Hidden away in the American Rescue Plan Act of 2021, the horribly misnamed "COVID relief" giveaway law signed by President Biden, is a curious provision that prohibits states from using any of the federal funds allocated to provide tax reductions to individuals or businesses.

This provision, according to the New York Times, was slipped into the legislation at the last minute.

It reads, in pertinent part:

A State or territory shall not use the funds provided… 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. [Act Sec. 9901(a), adding Sec. 602(c)(2)(A) to Title VI of the Social Security Act]

As the Wall Street Journal noted:

Democrats in Washington are trying to dictate to governors and state legislatures that they can't change their tax laws if they accept their share of the $1.9 trillion. The sweeping prohibition would last through 2024, and the bill grants Treasury Secretary Janet Yellen authority to write regulations "as may be necessary or appropriate to carry" it out.

The language is so expansive that states could be limited from making any changes to their tax codes that reduce revenue even if they don't use federal funds as direct offsets. Much will depend on how Ms. Yellen defines 'indirectly.' States that don't comply with her interpretation will have to repay federal funds.

In other words: More spending is dandy; cutting taxes is verboten.

The National Law Review opined that this provision represents "the most significant federal pre-emption of state tax policy in history."

A legislative fix has been proposed.  Sen. Mike Braun, Republican of Indiana, has introduced a bill that would remove the prohibition.  However, with the Democrats in control, enactment of such legislation seems unlikely.

Litigation is the more promising avenue.

According to Jared Walczak of the nonpartisan Tax Foundation, federal entanglement in state fiscal policy "raises constitutional questions."  He explains:

Under the Anti-Commandeering Doctrine, the federal government cannot require states to adopt or enforce a federal law, and there are limits on using federal aid to oblige states to take certain actions. This doesn't prevent the federal government from attaching strings to the use of federally-provided resources, but if accepting that money ties states' hands in ways that would otherwise violate the principles of fiscal federalism — the federal government cannot ordinarily prohibit states from cutting taxes — this raises serious constitutional questions.

Indeed it does.  This provision is nothing less than a frontal assault on federalism as envisioned by the Framers and deserves to be challenged in the courts.

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