Update: ALEC Coalition: Address the Ban on State Tax Cuts

Two weeks ago, an ALEC-led coalition of state-based and national organizations expressed profound concern with a feature of the newly-minted American Rescue Act, the $1.9 trillion COVID spending bill, that apparently prohibits states from cutting taxes. Today, that coalition has swelled to 52 organizations pushing back against this broad overreach by the federal government.

The coalition includes voices from D.C., including Americans for Tax Reform and FreedomWorks, as well as a multiplicity groups from all over the nation, from the Maine Policy Institute to the Rio Grande Foundation. This diverse assembly standing up to this policy sends a clear message: the new law will have far-reaching consequences for millions of tax-paying citizens all over the country.

As ALEC Chief Economist Jonathan Williams describes, the law bans states from “either directly or indirectly offset[ing] a reduction in net tax revenue.” Depending on how aggressively law is enforced, states could be barred from making any tax cuts at all. The vague language, which has yet to be clarified by the Department of the Treasury, also may overrule other changes in state policies under consideration, such as tax credits for school-choice scholarships. As the coalition letter points out:

With the fungible nature of budgeting, and absent any clarifications from the U.S. Department of Treasury, the incredibly ambiguous language involving indirect net revenue reductions could mean that any tax relief at the state level could potentially be called into question by aggressive federal action. This will undoubtedly harm state taxpayers and the future economic competitiveness of states.

In response, Senator Mike Braun of Indiana, along with Congressman Dan Bishop, introduced the “Let States Cut Taxes Act” to allow states more flexibility in the way they can use the federal funds, and Ohio Attorney General Dave Yost has filed a lawsuit in federal court to challenge the law.

The ALEC coalition has pledged to protect the fundamental principle of federalism and to expose the harmful policies implemented by the American Rescue Plan Act. State legislators are also invited to sign onto a letter asking Congress to redress this overreaching policy.