Joe Biden’s stimulus funds GOP billionaire tax cuts
President Joe Biden’s pandemic relief bill included language from Democratic lawmakers specifically designed to prevent states from using federal aid to subsidize tax cuts. But after Republicans protested, Biden’s Treasury Department said it would not aggressively enforce the provision – and now some GOP legislatures can use the stimulus funds to fund tax cuts for the rich. .
While some states, like Hawaii, Texas and Nevada, which depend on tourism and energy industries, have hit their incomes in the wake of the pandemic, others have exceeded disastrous spring 2020 revenue forecasts. and now face budget surpluses in part thanks to the COVID-19 relief legislation signed by Biden in March.
But rather than investing in underfunded schools and utilities, some Republican-led states are funneling the money to high-income households instead – and the Biden administration’s refusal to apply anti-language. Tax cuts in federal law give the green light for Republicans to try and do even more.
The Arizona legislature recently passed a $ 1.9 billion income tax cut designed to benefit the rich, with 93% of profits going to the richest 20% and more than half to the bottom 1%. richer. Ohio has passed $ 1.7 billion in tax cuts, more than half of which will go to the richest five percent and more than a third to the richest 1 percent. And Wisconsin has passed more than $ 2 billion in tax cuts, about three-quarters of which will go to individuals earning $ 100,000 or more.
“We have seen that many states are using better than expected income prospects as an excuse to cut personal and corporate income taxes,” said Marco Guzman, state policy analyst at the Institute of Taxation and economic policy. “Unfortunately, the people who will benefit the most from these cuts are not those who have been hit hardest by job losses or cuts to public services.”
The American Rescue Plan (ARP), adopted in March, provided nearly $ 200 billion in aid to states with a number of stipulations on how the funds could be used, including a provision to prevent States use the money to cut taxes.
Now, however, it remains unclear whether the Treasury Department, which issued an interim rule explaining how this provision will be enforced, will take action against states such as Arizona, Wisconsin and Ohio. But tax policy experts say even these historic tax cuts may not violate the Treasury rule because it was worded so broadly except to be triggered under the broadest circumstances.
The Treasury Department did not respond to a request for comment.
Historic tax cuts
States facing budget surpluses and Republican-held legislatures are proposing aggressive tax cuts, which will benefit the rich the most, arguing that they will stimulate a post-pandemic economy.
In addition to regressive multibillion-dollar tax cuts in Arizona, Ohio and Wisconsin, a handful of other states are considering income tax cuts. Most states already have regressive tax codes, meaning that low-income households pay a larger portion of their income in taxes than wealthy households, in part because states depend on property and sales taxes, all of which are taxed. two regressive.
Income taxes tend to be one of the only progressive sources of income available to states, so there has understandably been a movement in conservative states to reduce or eliminate income taxes altogether.
In February, the Mississippi House of Representatives passed a bill to eliminate the state’s personal income tax, before he was killed on commission in the state Senate. In March, West Virginia Governor Jim Justice submitted a proposal to the legislature to eliminate state income tax. Iowa Gov. Kim Reynolds said in June she was considering a proposal to eliminate state income tax, adding, “This is where (other states) are going. And if you listen to governors, that’s sort of their goal in multiple states. “
A last-minute provision added to the ARP by Senate Majority Leader Chuck Schumer was intended to prevent states from using the influx of federal aid to subsidize these types of tax cuts. But the interim rule issued by the Treasury Department to enforce this provision appears to have been worded broad enough that even billions of dollars in regressive tax cuts fall under the rules.
Will the Treasury stop them?
The ARP’s ban on using aid to subsidize tax cuts came as a welcome last-minute surprise to progressives. Schumer’s inclusion of the provision suggested Democrats had learned a lesson from two mistakes that plagued the years after the Great Recession: inadequate federal support to state and local governments, which employ around 16 million people. , and Republican state legislatures aggressively cutting taxes in the hopes of starting a recovery in the trickle-down economy logic, but instead bankrupt their own public services.
But when the legislation was passed, experts warned the devil would be in the details of implementation. In particular, the fact that the money is fungible makes it difficult to discern whether the aid is being used to finance a tax cut if a state adopts tax cuts.
The Treasury solution was a rule preventing states from dropping below their revenues for fiscal 2019 – before the pandemic – with a little leeway. If a state’s new tax cuts lower its income below 2019 levels before it has spent federal pandemic aid, that state must return all aid to the federal government.
By accepting ARP money, which each state has done, states have agreed to these conditions attached to the rules.
States that cut taxes, under the rules, will have to prove to the Treasury that they haven’t gone below 2019 income levels in a fiscal year in which they spend ARP money, according to the aggressiveness with which the department applies the rule. This means that any possible application would not take place until at least the end of this fiscal year.
But Richard Auxier, senior policy associate at the Urban-Brookings Tax Policy Center that studies state tax policy, said the rules don’t really target states like Arizona, Ohio and Wisconsin.
“They weren’t looking to go through the budget documents of states that are doing well economically. It was that they didn’t want a state that was in a real fiscal stalemate, which risked cutting budgets and therefore losing money. cut jobs, and maintain these budget cuts instead of adopting tax cuts. “
Instead, he said, the states that have spoken openly about the rule are those facing better-than-expected revenue projections, in addition to federal aid.
“Of course there will be states that are functioning well that want to cut taxes, and then we’re just going to get into all of these calculations and rules,” Auxier said. “But what the rules are really trying to stop are states that are in the most difficult conditions, which the ARP is helping and keeping afloat, and preventing spending cuts.”
Ohio is one of those states that has responded to a good fiscal year with a tax giveaway to the rich and whose attorney general has fought a battle among the Republican states to fight the principle of Treasury rule, even though the state is unlikely to violate with billions of dollars in tax cuts.
“A little bit of nothing”
Republicans have been battling the ARP’s tax cut provision since it was passed. Senator Mike Braun, R-Ind., Introduced the Let States Cut Taxes Act to repeal the provision.
“Not only has this Blue State bailout bill penalized states for reopening by calculating state funds based on unemployment, but they’re now trying to use it as a backdoor to ban states from cut their taxes. My bill would make sure they don’t go with her, “Braun said in a statement.
The ARP doesn’t bar, as Braun said, states from cutting taxes, just using ARP money to fund tax cuts.
Meanwhile, a coalition of Republican attorneys general sent a letter to Treasury Secretary Janet Yellen asking her to clarify the provision.
“In the absence of a more sensible interpretation by your department, this provision would amount to an unprecedented and unconstitutional intrusion into the separate sovereignty of the states by the federal usurpation of the bulk of half of the state’s tax books. [i.e., the revenue half]said the letter.
The rule Yellen ultimately published didn’t stop states from lowering taxes, but a number of states have still filed lawsuits protesting the rule. Recently, a federal judge in Ohio gave the state a victory by granting a permanent injunction against the rule’s application in that country.
The case, brought by Ohio Attorney General Dave Yost and backed by the United States Chamber of Commerce and the National Federation of Independent Businesses, argued that the federal government was forcing Ohio to accept its tax policies. unconstitutionally.
But there is a long precedent in which the federal government has imposed conditions on the money it sends to states. Plus, says Darien Shanske, a UC Davis law professor and state tax expert, Ohio had already agreed to the terms.
“The Ohio case was badly decided because Ohio had already certified that it could comply with regulations by accepting ARP money,” Shanske told The Daily Poster. “The judge ruled that the Treasury cannot enforce this warrant, but Ohio has already told the Treasury it can live according to the warrant.”
The Treasury Department had also argued that Ohio had no statute because it had yet to pass any tax cuts that could jeopardize its federal aid.
Not only did the judge rule on a moot point, but a number of anti-tax groups had also come to the conclusion that Treasury rules would not be a problem for a state like Ohio, Shanske said.
Eversheds Sutherland law firm, which advises the state’s Anti-Tax Council on Taxation, concluded about the rule: “Ultimately, ARPA’s clawback, under the interim rule, seems to be a bit of nothing. “