Arizona Attorney General Mark Brnovich threatened on Tuesday to sue the Biden administration over a provision in the $1.9 trillion pandemic rescue plan that could bar states from using its funds to offset tax cuts.
“Looks like we will see the Biden administration in court. It forgot that the states created the federal government, not the other way around,” the Republican attorney general said on Twitter.
In his Twitter post, Brnovich shared a letter from Treasury Secretary Janet Yellen addressed to him and Republican attorneys general from 20 other states. That letter was a response to the states after they questioned the provision from the American Rescue Plan Act of 2021 that could prohibit states from using federal funds to pay for tax cuts.
The stipulation of President Joe Biden’s sweeping relief package highlighted by the 21 attorneys general states, “A state or territory shall not use the funds provided under this section or transferred pursuant to this section to either directly or indirectly offset a reduction in the net tax revenue of such state of 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.”
In a letter (pdf) on March 16, the attorneys general argued that the prohibition is “unclear, but potentially breathtaking”—airing concerns that any tax cut could be construed as taking advantage of the pandemic relief funds.
Signing on to the letter were Arizona, Georgia, West Virginia, Alabama, Arkansas, Florida, Idaho, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Oklahoma, South Carolina, South Dakota, Texas, Utah, and Wyoming.
The group listed over a dozen instances of states currently considering new tax credits or cuts that they believe could be jeopardized simply because of the relief funds.
“We ask that you confirm that the American Rescue Plan Act does not prohibit States from generally providing tax relief,” wrote the coalition, led by Georgia, Arizona, and West Virginia.
In her response, Yellen asserted that nothing in the American Rescue Plan Act prevents U.S. states from enacting a broad variety of tax cuts.
“That is, the Act does not ‘deny States the ability to cut taxes in any manner whatsoever.’ 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,” Yellen wrote. “If States lower certain taxes but do not use funds under the Act to offset those cuts—for example, by replacing the lost revenue through other means—the limitation in the Act is not implicated.”
“It is also important to note that States choosing to use the federal funds to offset a reduction in net tax revenue do not thereby forfeit their entire allocation of funds appropriated under this statute,” she added. “The limitation affects States’ ability to retain only those federal funds used to offset a reduction in net tax revenue resulting from certain changes in state law.”
Yellen noted that the Treasury is working on crafting further guidance to address the issues raised by the coalition.
Ohio on March 17 became the first state to sue Biden’s administration over his pandemic rescue plan, arguing that the provision holds a “gun to the head of states” by blocking them from cutting taxes, and exceeds the authority of Congress.
“[States] can either have the badly needed federal funds or their sovereign authority to set state tax policy,” Republican Ohio Attorney General Dave Yost said in his lawsuit. “But they cannot have both. In our current economic crisis, that is no choice at all. It is a metaphorical ‘gun to the head.’”
The White House didn’t immediately respond to a request for comment by The Epoch Times.
The Associated Press contributed to this report.