Red states said they'd just use COVID relief to cut taxes — and it backfired big-time

A last minute amendment to the American Rescue Plan may stop red states from taking billions of dollars intended for COVID-19 relief and using it to offset new tax cuts.

A major provision of President Joe Biden’s $1.9 trillion legislation, passed without a single Republican vote and signed into law on Thursday, sends $350 billion to cash-strapped state, local, tribal, and territorial governments. This money is intended to “ensure that they are in a position to keep front line public workers on the job and paid, while also effectively distributing the vaccine, scaling testing, reopening schools, and maintaining other vital services.”

Rather than planning to use the money for its intended purpose, some Republican state legislators apparently saw the funds as an opportunity to instead cut taxes.

On Feb. 23, the Atlanta Journal-Constitution reported that Georgia House Ways and Means Committee Chair Shaw Blackmon planned to cut total taxes by $120 million a year for the benefit of taxpayers who take the standard deduction. He told the paper he and the GOP House majority might cut taxes much more if the American Rescue Plan became law. “It’s the fairest way to help the most people keep more of their money,” he said. “If we are able to afford it, we ought to let people keep some more of their money.”

The Kansas City Star reported on March 1 that the GOP-controlled Kansas Legislature was planning to use the relief funds to pass $500 million in tax cuts, mostly to benefit large companies and rich and retired individuals. Senate Majority Leader Gene Sullentrop told the paper that the size of the tax cut would depend on how much federal aid Kansas received, saying, “We don’t know the revenue stream that’s going to ultimately come from the feds to provide relief in all areas of the budget.”

Republican-controlled legislatures in Arkansas, Idaho, Mississippi, and West Virginia were also reportedly mulling new tax cuts.

But thanks to a last-minute amendment to the final version of the $1.9 trillion package proposed by Senate Majority Leader Chuck Schumer, the Biden administration now has the power to stop states from diverting the relief funds to tax cuts.

The restriction in the law says, “A State or territory shall not use the funds provided under this section or transferred pursuant to section 603(c)(4) to either directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.”

If it does so, the law explicitly authorizes the secretary of the treasury to take the federal aid money back.

The conservative Wall Street Journal editorial board, which opposed the $350 billion state aid as an “unnecessary state COVID bailout,” angrily denounced the restriction on Tuesday as an “egregious affront to constitutional federalism.”

“Democrats in Congress aren’t satisfied with spending $1.9 trillion to help blue states and union friends. They’ve also launched a sneak attack against conservative states,” the board wrote. “Read their legislation’s lips: No new state tax cuts.”

On Thursday, Sen. Mike Braun (R-IN) introduced a bill that would undo the rule.

In a press release, he claimed that his “Let States Cut Taxes Act” would “make sure Democrats don’t get away with this scheme to stop states from further opening their economies and allowing Americans to keep more of what they earn through tax cuts.”

Braun voted against the relief bill, calling it a “smokescreen … for bailing out bad governing in California and New York.”

Published with permission of The American Independent Foundation.