Federal judge sides with GOP states challenging limits on tax cuts in pandemic relief law

The ruling found that the prohibition on state tax cuts was too vague and ‘a federal invasion of state sovereignty’

By: - November 17, 2021 10:52 am

WASHINGTON —  A federal judge in Alabama has ruled in favor of attorneys general in 13 Republican-led states — including Iowa, Florida, New Hampshire, Kansas and Montana — that sued the federal government over a section of a coronavirus relief bill that barred states from using relief money to offset tax cuts.

The ruling, which granted a permanent injunction, found that the prohibition on state tax cuts was too vague and “a federal invasion of state sovereignty.”

“The inherent ambiguity in the text of the mandate may disincentive the plaintiff states from considering any tax reductions for fear of forfeiting ARPA funds,” wrote Chief Judge L. Scott Coogler, of the U.S. District Court for the Northern District of Alabama. Coogler was appointed by President George W. Bush.

The ruling follows another in September that was decided in favor of Kentucky and Tennessee, which filed a similar suit.

Republican state officials involved in the suit heralded the victory on Tuesday.

Kansas Attorney General Derek Schmidt said in a statement that the ruling means tax cuts enacted earlier this year will remain in effect, and clears the way for other tax changes.

“The Biden administration was trying to punish fiscally responsible states like Iowa, which has a record budget surplus, and that’s why we took legal action,” Iowa Gov. Kim Reynolds said. “With this ruling, Biden’s administration can’t keep us from cutting taxes, and I look forward to doing just that.”

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A U.S. Treasury spokeswoman referred questions to the Department of Justice, and officials there did not immediately provide a comment Tuesday afternoon.

The COVID-19 relief package approved in March sent states and local governments the $350 billion in direct federal assistance, but those funds came with a significant prohibition. 

States were instructed they could not use the funds “to either directly or indirectly offset a reduction in the net tax revenue” or delay the imposition of any tax or tax increase.

That provision doesn’t entirely prevent state officials from cutting taxes. Some scenarios, such as slashing one tax but offsetting it with a tax increase, wouldn’t be a problem.

Still, it sparked a swift backlash from Republicans in Washington and state capitals, who criticized it as an unprecedented string attached to the federal dollars. The conservative Heritage Foundation urged states to reject the federal assistance.

Guidance issued in May by the U.S. Treasury offered some additional details on ways that states and local governments can use the money, including outlining a framework for how states will be able to show that any tax cuts were paid for using money separate from the federal stimulus dollars.

That could include raising other sources of revenue, cutting spending, or through higher revenue due to economic growth, according to the Biden administration.

Senior administration officials had defended the prohibition against direct or indirect tax cuts as in line with other federal aid to states, and said that it would help ensure the funding is used for its intended purposes.

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Laura Olson
Laura Olson

Laura Olson covers the nation's capital as a senior reporter for States Newsroom, a network of nonprofit outlets that includes Pennsylvania Capital-Star. Her areas of coverage include politics and policy, lobbying, elections, and campaign finance.