Now that this bailout of state and local governments has been signed into law by President Biden, there
is perhaps an even more troubling element than any of us could have anticipated. As the editorial board
of The Wall Street Journal recently pointed out, states appear to be prohibited from using these new
federal funds to directly or indirectly reduce net state tax revenue through 2024. With the fungible
nature of budgeting, and absent any clarifications from the Department of Treasury, the incredibly
ambiguous language involving indirect net revenue reductions means 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.
To address this glaring policy mistake, U.S. Senator Mike Braun’s “Let States Cut Taxes Act” would allow
states more flexibility in the way they can use federal funds, if they choose to take the money.
Absent reforms like these, states will be pressured into using federal funds to grow government and baseline spending totals. We watched this play out more than a decade ago with the Obama-era “American Recovery and Reinvestment Act of 2009” (ARRA) and those infamous “shovel ready” projects. Growing state government bureaucracy with federal funds would create massive state budget challenges as the money disappears, but the federal requirements live on for years to come.
Using federal coercion to artificially elevate state tax burdens at a time when small businesses and
hardworking American taxpayers need real tax relief is nonsensical. Our groups have spent decades
working with state policymakers and watching them achieve more economically competitive business
climates through pro-growth tax and economic reforms. Having the federal government use “the power
of the purse” in an attempt to curtail the use of competitive federalism is incredibly damaging to our
American system of government.