Address the Ban on State Tax Cuts

Dear Members of Congress:

We, the undersigned legislators, representing millions of Americans across the United States, write to express our profound concerns with provisions in the American Rescue Plan Act of 2021. Elements of this recently adopted legislation fundamentally threaten our role and responsibility to promote fiscal responsibility in the states we represent, particularly an apparent ban on states exercising the freedom to reduce tax burdens on our own constituents.

The American Rescue Plan Act (ARPA) includes $350 billion in State and Local Fiscal Recovery Funds. This is despite early reports that show total state and local revenue actually increased in calendar year 2020, and many states currently have significant surpluses. These funds are in addition to the hundreds of billions in federal assistance to state and local governments received through the CARES Act and other measures in 2020. The pandemic cannot become an excuse to bail out state governments that have recklessly mismanaged their budgets.

With the latest bailout of state and local governments signed into law by President Biden, there is perhaps an even more troubling element than any of us could have anticipated. States appear to be prohibited from using these new federal funds to directly or indirectly reduce net state tax revenue through 2024.

With the fungible nature of budgeting – and this incredibly ambiguous language — any tax relief at the state level could potentially be called into question by aggressive federal action. The Department of Treasury has yet to clarify how state legislators should translate a prohibition on “indirect” reductions of tax revenue. And this ban on state level tax cuts will undoubtedly harm our taxpayers and the future economic competitiveness of our states, as evidenced by the annual ALEC Rich States, Poor States publication.

Thankfully, 21 attorneys general are pursuing legal action, and Ohio Attorney General Dave Yost has already filed a lawsuit in federal court. U.S. Senator Mike Braun of Indiana and Congressman Dan Bishop of North Carolina are working on ideas to allow us to have more flexibility in the way we use federal funds, if our states choose to take the money.

Absent reforms to ARPA our state governments will be pressured into using federal funds to grow government and baseline spending totals. We watched this play out more than a decade ago with the Obama-era “American Recovery and Reinvestment Act of 2009” (ARRA) and those infamous “shovel ready” projects. Growing state government bureaucracy with federal funds always leads to massive budget challenges as federal dollars disappear, but the federal requirements live on for years to come.

Restricting us from providing pro-growth net tax relief tips the scales of federalism inexorably toward central planning and micromanagement by the federal government, which we cannot allow to happen. Each of us stands ready to assist those working to find solutions for the numerous areas of harmful policy implemented by the American Rescue Plan Act.

Respectfully,