Republican Leaders Request Clarification from Treasury on American Rescue Plan Restrictions on State Tax Cuts

Ambiguous provisions included in the ARP could restrict states receiving State and Local Fiscal Recovery funds from implementing new tax cuts. The federal government should not dictate state and local fiscal decisions, including stimulus checks to families, state-level earned income or child tax credits, state unemployment insurance trust funds, or sales tax holidays.

“We have heard from many stakeholders concerned about the apparent breadth of this provision, which was included in the ARP without the benefit of committee hearings, a legislative markup, or any input from affected stakeholders.” said the Republican leaders.

Yesterday, The Washington Post reported that Republican attorneys general from 21 states also called on the Biden administration in a letter to Treasury Secretary Janet Yellen expressing similar concern that the relief “would represent the greatest invasion of state sovereignty by Congress in the history of our Republic.”

A copy of the letter can be found here.

March 17, 2021

The Honorable Janet Yellen
Secretary of the Treasury
U.S. Department of the Treasury

Dear Secretary Yellen:

We are writing with serious concerns about Public Law No. 117-2 (the “American Rescue Plan Act of 2021” or ARP), and specifically the Coronavirus State Fiscal Relief and Coronavirus Local Fiscal Relief Funds.  We are especially concerned about a provision inserted into the Coronavirus State Fiscal Relief Fund before it was signed by President Biden.  Specifically, the provision appears to impose coercive restrictions on states, prohibiting them from “directly or indirectly” taking actions that would “reduce net revenue” if the states receive even a dime of federal State Fiscal Recovery Funds.  Furthermore, this prohibition may apply for a period that extends through December 31, 2024.  We have heard from many stakeholders concerned about the apparent breadth of this provision, which was included in ARP without the benefit of committee hearings, a legislative markup, or any input from affected stakeholders.

We are also generally concerned about the ambiguity in the Coronavirus State Fiscal Relief and Coronavirus Local Fiscal Relief Funds.  

For these reasons, we believe clarification from the Treasury Department is urgently needed on the following questions:

1. If a state provided its own economic impact payments to families in need through an advance refundable state tax income tax credit, would this violate the restriction in ARP?
2. If a state followed federal tax law and exempted from gross income the first $10,200 of unemployment insurance, would it violate the restriction in ARP?
3. If a state used funds to replenish its state unemployment insurance trust fund in order to prevent automatic tax increases on Main Street businesses, would it violate the restriction in ARP?
4. If a state created a new state-level earned income or child tax credit, would it violate the restriction in ARP?
5. If a state decided to align with the federal tax treatment of PPP loan forgiveness by excluding that amount from gross income, would it violate the restriction in ARP?
6. If a state provided a state-level deduction for contributions to charitable organizations, would this violate the restriction in ARP?
7. If a state or local government that received ARP funding opted to provide property tax abatements to low-income residents, would this violate the restriction in ARP?
8. If a state legislature determined that now is the wrong time to raise gasoline prices consumers face at the pump, would a delay of a scheduled gas tax hike violate the restriction in ARP?
9. If a state or locality provided a sales tax holiday in order to provide cash flow to help local small businesses, would this violate the restriction in ARP?
10. Once a state economy rebounds from COVID-19, would enactment of temporary or permanent tax relief in a future year trigger a financial penalty under ARP as long as any ARP funding remains unspent?
11. Are townships and boroughs treated the same cities and/or counties for the purposes of determining whether a locality is eligible for and the amount of the allocation under the State Fiscal Relief Fund?
12. If a state declines payment from the State Fiscal Relief Fund, what will the Treasury Department do with the unclaimed funds?

We respectfully request that you please respond in writing no later than March 26, 2021. 

Because many state legislatures are now in session and have relatively short periods in which to make important fiscal decisions, we also request that Treasury promptly issue guidance on the Coronavirus State and Local Fiscal Relief Funds.

Thank you for your attention to this request.

Sincerely,

Kevin Brady                                                                        
Republican Leader                                                         
Committee on Ways and Means

James Comer
Republican Leader
Committee on Oversight and Reform 

Steve Scalise
Republican Whip
Ranking Member
Select Subcommittee on the Coronavirus Crisis