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Missouri attorney general joins others in lawsuit against Treasury Department over rescue plan funds

Eric Schmitt running for U.S. Senate
Eric Schmitt running for U.S. Senate(Eric Schmitt)
Published: Mar. 29, 2021 at 11:37 AM CDT
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JEFFERSON CITY, Mo. (KY3) - Missouri Attorney General Eric Schmitt filed a lawsuit against the United States Department of the Treasury and Treasury Secretary Janet Yellen over the interpretation of a mandate in the American Rescue Plan Act forcing states to choose between accepting COVID-19 relief funds or exercising their sovereignty over state tax policy.

Responding to concerns from state officials, the U.S. Treasury Department said last week states can cut taxes without penalty under a new federal pandemic relief law — so long as they use their own funds to offset those cuts.

Republican governors, lawmakers and attorneys general have expressed apprehension about a provision in the wide-ranging relief act signed by President Joe Biden that prohibits states from using $195 billion of federal aid “to either directly or indirectly offset a reduction” in net tax revenue. The restriction could apply through 2024.

“As a state senator, I helped pass one of the largest tax cuts in Missouri history. Now, as attorney general, ensuring that the state of Missouri’s sovereign ability to implement tax policy is not infringed upon by federal overreach is vitally important,” said Attorney General Schmitt. “Missouri should not have to choose between implementing tax policy or receiving federal COVID-19 relief funds, especially as this pandemic has crushed small businesses and individuals.”

A treasury spokesperson told The Associated Press the provision isn’t meant as a blanket prohibition on tax cuts. States can still offset tax reductions through other means.

“In other words, states are free to make policy decisions to cut taxes – they just cannot use the pandemic relief funds to pay for those tax cuts,” the Treasury Department said.

The treasury’s application of the law could provide clearance for some tax cuts, such as Missouri legislation that would expand online sales taxes to offset proposed income tax reductions in 2023. Republican Sen. Andrew Koenig said he thinks his legislation is OK but has asked the state attorney general for guidance on whether it could run afoul of the federal law.

“To say that we’re cutting taxes because of the (federal) money would be a ridiculous argument,” Koenig said, “because this is an entire package that is completely separate.”

Arkansas Gov. Asa Hutchinson said formal guidance from the Treasury Department will be critical in determining how much flexibility exists for states. The Republican governor, however, wants lawmakers to move forward with his proposal to set aside $50 million for tax reductions, including a cut to sales taxes on used vehicles.

“We should not let federal restrictions weigh in on that direction we’re going as a state,” Hutchinson said.

Schmitt and 20 other state attorneys general sent a letter to Secretary Yellen to ensure the narrow interpretation was applied and that states’ sovereign authority to effectuate tax policy was not impacted. Secretary Yellen’s reply letter to state attorneys general declined to adopt the narrow interpretation and thus created confusion and uncertainty about the meaning of the tax mandate. The lawsuit asks the court to provide clarity as it relates to the interpretation of the tax mandate, ensuring that the narrow interpretation is applied, and states’ sovereignty is respected. Alternatively, if the court adopts the broad interpretation, the lawsuit asks the court to declare that the tax mandate is unconstitutional, sever the tax mandate from the rest of the American Rescue Plan Act, and enjoin the treasury and treasury secretary from enforcing the broad interpretation of the Tax Mandate.

Legislatures in numerous states are considering tax cuts this year.

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