Utah among 21 states threatening legal action over COVID-19 relief bill and tax cuts
Group of GOP attorneys general wants Biden administration to clarify provision in relief package banning state tax cuts
SALT LAKE CITY — Utah Attorney General Sean Reyes is among nearly two dozen Republican attorneys general threatening legal action against the Biden administration if it doesn’t clarify a provision in the $1.9 trillion economic relief package that appears to ban states from cutting taxes.
In a seven-page letter to Treasury Secretary Janet Yellen, the attorneys general warn that restrictions on state efforts to cut taxes could be “the greatest attempted invasion of state sovereignty by Congress in the history of our Republic.”
They take issue with a restriction Congress included in $350 billion of aid for state, local and tribal governments that prevents them from using the federal funds “to either directly or indirectly offset a reduction in the net tax revenue” as a result of tax cuts.
“This language could be read to deny states the ability to cut taxes in any manner whatsoever — even if they would have provided such tax relief with or without the prospect of COVID-19 relief funds,” the letter says.
The provision calls into question tax cuts Utah lawmakers passed in the general session that ended March 5. It could mean the state must return that amount in aid received under the federal relief bill.
“The Utah Legislature recently passed $100 million in tax relief to families with children, veterans and older residents receiving Social Security,” Reyes said in a statement.
“But that relief is now at risk because the American Rescue Plan Act potentially denies states the ability to cut taxes. I joined with attorneys general from 20 other states in asking Secretary Yellen to confirm that the act will not prohibit Utah and other states from providing much needed tax relief.”
The Associated Press reported that the provision isn’t meant as a blanket prohibition on tax cuts. States can still offset tax reductions through other means.
“In other words, states are free to make policy decisions on tax cuts — they just cannot use the pandemic relief funds to pay for those tax cuts,” the Treasury Department told the AP.
John Valentine, chairman of the Utah State Tax Commission and president of the Federation of Tax Administrators, told the Deseret News on Wednesday he’s concerned about numerous “ambiguities” in the COVID-19 relief act. In particular, he said the act doesn’t define a time period, throwing into question at what point a state could enact a tax cut without having to return that amount in federal aid.
“So instead of $100 million, which is one year’s worth of (Utah’s tax) reduction, is it now $300 or $400 million?” Valentine said, questioning if the life of the bill is one year, two years, or maybe even three or four years. “We don’t know. This is what we call ambiguities in the law. We just don’t know.”
Valentine noted that Utah’s tax-cut package this year was two years in the making, with $80 million set aside last year. Lawmakers this year added $20 million, all from the state’s own ongoing revenue.
Based on statements of members of Congress and Utah’s own congressional delegation, Valentine said he believes Congress intended not to allow states to use one-time federal COVID-19 relief money to “replace tax cuts.” But the issue is, he said, is the act’s language doesn’t make that explicit, throwing into question Utah’s tax cut even though Utah lawmakers never planned to use federal money for the cut.
“The language was inartful,” Valentine said. “It was not carefully enough drafted.”
Valentine said he supports either Congress or the U.S. Department of Treasury “giving clarification as to how to interpret these provisions.”
Utah legislative leaders are adamant that the tax cut shouldn’t be impacted by the COVID-19 relief act, though Senate President Stuart Adams, R-Layton, said clarification would be appreciated.
“Our legislation passed before the federal legislation passed, but our tax cuts can remain in place, at least that’s my understanding,” Adams said. “But more clarity would always be great, and I think we’re trying to get that clarity.”
Gov. Spencer Cox has signed two of the three bills cutting taxes. Cox’s spokeswoman did not respond to a request for comment from the governor.
House Speaker Brad Wilson, R-Kaysville, noted in a text message to the Deseret News that Utah’s tax bills passed “two days before the U.S. Senate amendment on taxes was public and a week before” the American Rescue Plan Act passed.
“We set aside our tax cut money in December — well before ARPA and even before its predecessor, the Consolidated Appropriations Act of 2021,” Wilson said.
Adams had a similar take.
“Again, most of this money was actually put aside a year ago, so I think it would be a real stretch to think the federal government could pick a year or so in the history of any state budget process and wash away tax cuts,” Adams said. “But my impression is I think we’re in pretty good shape.”
Sen. Jerry Stevenson, R-Layton, who heads the Legislature’s budget committee, said he doesn’t believe Utah would have to return the money.
“In my mind, I don’t think there’s any relationship to what we’re doing here. We were working on these tax cuts clear back with tax reform two years ago,” he said.
Voices for Utah Children, a child research and advocacy organization, had urged Cox to veto the bills, arguing the cuts reduce the state’s ability by $100 million to invest in urgent unmet needs such as in education, public health and poverty prevention.
“Now we learned this week that their price has just doubled. Because the new federal COVID relief law penalizes states for tax cuts on a dollar-for-dollar basis, they will actually cost Utah $200 million of revenue next year, not just $100 million,” claimed Matthew Weinstein, Voices for Utah Children’s fiscal policy director.
In the letter, the attorneys general say the provision in the relief bill might have been intended to stop states from taking COVID-19 relief funds and rolling them directly into a tax cut of a similar amount.
But its prohibition on “indirectly” offsetting reductions in tax revenue, combined with the list of prohibited kinds of tax reductions, including rate cuts, rebates, deductions, credits, or “otherwise,” could also be read to ban tax relief of any type, even if it’s unrelated to and independent of the availability of federal stimulus funds, the letter says.
“Absent a more sensible interpretation from your department, this provision would amount to an unprecedented and unconstitutional intrusion on the separate sovereignty of the states through federal usurpation of essentially one half of the state’s fiscal ledgers,” the attorneys general wrote.
They asked Yellen to confirm that the American Rescue Plan Act does not prohibit states from generally providing tax relief through the kinds of measures listed in the law, but at most precludes use of relief funds for direct tax cuts.
“In the absence of such an assurance by March 23, we will take appropriate additional action to ensure that our states have the clarity and assurance necessary to provide for our citizens’ welfare through enacting and implementing sensible tax policies, including tax relief,” the letter concludes.
Contributing: Katie McKellar
Correction: An earlier version said Utah Gov. Spencer Cox has not signed into law three bills that cut taxes. He signed two of them last week.