Protecting States’ Ability to Cut Taxes

The “American Rescue Plan Act” gives states billions of federal dollars to help them recover from the COVID-19 pandemic’s economic effects. But there’s a catch: The Act effectively prohibits states that take the money from cutting taxes through 2024.

The Act says that a state can’t use its federal grant to “directly or indirectly offset” a loss in tax revenue resulting from a tax cut. If a state does, the federal government can take the grant back, up to the amount of lost revenue.

Defenders of this “Tax Mandate” say this is just to make sure that states use their grants for COVID relief. But that doesn’t make sense because the Act requires states to prove that they spent the amount of their grants on purposes the Act allows.

And the Act doesn’t prevent states from using federal money to “indirectly” subsidize <em>spending</em> on other things. As long as states properly account for their uses of federal money, they can otherwise spend their own money on whatever they want, no matter how wasteful, frivolous, or unrelated to COVID-19 relief.

So the Tax Mandate isn’t about making sure states use their grant money for approved purposes. It’s only stopping state tax cuts–and protecting high-tax states from increasing competition from lower-tax states.

Ohio is one of many states that has filed a federal lawsuit challenging the Tax Mandate. The Goldwater Institute has filed an amicus brief supporting that challenge, arguing that the Tax Mandate is unconstitutional because stopping states from cutting taxes has nothing to do with pandemic relief.