, the top Republican on the Tax Drafting Finance Committee, wants to know if the provision would prohibit states from cutting their own unemployment benefit taxes, as Congress did for federal taxes as part of the relief package, or whether they would be penalized for postponing the tax filing deadline in response to the IRS delay in the federal timeframe, as the agency is expected to do.
“Will the Treasury retain or recover funds from a government if that government decides that it is in its citizens’ interest to delay tax revenue due to a delay in filing federal tax dates?” he asked in a letter to Yellen.
Many are now waiting for the Treasury to provide details of how the restrictions will work. Aid is expected to start flowing later this month, meaning the department will be under pressure to work quickly.