Kansas Attorney Derek Schmidt joined 20 other state attorneys general in a letter threatening to take action against the Biden administration for trying to prevent states from cutting taxes. Addressed to Treasury Secretary Janet Yellen, the seven-page letter warns one element of the recently enacted coronavirus relief package intrudes on states’ authorities to set their own tax policy. Schmidt and the 20 state attorneys general urge Yellen to adopt a narrow interpretation of the legislation.
The $1.9 trillion American Rescue Plan prohibits state governments from using the stimulus funding to “directly or indirectly offset a reduction in the net tax revenue.” The attorneys general say that is unconstitutional.
“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 funds,” the letter reads. “…Indeed, such federal usurpation of state tax policy would represent the greatest attempted invasion of state sovereignty by Congress in the history of our Republic.”
The state attorneys general worry that the prohibition against indirectly offsetting state tax revenue is unclear. The letter lists a number of state proposals that may run afoul of the federal relief act.
Kansas proposals may indirectly offset COVID funding
For instance, Kansas lawmakers are considering a proposal to allow individuals who do not itemize federal taxes to itemize their state taxes. The change would pass savings from the 2017 Trump tax cuts to taxpayers, rather than the state government keeping funding that they otherwise wouldn’t collect.
State legislators are also considering providing property and income tax deferrals or credits to small businesses impacted by closure orders during the COVID-19 pandemic.
The $1.9 trillion relief act directs $350 billion in aid to state governments. It provides additional money to states based on unemployment numbers. Rather than basing payouts on population, the stimulus plan allocates additional money to states with high unemployment. Kansas boasts the sixth lowest unemployment rate in the country at 3.5%, according to the Bureau of Labor Statistics.
The letter asks the Treasury Department to confirm that the COVID relief package does not prohibit states from providing indirect tax relief by March 23. Schmidt’s office didn’t say how his office would respond without confirmation. However, a press release from the Kansas Attorney General’s Office says the state attorneys general “may take further appropriate action if necessary assurance is not provided.”
Let States Cut Taxes Act
U.S. Senator Mike Braun of Indiana today introduced the Let States Cut Taxes Act, to allow
states more flexibility in the way they can use federal funds if they choose to take the money. A coalition of 28 state and national organizations sent a letter of support to all members of Congress. The effort was coordinated by the American Legislative Exchange Council (ALEC) and joined by Americans for Prosperity, American for Tax Reform, the National Taxpayers Union, Kansas Policy Institute (the Sentinel’s owner), the Independent Women’s Forum, the Committee to Unleash Prosperity, the Hispanic Leadership Fund, and other state and national organizations.