Biden’s Rescue Plan Includes Attack on State Sovereignty

by | Mar 24, 2021

Biden’s Rescue Plan Includes Attack on State Sovereignty

by | Mar 24, 2021

Map Maps American Book 32307

Tucked into the $1.9 trillion American Rescue Plan Act (ARPA) is a provision that could mark another major federal government intrusion into state sovereignty.

The provision, using vague language, says that states cannot leverage the federal funds to “offset” tax cuts thru 2024, potentially barring states from cutting taxes for three years. In response, attorneys general from 21 states issued a letter to Treasury Secretary Janet Yellen asking for clarification.

As reported in this March 16 AP News article, “In a letter to Treasury Secretary Janet Yellen on Monday, they called the prohibition is “unclear,” airing concerns that any tax cut could be construed as taking advantage of the pandemic relief funds.

“The attorneys general list over a dozen instances of states currently considering new tax credits or cuts that they believe could be jeopardized simply because of the relief funds,” the article continues.

The Rescue Plan includes nearly $200 billion designated for state governments, many of which are running budget surpluses and had tax cutting plans prior to Biden signing the act on March 11.

In the letter, the attorneys general object to the wording in the Act forbidding states from using the relief funds to “directly or indirectly offset a reduction in…net tax revenue.”

“This language could be read to deny States the ability to cut taxes in any manner whatsoever—even if they would have provided such tax relief with or without the prospect of COVID-19 relief funds,” the letter continues.

Calling the provision “potentially breathtaking,” the letter further declares that “such federal usurpation of state tax policy would represent the greatest attempted invasion of state sovereignty by Congress in the history of our Republic.”

“If a state like Idaho wants to provide tax relief in the interest of economic recovery, and to help people return to earning their livelihoods, the American Rescue Plan says it will be financially punished by the federal government,” Sen. Mike Crapo of Idaho said in a statement.

Calling it an effort to “take state tax policy hostage,” the letter further declares “If this expansive view of this provision were adopted, it would represent an unprecedented and unconstitutional infringement on the separate sovereignty of the States.”

If states do cut their taxes between now and 2024, according to ARPA, it would be compelled to pay the federal government back in the amount of the tax reduction.

The state of Ohio has already filed suit challenging the provision.

In response, the Treasury Department issued a statement attempting to provide clarity and assuage the concerns of the attorneys general. “In other words, states are free to make policy decisions to cut taxes – they just cannot use the pandemic relief funds to pay for those tax cuts,” the Treasury Department said.

But because money is fungible, any state tax cut could be interpreted as “indirectly” being offset by the federal funds. How do states prove that their tax cuts were offset by organic economic and revenue growth, and would have occurred absent the relief funds?

With continued uncertainty, many states may shy away from tax cuts that would benefit their citizens and economies for fear of having those cuts tied up with expensive legal challenges from the federal government.

This dampening effect sends the wrong message, according to Ohio attorney general Dave Yost, who said “the federal government should be encouraging states to innovate and grow business, not holding vital relief funding hostage to its preferred pro-tax policies.”

This latest move is nothing new, however, as the federal government is notorious for attaching strings to state aid. Transportation funding provides perhaps the most widely known examples, including the 1970s mandate that states adopt a 55 mile an hour speed limit or risk losing a share of their federal transportation funding.

Each condition placed on states receiving federal funds represents a further erosion of their sovereignty, and a further centralization of power into the hands of the federal government. This “carrot” approach has been an effective means by which the federal government imposes more of its will over state governments.

And states have been becoming more and more reliant on federal aid. According to Pew Trusts, by 2017 roughly one-third of total state government revenue came in the form of federal funding. That figure is up from 23 percent in 1987. No doubt the massive “relief” bills over the past year have increased that number.

Centralized power is the greatest threat to liberty. State sovereignty is supposed to represent a check on the federal government’s centralized power, however that system is collapsing under the temptation of the deep pockets and printing press at the federal government’s disposal.

State government’s should know by now that federal funds rarely come without strings attached, and every one of those strings marks a further erosion of state sovereignty. Biden’s “rescue plan” is no exception.

Bradley Thomas is creator of the website Erasethestate.com and author of the book “Tweeting Liberty: Libertarian Tweets to Smash Statists and Socialists.” He is a libertarian activist who enjoys researching and writing on the freedom philosophy and Austrian economics. Follow him on Twitter @erasestate.

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