Many states have been challenging the American Rescue Plan Act of 2021 (ARPA) due to its provisions violating basic principles of the Constitution. ARPA was signed into law by President Biden on March 11, 2021. The legislation was designed to help Americans be able to respond to and recover from the impacts of the pandemic.
Specifically, states are not pleased with the “tax cut ban” that was introduced with ARPA. The ban requires any state receiving federal rescue funds to give up their ability to lower taxes. Due to the ambiguous nature of the tax ban’s conditions, states feel the ban is unconstitutional as Congress cannot tell states how to handle their own tax policy and cannot tell them to decrease their taxes.
The Treasury’s guidelines for the tax cut ban restricts states that receive aid from using these funds to offset a reduction in the net tax revenue. The stimulus package provided by ARPA offered $200 billion to states to help assist with recovery from the damages from COVID-19. These funds represented between 20-30% of most states’ overall budget. Due to the need for assistance because of the pandemic as well as the financial incentives offered by the ARPA, it made it impractical for states to refuse funds that were raised from their own taxpayers.
The Sixth Circuit Court of Appeals agreed with many states filing cases against federal government which enacted the tax cut ban. The New Civil Liberties Alliance argued “State taxation must remain firmly and exclusively in the hands of locally elected legislatures. It is both unconstitutional and dangerous to centralize control over state taxes in the hands of federal officials.”
The court found that the tax cut ban is “impermissibly vague.” However, it was found some states didn’t have standing to challenge the ban. The cases continue as states that were found to not have standing are appealing, and the ones where the federal government lost are also being appealed by the Treasury. It will be interesting to see how this plays out which could affect how much tax states will be required to charge.
