A group of Republican lawmakers and attorneys general are suing the Biden administration for restricting states’ use of federal COVID relief funds. Several Republican states that are in good fiscal health were considering tax relief for their residents, and a provision in the relief bill prevents them from doing so.
The American Relief Plan signed by President Joe Biden last month includes $195 billion for state governments to use to shore up their finances. Although the taxpayer money was allocated to states for use at their discretion, it was not without conditions. The law includes a provision prohibiting use of the money directly or indirectly to cut taxes.
The Republicans argue this restriction punishes those states whose governments use prudent fiscal policies and rewards those that do not. The poorly run, overspending states will get bailed out of their mismanagement, while those states that would choose to send the taxpayer money back to the taxpayers are prevented from doing so, the lawmakers and attorneys general argue.
West Virginia Attorney General Patrick Morrissey is one of those that have filed suit in an Alabama federal court to block the provision.
“West Virginia is a sovereign state with the power to independently reduce its citizens’ tax burden and decide how taxpayer funds are spent,” Morrisey said.
U.S. Treasury Secretary Janet Yellen is expected to provide guidance on the matter. Yellen has already indicated it may not be possible to identify some indirect tax relief.
“The Treasury last week clarified that states that take steps to conform with federal tax-law changes—including recently enacted tax relief for unemployed workers—won’t be considered to have violated the prohibition on tax reduction. Ms. Yellen has said the Treasury is working quickly to provide additional guidance,” The Wall Street Journal reports.
Tax policy experts, state governments, and congressional Republicans are looking to the courts for more concrete confirmation of their belief that this restriction is unconstitutional and need not be obeyed.
Several states fared quite well during the lockdowns because they did not restrict their businesses as much or as long as other states did. These states are not suffering a tax revenue loss and in some cases are enjoying gains. Some of those states were already planning on cutting taxes. Now those plans are on hold.
On the other side of the coin, several states were running short of tax money before the pandemic, and the federal funds will bail out those big-spending states by closing a gap not caused by the COVID lockdowns, Forbes reports.
The COVID funds will help those profligate states overcome overextended finances that have no connection to the pandemic. Unfunded pension liabilities, for example, are the main drag on the finances of Illinois and New Jersey. Those problems existed long before COVID reached the nation’s shores.
Thirteen states are in significant debt at present, with New York at the top of the list. California has the most absolute debt, but the state’s assets put it in a better position than several others.
The other indebted states are Connecticut, Delaware, Hawaii, Illinois, Kentucky, Massachusetts, Maryland, New Jersey, Pennsylvania, Rhode Island, and Vermont.
Most of the states with a high amount of debt are in the East, and the states with the least amount of debt are primarily in the West; Alaska, Idaho, Montana, Nebraska, North and South Dakota, Oklahoma, Wyoming, and an outlier from the East, Tennessee, Forbes reports.
Economist Stephen Moore originated the suggestion the well-managed states should send the money allocated through the COVID bill back to their taxpayers.
“Rather than squander the money with more bureaucratic spending and the risk of inflating a financial bubble in their state budgets in the years ahead, devote every penny of these funds to finance tax reform and relief,” Moore writes. “It would be rough justice for the blue-state bailout. If Democrats take the red states’ money, Republican governors should make their states income-tax-free havens and steal the blue states’ families and businesses.”
Moore also noted the disparity between the amount the blue states were allocated and the amount the red states were provided. The calculation was based on unemployment statistics instead of population. Twenty-one Republican governors and one Democrat are protesting the biased formula for allocating some $400 billion to the states, Heartland Daily News reports.