Attorney General Mark Brnovich plans to sue the U.S. Treasury Department over a provision in a federal COVID-19 relief package that limits states’ ability to cut taxes.
Treasury Secretary Janet Yellen informed Brnovich and 20 other Republican attorneys general in a letter on Tuesday that the American Rescue Plan Act, a $1.9 trillion COVID relief package doesn’t preclude states from “enacting a broad variety of tax cuts” — as long as they don’t use the federal money they receive to offset the revenue they’ll lose from doing so.
“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 limited,” Yellen wrote.
States that do use money from the act to offset lost revenue from tax cuts, or are perceived as doing so by the Treasury Department, won’t sacrifice all of their funding from the American Rescue Plan Act, Yellen said. Rather, they’ll be forced to repay the federal government the amount of lost revenue they replace with federal dollars.
That was not the answer Brnovich wanted. He announced on Twitter that he plans to sue over the prohibition.
— Mark Brnovich (@GeneralBrnovich) March 24, 2021
“Looks like we will see the Biden Administration in court. It forgot that the states created the federal government, not the other way around,” Brnovich tweeted on Tuesday evening.
The federal relief package bars states from using the money “to either directly or indirectly offset a reduction in the net tax revenue,” including any “reduction in a rate, a rebate, a deduction, a credit,” or a delay in the implementation of a tax increase.
Treasury’s guidance is murky, at best, and it’s unclear whether the restriction applies to major tax cuts that Gov. Doug Ducey and Republican lawmakers are negotiating. The agency has said, and Yellen reiterated in her letter, that more complete guidance would be issued soon.
“Secretary Yellen’s response raises more questions than answers. Her letter was ambiguous and failed to provide the assurances that states can craft their own tax policies and budgets without being stripped of federal relief funding. We must seek clarification from the court,” Katie Conner, a spokeswoman for Brnovich, told the Arizona Mirror.
Ducey hopes to cut income taxes by $600 million, while GOP legislators are eying a billion-dollar tax cut. Those plans wouldn’t use federal money to offset the cuts, instead relying on projected revenue surpluses to fund the tax reductions. Lawmakers and the Ducey administration have said the federal relief package won’t deter them from carrying out their planned tax cuts.
The tax cut provision of the American Rescue Plan Act could also potentially affect Republican plans to gut Proposition 208, a voter-approved tax hike for high-income earners to provide additional funding for K-12 education. The Senate has passed legislation that would create a new tax category for small business owners that would allow them to avoid the 3.5% surcharge from Proposition 208.
Ducey said on Monday that the state can move forward with the planned tax cuts without triggering the restriction in the American Rescue Plan Act under his administration’s reading of the feds’ guidance. But it’s unclear what guidance he was referring to, considering the only guidance provided by the Treasury Department was the letter that Brnovich received the day after the governor’s comments.
The Ducey administration has refused to say what guidance he was referring to. A spokesman for Ducey declined to comment on Yellen’s letter.
Yellen’s letter was in response to a previous letter by 21 Republican AGs, including Brnovich, demanding clarification on the tax cut provision of the American Rescue Plan Act and calling the restriction an “unprecedented and unconstitutional infringement” on state sovereignty because it could be interpreted as “to deny States the ability to cut taxes in any manner whatsoever.”
Ohio’s attorney general has already sued the Biden administration over the provision, while Brnovich had planned to wait until after March 23, the deadline the attorneys general set for Yellen to provide the guidance they sought.
According to legislative budget analysts, Arizona will receive at least $12.2 billion from the American Rescue Plan Act.
This story has been updated to include a comment from the Arizona Attorney General’s Office.