April 14, 2021

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States Fight the Tax-Cut Ban

2 min read

After its price tag and progressive ambition, the most significant feature of the new Democratic agenda is how it seeks to shift core policy-making powers from state legislatures to Washington. The House of Representatives has already passed one bill that would federalize election rules and another that would undo state right-to-work laws on union membership. The Covid relief bill, now law of the land, includes unprecedented controls over states’ ability to set tax policy.

Ohio recently challenged the tax-cut restrictions in federal court, and on Wednesday 13 other states, led by West Virginia Attorney General Patrick Morrisey, followed suit. The challenges are worth watching for their economic impact—and because they offer a preview of how the court system might mediate the contradictions between constitutional federalism and the new progressive juggernaut.

The American Rescue Plan bill distributes $350 billion to state and local governments, but it includes a provision that states can’t use the funds to “directly or indirectly offset” tax reductions. What that means in practice is unclear—and the new lawsuit argues the language “is either impermissibly overbroad, impermissibly vague, or both.”

The Supreme Court’s anti-commandeering doctrine puts strict limitations on how much Congress can lean on states to enact its favored policies. There’s a straightforward small-d democratic reason for this: Voters need to know who to credit or blame for the laws they live under. The brief quotes a 2018 Supreme Court ruling that “if a State imposes regulations only because it has been commanded to do so by Congress, responsibility is blurred.” That puts sand in the gears of the federalist system.

The lawsuit also explains that the funds from Washington are too significant for states to reasonably refuse or raise on their own. West Virginia’s share amounts to a quarter of its 2021 revenue. It’s 21% for Alabama and 29% for Arkansas. “This forced ‘choice’”—of whether to accept federal aid after an economic shock—“commands states to pursue tax policy regimes in the interest of Congress, not of their constituents,” the suit says.

2021-04-02 18:30:00

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