AG urges federal government to respect state’s sovereignty in settings tax policy

Treasury tax check with cash.

FRANKFORT, Ky. (WTVQ) – On Wednesday Attorney General Daniel Cameron joined a letter signed by twenty-one state attorneys general urging the U.S. Department of Treasury (“Treasury”) to take immediate action to ensure the American Rescue Plan Act (“Act”) does not strip states of their core authority to implement basic state tax policy.

According to the AG, certain provisions of the Act forbid states from using COVID-19 relief funds to “directly or indirectly offset a reduction in…net tax revenues” resulting from state laws or regulations that reduce tax burdens, whether by cutting rates or by giving rebates, deductions, credits, “or otherwise.”

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Attorney General Cameron warns that this language could be used to deny Kentucky and other states the ability to cut taxes in any manner, even if they would have provided tax relief with or without the prospect of COVID-19 relief funds.

The coalition is urging the Treasury to adopt a more sensible interpretation of the language, warning that a broad interpretation would result in an unprecedented and unconstitutional intrusion on the sovereignty of the States.

“The federal government cannot micromanage whether the General Assembly can provide tax relief for Kentuckians,” said Attorney General Cameron.  “Just as federal lawmakers have the ability to enact federal tax policies that benefit communities, like opportunity zones, Kentucky’s lawmakers should be able to do the same with state policies.  We cannot afford to have our hands tied by federal overreach simply because we accept COVID relief funds.”

A broad interpretation against “offsetting” reductions could be interpreted to prohibit tax cuts or relief of any kind, even if unrelated to or independent of relief funds. For example, a measure currently being considered by the General Assembly, which proposes tax increment financing to assist homeowners in a minority neighborhood of Louisville hurt by decades of disinvestment, could trigger this prohibition if it is expansively interpreted.

The attorneys general also warn that a single governor could accept stimulus funds and thereby potentially bind both the state legislature and a future successor from cutting any tax or tax assessments in the near future. This would be a clear intrusion by Congress upon the democratic structures of the states.

Accordingly, Attorney General Cameron is asking the Treasury to confirm by March 23 that the Act does not prohibit States from generally providing tax relief, and that the Act simply precludes express use of the relief funds to provide direct tax cuts. The attorneys general will take further appropriate action if such an assurance is not provided to ensure that states like Kentucky have the clarity and assurance needed to enact and implement sensible tax policies for the taxpayers.

Joining Attorney General Cameron are attorneys general from the states of Alabama, Arizona, Arkansas, Florida, Georgia, Idaho, Indiana, Kansas, Louisiana, Mississippi, Missouri, Montana, Nebraska, Oklahoma, South Carolina, South Dakota, Texas, Utah, West Virginia, and Wyoming.

A copy of the letter can be viewed here.