States Should Choose Tax Cuts Over Federal Bailouts
Ohio is in many ways a perfect example of why a federal bailout of states was hardly necessary—and now it will become the focus of a legal battle over a federal power-grab hidden inside that bailout.
Last year, as the COVID-19 pandemic was accelerating and the U.S. economy was being locked down, Republican Gov. Mike DeWine said the state might have to drain its entire $2.7 billion rainy day fund to offset expected revenue losses. By this spring, however, things were looking much less bleak. Thanks to some wise spending reductions and a less-severe-than-anticipated revenue decline due to COVID, the state now seems likely to emerge from the pandemic without touching the rainy day fund at all.
The story is pretty similar in most states. Overall, state tax revenue declined by less than 0.1 percent last year, and billions of dollars in federal aid distributed to states remain unspent. Still, Ohio is set to receive more than $5.5 billion—twice as much money as is sitting in the state’s untapped rainy day fund—from the American Rescue Plan (ARP), which President Joe Biden signed into law earlier this month.
To get it, all Ohio has to do is trade away control over tax policy for the next few years. States that accept the federal bailout are prohibited from using the money to “directly or indirectly offset a reduction in the net tax revenue” from policy changes between now and 2024. It’s a provision that is both vague enough and potentially broad enough to block states from cutting taxes or making changes to tax credit programs without first getting permission from the federal government.
That “coercive” provision of the ARP “allows Congress to quietly impose its preferred tax policies without having to pay the full political price for doing so,” argues Ohio Attorney General Dave Yost in a lawsuit filed in federal court last week. Other states are likely to join the lawsuit. Already, 21 Republican attorneys general signed a letter to Treasury Secretary Janet Yellen last week objecting to what they called “an unprecedented and unconstitutional intrusion” o
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