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Brady Looks to Remove State Tax Limitation From COVID-19 Relief

Posted on Mar. 30, 2021

The top Republican on the House Ways and Means Committee is using legislation to address concerns that the latest pandemic relief signed into law unconstitutionally restricts states from using federal aid to lower taxes. 

The State Tax Freedom Act (H.R. 2189) would amend section 9901 of the American Rescue Plan Act of 2021 (P.L. 117-2), which prevents the $350 billion in funding given to state and local governments from being used to “either directly or indirectly offset a reduction in the net tax revenue of such State or territory.” 

Republicans have argued that the provision could be interpreted as prohibiting states from cutting taxes and that its ambiguity wouldn’t pass constitutional muster. 

Ways and Means ranking member Kevin Brady, R-Texas, introduced the legislation on March 29. A similar bill was introduced in the Senate on March 15 by Finance Committee ranking member Mike Crapo, R-Idaho. 

“States that have helped workers, families, and Main Street businesses through tax relief need greater flexibility, not shackles from the federal government,” Brady said in a release. “Democrats rammed through an unconstitutional provision with no committee hearings or input from the states, and this bill will protect states’ freedom to make their own fiscal decisions.” 

In a March 23 letter, Treasury Secretary Janet Yellen responded to concerns about the provision from a coalition of Republican attorneys general, saying that “nothing in the Act prevents States from enacting a broad variety of tax cuts.” 

“If States lower certain taxes but do not use funds under the Act to offset those cuts — for example, by replacing the lost revenue through other means — the limitation in the Act is not implicated,” Yellen wrote. 

It is within Congress’s authority to place reasonable conditions on how states use federal aid, Yellen added, appearing to respond to the claim that the provision is unconstitutional. Republican leaders called Yellen’s response “entirely inadequate.” 

In addition to repealing the American Rescue Plan Act’s provision, Brady’s bill would require that Treasury issue a refund to any state required to return part of its federal aid for being in violation of section 9901.

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