June 24, 2021
By Jacob Huebert
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.