Republican attorneys general often tilt at partisan windmills hoping to disrupt what they call the socialist agenda of Democrats. A lawsuit to overturn the presidential election results, unsuccessful because it recycled unfounded claims of election fraud in four states, leaps to mind.
But this time they have something: unclear wording in the state and local government portion of President Joe Biden’s $1.9 trillion stimulus package may keep Louisiana legislators from pursuing what its leadership says is their No. 1 priority.
Lawmakers want to simplify the state’s wildly complex tax system and have been spending weeks working out the details for when the session convenes April 12. This means lower tax rates as Louisiana legislators remove special interest loopholes. That would raise what some have to pay.
What Attorney General Jeff Landry and his GOP counterparts in 21 states uncovered was questionable wording in the 800-plus page American Rescue Plan, which was drafted, debated, passed without any Republican votes, and signed into law in less than two months’ time.
The wording says that the funds are supposed to help state and local governments recover from the economic ravages brought on by COVID-19. The stimulus funds can’t be used “to either directly or indirectly offset a reduction in the net tax revenue” and if that happens, the states will have to repay the full amount to the federal government.
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“This has become the mastodon in the room,” said Robert Scott, head of the Public Affairs Council of Louisiana, a Baton Rouge-based think tank. “Did you really mean we couldn’t tweak the tax system as states do all the time? Is that what you’re really saying? And some people are raising a constitutional issue that the whole idea of what you’re doing is wrong” — the federal government can’t tell states how to run their fiscal affairs.
Though many at state capitols around the country were concerned their hands would be tied by accepting the money, Jared Walczak says that outlook is changing. He is vice president of state projects for the Tax Foundation, a Washington, D.C.-based think tank on tax policy, founded in 1937.
“Still, the language is vague and that by itself may make it inoperable,” Walczak said.
Giving federal money to help state and local governments recover from the pandemic was controversial from the get-go. Republicans in Congress argued last year and this that the dollars would be used to bail out incompetent Democratic mayors. But Democratic and Republican local leaders say they need the money or will face years of slashed services and higher taxes that would impede recovery.
The provision was added to keep politicos from making the ever-popular move of cutting taxes, using the stimulus money to cover the government’s lost revenues, then take credit for putting cash into taxpayer pockets, rather than stabilizing government budgets.
The sponsor of that amendment, West Virginia’s U.S. Sen. Joe Manchin, a Democrat, took to the Senate floor last week to say his objective was not to stop states from doing their main jobs of choosing which services are funded with the state general fund revenues available. Walczak said Manchin’s basic message was if tax cuts weren’t paid for with the stimulus money then everything was fine.
Achieving that goal requires technical language to determine when stimulus money is improperly used. They aimed at saying, essentially, when tax breaks passed by state lawmakers lower the amount of money a government takes in below the amount it spends.
“The basic provision says the funds can’t be used to offset a ‘net reduction.’ But a ‘net reduction in revenues’ isn’t defined,” Walczak said.
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Also, the Biden administration recognizes that dictating whether legislatures can tinker with their tax systems, as many read the American Rescue Plan, wouldn’t survive a court challenge, Walczak said.
Basically, the courts have ruled time and again that the federal government can tell state and local entities how they can use federal dollars they are given. But the guidance has to be unambiguous and the penalties modest.
For instance, in the 1980s the federal government attached a requirement that states adopt harsher drinking-while-driving laws to highway grants. The penalty for refusing was losing 5% of the funds. The courts were OK with that. But the Affordable Care Act of 2010 initially included a provision that states refusing to expand Medicaid to cover more of their residents would lose Medicaid altogether. The courts, even liberal judges, found that was too harsh a penalty and reversed the provision.
“The question for clarity is universally recognized as a fair question. And the Treasury Department recognizes that and hopefully will issue the appropriate guidance soon,” Scott said.