The American rescue plan prohibits recipient states from using aid funds to offset net tax losses.
Attorneys-general from more than a dozen states have filed lawsuits against the Biden government.
The New York Post reports that the lawsuit concerns a specific issue with an aspect of the recently enacted $ 1.9 trillion coronavirus relief act. Legislation, the Post said, largely prohibits states from using aid funds to lower taxes.
The lawsuit has been filed in the US District Court in Alabama and is asking the court to invalidate this provision of the US rescue plan.
Under the current definition of the plan, states cannot use federal funds of $ 195 billion to “offset, either directly or indirectly, a decrease in net tax revenue.”
The restriction could stay in place until 2024.
“Never before has the federal government tried to take over the state finances so completely,” West Virginia attorney general Steve Morrisey said in a statement. “We cannot stand for such overreach.”
Similarly, Kentucky Attorney General Daniel Cameron said that every state has the right to set its own tax policy without federal interference.
A hammer. Image via Wikimedia Commons via Flickr / User: Brian Turner. (CCA-BY-2.0).
“Kentuckians expect the men and women they elect to represent in the General Assembly to determine the tax policy of the state, and not through a federal government decree,” said Attorney General Cameron. “These COVID bailouts are essential to help the Commonwealth and hardworking Kentuckians recover from the effects of the pandemic, and it is unconstitutional for the Biden administration to hold the funds hostage when following Washington’s preferred tax policy disagree.”
According to the New York Post, the lawsuit comes two weeks after an additional 21 attorneys general sent a letter to the Treasury Department asking how the Biden government planned to interpret the tax regime.
For example, they asked whether states that accept coronavirus aid funds are prohibited from lowering taxes for any reason, or whether the law merely prevents states from using coronavirus aid funds to offset new tax cuts.
Treasury Secretary Janet Yellen later confirmed the government’s intent, saying the law was not intended as a “blanket moratorium” on tax cuts.
“Nothing in the law prevents states from making a variety of tax cuts,” said Yellen. “It simply provides that the funds received under the law may not be used to offset a decrease in net tax revenue due to certain changes in state law.”
However, Attorney General Morrisey has alleged that the language of the law – particularly the inclusion of the word “indirect” in relation to tax cuts – could cause problems years later.
“These [lawsuit] ensures that our citizens won’t hold onto an unforeseen government bill in years, ”Morrisey said in a statement.
The attorneys general stressed that Yellen’s response did not adequately address the legal ramifications of the word “indirect”.
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