Eleventh-hour changes to the $1.9 trillion American Rescue Plan take square aim at one idea that’s been percolating in GOP legislatures around the country: using funds for states to finance deep tax cuts.
Over the past month, lawmakers in Kansas, Michigan, Florida, Georgia, and other states have all suggested that $350 billion in aid to state and local governments could be used to finance state tax cuts.
Mississippi and West Virginia are pushing outright elimination of the state income tax, with legislators around the country tying the push to the Biden stimulus bill.
“You would be looking at a very large tax cut for businesses that are trying to reopen in this state, which I think would be very stimulus in nature,” Florida Senate President Wilton Simpson (R) said in a March 2 press conference.
But last-minute legislative maneuvering in the Senate may have rendered that impossible.
The American Rescue Plan now stipulates that states receiving the money cannot use it to “offset a reduction” in tax revenue due to any law passed during the time that the funds are available — from now until 2024.
That provision aims to ban the stimulus money from financing new tax cuts.
“In most cases, these were the same income taxes being proposed last year and the year before that,” Richard Auxier, a senior policy associate in the Urban-Brookings Tax Policy Center, told TPM. “But now, there’s an infusion of cash that could offset them.”
He added that the stimulus package had provided a brief window for many states to fund the deep tax reductions, apart from the usual justification of rapid growth thanks to low tax rates.
“What’s troubling is that the tax cut stays around, and this is a one-time infusion of funds,” Auxier added.
The move has already enraged some state legislators who were banking on billions of dollars financing deep cuts.
In Georgia, Speaker of the House David Ralston (R) sent a letter to Biden asking that the provision banning stimulus funds being used to finance tax cuts be excised from the law.
“In Georgia, we have prioritized providing tax relief to our citizens and H.R. 1319 appears to prohibit that relief,” the letter reportedly reads. “I pray that you will prevail upon Congress to have this flaw in the legislation corrected before signing it into law.”
The Georgia House passed a $120 million income tax cut earlier this session.
The legislation itself remains unclear in the details, Auxier said, leaving state policymakers and tax analysts somewhat befuddled while waiting on further guidance from the Treasury Department on how it will be carried out.
“It’s not sending out money and saying, spend it on this — it’s sending out money and saying how not to spend it,” he told TPM.
Auxier went on to point out that the provision is written broadly enough to encompass proposals across the ideological board — not just GOP legislators using the stimulus to finance tax cuts for the rich.
Maryland, for example, recently expanded its earned income tax credit. It’s not clear whether that change or others would pass muster under the new provision.
“Nobody has clear answers to these questions right now,” Auxier said.