April 15, 2021

Volume XI, Number 105

Advertisement

April 14, 2021

Subscribe to Latest Legal News and Analysis

April 13, 2021

Subscribe to Latest Legal News and Analysis

April 12, 2021

Subscribe to Latest Legal News and Analysis

Federal COVID-19 Relief Bill Brings State Tax Policy to a Grinding Halt

On March 11, 2021, US President Joe Biden signed the American Rescue Plan Act of 2021 (ARPA), the COVID-19 relief bill that includes $350 billion in relief to states and localities. To prevent states from using federal relief funds to finance tax cuts, Congress included a clawback provision requiring that any relief funds used to offset tax cuts during the next three years be returned to the federal government. Here is the text of the provision:

  • A State or territory shall not use the funds provided under this section or transferred pursuant to section 603(c)(4) 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.

This language broadly prohibits states from taking legislative or administrative action through the end of 2024 that reduces state tax revenues by any means (deduction, credit, delay, rate change, etc.) if doing so could be characterized as the use of federal relief funds to offset, directly or indirectly, the tax reduction. Practically speaking, this limitation will completely hamstring state and local governments from the normal ebb and flow of tax policy changes, adjustments and interpretations. Taken to its logical conclusion, this language freezes state legislative and administrative tax policy development out of fear anything they may do would require the return of federal relief funds. We expect the US Department of the Treasury will issue guidance clarifying this provision in the coming weeks.

Practice Note: This provision of ARPA is, in our view, the most significant federal pre-emption of state tax policy in history. For the next three years, legislators and tax administrators alike will be scrutinized as their tax policy decisions are evaluated through the lens of this prohibition. This level of congressional control over state tax policy decisions and fiscal autonomy likely violates the Tenth Amendment of the US Constitution and would dismay the framers’ basic notions of federalism.

While Congress has the ability to limit the use of federal funds in ensuring its policy goals are accomplished, the overly broad state tax limitation adopted by Congress goes far beyond its stated purpose and prevents states from furthering ARPA’s goals by using tax policy to craft their own COVID-19 relief measures. Any regulation or administrative interpretation that reduces state tax revenue or delays the implementation of a tax is, effectively, barred by the unprecedented intrusion into state tax policy-making.

The effects of ARPA’s state tax limitation are immediate and far-reaching. It will chill continuing state efforts to couple/decouple state tax codes to or from the Tax Cuts and Jobs Act of 2017. Additionally, ARPA already stalled legislation pending in Maryland that would delay, for one year, implementation of its digital advertising services gross receipts tax, restoring return filing and tax payment deadlines due this April. These a just a few of the many examples of state tax bills, regulations and administrative guidance abruptly halted by Congress through the enactment of ARPA.

Legislative Fix?

While it is too early to tell whether Congress will take remedial action walking back this intrusion into state tax policy, there is a proposal pending in the US Senate that would do so. Specifically, on March 11, Senator Mike Braun (R-IN) introduced a bill (S. 730, the Let States Cut Taxes Act) that would remove the prohibition. The bill was referred to the US Senate Committee on Finance upon introduction and, if enacted, would retroactively repeal the jaw-dropping congressional intervention in state tax and fiscal policy. 

Advertisement
© 2021 McDermott Will & EmeryNational Law Review, Volume XI, Number 75
Advertisement
Advertisement

TRENDING LEGAL ANALYSIS

Advertisement
Advertisement

About this Author

Stephen P. Kranz Lawyer McDermott Will
Partner

Stephen P. Kranz is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  He engages in all forms of taxpayer advocacy, including audit defense and litigation, legislative monitoring, and the formation and leadership of taxpayer coalitions.  Steve is at the forefront of state and local tax issues, including developments arising in the world of cloud computing and digital goods and services.  He assists clients in understanding planning opportunities and compliance obligations for all states and all tax types. ...

202-756-8180
 Mary Kay McCalla Martire, Mcdermott, Tax attorney
Partner

Mary Kay McCalla Martire focuses her practice on state and local tax disputes. She helps clients with audits, tax-related litigation, letter rulings and settlement conferences. Mary Kay has experience resolving disputes involving income, sales and use, utility and telecommunications taxes, as well as premium and retaliatory tax.

Mary Kay has an extensive litigation background in state and federal court, as well as administrative tribunals. She has particular experience in the defense of qui tam (whistleblower) claims filed in the state tax arena, and has won the dismissal...

1 312 984 2096
Partner

Richard C. Call is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm's Boston office.  He focuses his practice on state and local tax litigation before administrative and judicial bodies, at all levels and in multiple states, with respect to income, franchise, gross receipts, and sales and use taxes.  He also advises clients on the state and local tax consequences of business restructurings, as well as the impact of new state legislation on current business operations.

Richard is a frequent publisher on state and local tax topics.  He has published...

212-547-5333
Advertisement
Advertisement