On March 11, President Biden signed the American Rescue Plan Act of 2021 (“ARPA”), which is aimed at providing $350 billion for eligible state, local, territorial, and Tribal governments to respond to the COVID-19 pandemic. The ARPA discusses the permitted uses in which states can use the federal aid funds, and contains a limitation restricting states from using the federal funds, “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….” This limitation has raised questions of constitutionality and state sovereignty because if interpreted broadly, any tax-related action that reduces revenue could be deemed by The Department of Treasury to have run afoul with the ARPA (even if the theoretical tax reduction in question have nothing to do with ARPA). The Treasury had published an Interim Final Rule regarding implementation of the ARPA. The attorneys general of 21 states released a letter to Treasury Secretary Janet Yellen, seeking clarification on the provision containing this limitation. Yellen recently issued a response, stating:
Nothing in the Act prevents States from enacting a broad variety of tax cuts. That is, the Act does not “deny States the ability to cut taxes in any manner whatsoever.” It simply provides that funding received under the Act may not be used to offset a reduction in net tax revenue resulting from certain changes in state law. 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 also notes that the Treasury is crafting further guidance specific to the issues raised by the Attorneys General, and that there will be an ongoing dialogue throughout the ARPA program. Withum will keep you aware of updates on this issue as information is released.
reach out to Withum’s State and Local Tax Team.
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