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Attorney general files suit challenging federal rescue plan’s state tax provision

States can’t make up for tax cuts with federal relief funds. Marshall says that’s a de facto ban on tax cuts.

Alabama Attorney General Steve Marshall speaks during a press conference on COVID-19 with Gov. Kay Ivey in April 2020. (VIA GOVERNOR'S OFFICE)

Alabama Attorney General Steve Marshall led a 13-state lawsuit filed Wednesday, alleging that a limitation on how federal relief funds can be used amounts to a ban on state tax cuts.

The suit charges that it is unconstitutional for the U.S. Department of the Treasury to prevent states from using federal relief money from the American Rescue Plan Act to offset state tax cuts.

In a March 16 letter to Treasury Secretary Janet Yellen, Marshall and 20 other state attorneys general expressed concerns that the tax mandate would “strip States of their core sovereign authority to enact and implement basic tax policy.” They asked her how her department was interpreting it. 

Yellen replied with a letter stating that the provision does not prevent states from enacting various tax cuts.

“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. If States lower 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,” she wrote.

Congress places such limitations to ensure that the money is used for its intended purpose, which varies depending on a state’s unique needs.

If a state uses federal relief funds meant to help them manage the pandemic’s public health and economic damage to instead make up for money it loses due to tax cuts it chooses to enact, those funds can be recouped by the Treasury Department. Yellen added that in such a case, other relief funds received by the state are not affected.

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Marshall called her response “ambiguous” and said it directly contradicted the expectation of Sen. Joe Manchin, the provision’s main proponent, that it would forbid states from making any tax cuts through 2024.

“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,” Marshall said in a statement.

Alabama co-leads the lawsuit with West Virginia and Arkansas. The other states that joined are Alaska, Florida, Iowa, Kansas, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota and Utah.

It was filed in U.S. District Court for the Northern District of Alabama.

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