Fiscal Policy

Should All States Tax and Spend Like California? President Biden’s Stimulus Plan Could Make It So

President Joe Biden delivers remarks on the economy during a visit to Cuyahoga Community College in Cleveland, Ohio, May 27, 2021. (Evelyn Hockstein/Reuters)
How a partisan provision of the Biden stimulus handicaps states.

President Biden’s recently enacted American Rescue Plan Act gives states billions for COVID-19 relief, but with strings attached: States that take it are effectively banned from cutting taxes through 2024. The policy not only has extraordinary repercussions for the nature of states’ power — it would also slow states’ recovery.

The Act says states can’t use their federal funds to “directly or indirectly offset” revenue loss from a tax cut. If they do, the Treasury secretary can take their grant money back. Defenders of this “tax mandate” say it ensures states use their federal grants for COVID relief, not to “pay for” tax cuts. But that makes no sense, given that the Act otherwise gives states broad leeway. The mandate’s true purpose is obvious: to push all states to adopt policies favored by the high-tax states that are losing residents to lower-tax states.

The tax mandate isn’t necessary to make sure states use their grant money for COVID relief. The Act elsewhere requires states to tell the Treasury Department what they used their relief money for. If a state receives, say, $5 billion, it has to show that it actually spent $5 billion for purposes the Act allows. A state has to pay back any portion of the money that it spends on anything else. That rule ensures states use their federal grants for COVID relief. The tax mandate does not: A state could run afoul of it even if it spends the full amount of its grant on federally approved purposes.

Some might argue that if a state can afford to cut taxes, it should pay for its own COVID relief and not get federal money. That might make sense — if the Act were designed to ensure that states only receive federal help if they can’t afford to pay for their own COVID relief. But the Act isn’t designed that way: It allows states to spend as much state tax revenue as they want on whatever they want, as long as they use the federal money for COVID relief.

So the Act and its tax mandate aren’t designed to protect against states “indirectly” using federal funds for unapproved purposes. The mandate serves only to stop states from cutting taxes.

Why would such a condition be added into the federal COVID relief plan? The tax mandate was added to the Act at the last minute at the behest of West Virginia Senator Joe Manchin, who said “states shouldn’t be cutting taxes” and reportedly insisted on the mandate to thwart a plan by the governor of West Virginia (an office Manchin previously held) to phase out the state’s income tax. Others in Congress who voted for the mandate undoubtedly had a motive that has nothing to do with COVID relief: suppressing tax competition among the states.

For years, taxpayers have been fleeing poorly managed high-tax states, such as California and Illinois, for states with lower taxes. The pandemic has accelerated that trend. Unsurprisingly, senators from the states that are losing the most residents voted for the mandate, in an apparent attempt to stem the outflow of residents and businesses to lower-tax states — that is, to suppress the competition among the states that our federalist system was designed to encourage. And, of course, the mandate’s duration through the 2024 election cycle raises further suspicions.

Another reason the mandate has nothing to do with COVID relief is that tax relief can itself be COVID relief. Congress knows this: The Act provides billions in relief through federal-tax credits. And it makes sense that, as part of a comprehensive recovery plan, a state would want to use federal funds as the Act prescribes while also enacting tax reforms to encourage business and job growth. Just as a state could complement the Act’s COVID relief with additional state spending on COVID relief — which the Act allows — it could also do so with tax relief.

There’s no good reason why the Act should force states that want to provide extra COVID relief to choose spending over tax breaks. There’s only the obvious illegitimate reason: to force states that have managed their finances well to adopt the tax-and-spend policies of states that have managed their finances poorly.

Many state attorneys general have filed lawsuits arguing that the tax mandate exceeds Congress’s power under the Constitution’s Spending Clause. In Ohio’s lawsuit, U.S. District Court Judge Douglas R. Cole has said in a preliminary ruling that the mandate is likely unconstitutional because it is ambiguous — it is not clear exactly how a state can determine what constitutes a decrease in “net tax revenue” that could trigger an obligation to repay federal grant money. As the Goldwater Institute has argued in a brief in that case, the complete lack of any relationship between the tax mandate and the Act’s supposed purpose of providing COVID relief — and Congress’s obvious ulterior motive — is another reason why the states challenging the mandate should prevail.

Recommended

The Latest