Another 13 states filed a lawsuit Wednesday against the Biden administration for prohibiting states that accept federal stimulus funding from reducing taxes “directly or indirectly” for three years.
Under the $1.9 trillion American Rescue Plan, states may hike taxes, but those that decrease their tax rates and then use federal stimulus funding to fill the gap would forfeit the amount used to offset the net tax reduction.
Alabama Attorney General Steve Marshall said in a statement that the tax-cut ban “punishes states for making any changes to laws that would reduce taxes.”
“This federal tax mandate is an unprecedented and unconstitutional assault on state sovereignty by the federal government, which would commandeer the State of Alabama’s sovereign power to tax and spend and determine her own fiscal policies,” Mr. Marshall said. “Today, I and 12 other state attorneys general filed suit against the Biden administration to block the enforcement of this grievous federal encroachment on states’ rights.”
In addition to Alabama, the 13 states behind the lawsuit filed in U.S. District Court for the Northern District of Alabama were West Virginia, Arkansas, Alaska, Florida, Iowa, Kansas, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota and Utah.
Another three states — Arizona, Ohio and Missouri — have already filed similar challenges against the provision, which prohibits states from using relief funds to “directly or indirectly offset a reduction in … net tax revenues.”
Republicans argue that the provision is ambiguous, and that Treasury Secretary Janet Yellen’s attempts to explain the law have failed to clear up the confusion.
She sought to address the state concerns last week by insisting that the stimulus bill allows states to lower taxes as long as the federal funding is not used to “offset a reduction in net tax revenue resulting from certain changes in state law.”
“If States lower certain taxes but do not use the 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,” said Ms. Yellen in a March 23 letter to 20 GOP attorneys general.
At the same time, she acknowledged in a Senate Banking Committee hearing last week that money is fungible, and that administration officials would “do our best to offer guidance on it.”
Arizona Attorney General Mark Brnovich asked the court in his March 25 lawsuit to declare the tax mandate unconstitutional.
“Arizona is seeking a declaration that the Tax Mandate is unconstitutional: either because (1) it is too ambiguous to place valid conditions upon the States or (2) actually means what its sponsors intended, in which case it is a patently unconstitutional violation of the sovereignty of the States,” said Mr. Brnovich.
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