Can States Use Stimulus Funds for Tax Cuts?

close up shot of stimulus package.
Kameleon007 / Getty Images/iStockphoto

Prior to the potential for federal tax hikes based on President Joe Biden’s newly proposed legislation, many states have been planning tax cuts or tax credits for their residents. For instance, West Virginia had plans to cut its state personal income tax amidst a recovering economy, CBS News reports. 

See: Do You Support a Biden Tax Increase? Take Our Poll
Find: Biden’s $1,400 Stimulus Checks Won’t Work – How Economists Think We Should Use the Money Instead

State aid from the American Rescue Act Plan, which has provisions for $195 billion in emergency funding, could help states stimulate local economies – with or without tax cuts. The bill also called for additional funds for local governments and public schools, CBS News reports. 

However, language in the new American Rescue Act could be construed as prohibiting states from using the funding to offset tax costs – even if tax cuts had been considered before the American Rescue Plan act passed. 

“We ask that you confirm that the American Rescue Plan Act does not prohibit states from generally providing tax relief,” wrote a coalition of 20 state officials, including West Virginia Attorney General Patrick Morrisey. “Congress may not micromanage a state’s fiscal policies in violation of anti-commandeering principles nor coerce a state into forfeiting one of its core constitutional functions in exchange for a large check from the federal government,” he said in a statement reported by CBS News. 

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Morrisey fears the legislation could prevent states from creating or removing taxes, which could include neighborhood tax credits, historic preservation tax cuts, aircraft repair cuts and even personal state income tax relief, the attorney general told local news station WHSV, a Fox affiliate.

See: Should the Minimum Wage Be $15? Take Our Poll
Find: What Biden’s Proposed Tax Hikes Mean for Average Americans

“The state would be at risk of having a massive amount of money subject to a federal claw-back,” Morrisey told WHSV News. “It may not happen now, it may not even happen for four years, but it would be a very big risk, and we would have a chilling effect on the state legislature’s ability to do their job and to control tax policy.”

Morrisey, joined by attorney generals from Georgia, Arizona and other states, gave Treasury Secretary Janet Yellen until March 23 to respond to requests for clarification, before the states filed lawsuits against legislation to preserve their rights to control state taxes, WSHV reported. 

The original purpose of the state and local funding was to keep cops, firefighters, other essential employees at work and employed, and it wasn’t intended to cut taxes,” White House Press Secretary Jen Psaki stated Monday in a briefing, according to CBS News.

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About the Author

Dawn Allcot is a full-time freelance writer and content marketing specialist who geeks out about finance, e-commerce, technology, and real estate. Her lengthy list of publishing credits include Bankrate, Lending Tree, and Chase Bank. She is the founder and owner of GeekTravelGuide.net, a travel, technology, and entertainment website. She lives on Long Island, New York, with a veritable menagerie that includes 2 cats, a rambunctious kitten, and three lizards of varying sizes and personalities – plus her two kids and husband. Find her on Twitter, @DawnAllcot.

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