Congress Gives States Far More Money Than They Need, Tells Them They Can’t Use It to Cut Taxes

Jared Walczak of the Tax Foundation has a fascinating blog post about one of the amendments that made it into the COVID-relief bill.

The bill doles out $350 billion to state and local governments, nearly $200 billion of it to states. (There’s also, separately, money for schools and public transportation.) But states haven’t seen their revenues decline anywhere near that much, and some states aren’t hurting at all. So for many governments this is just a big windfall to spend.

But not so fast! The Democrats who passed the bill don’t want the free money to go to something icky, and they especially don’t want it to go to something really icky like tax cuts. So they put restrictions on how the money can be spent, including this language:

A State or territory shall not use the funds provided under this section or transferred pursuant to section 603(c)(4) to either directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.

As Walczak notes, not only does this bar states from explicitly and directly using the money to cut taxes, but it makes it pretty tricky for them to cut taxes at all between now and 2024. It will still be okay for a state to cut a tax if the change is fully offset by a spending cut or other revenue increase, because in that case the state can show it financed the tax cut without the new money. But the situations get complicated from there.

For example, states are allowed to use the money to pay public-health officers who deal with the pandemic. But many of these folks would have been employed even without the federal cash, and money is fungible — which is to say, this frees up money for use elsewhere in the budget. If a state sees that resulting budget surplus and decides a tax cut is the appropriate response, that would appear to be prohibited, because the federal money “indirectly” financed the tax cut.

This is a shocking overreach, and very arguably unconstitutional under Supreme Court doctrines that stop the federal government from unduly coercing the states. Coupled with the other restrictions on how the aid is used, it could even leave states wondering what exactly they can blow this money on.