Stimulus package: Rules on state use of stimulus money prompt GOP complaints —

At issue is a provision in the $1.9 trillion stimulus law that could limit states’ ability to cut taxes. It says states cannot use the funds to “either directly or indirectly” offset a decrease in net tax revenue resulting from changes such as rate reductions, rebates, deductions, credits or delays in tax increases or the imposition of a tax.

Democrats sought to add to the $150 billion pot provided in the stimulus deal passed a year ago, but Republicans successfully blocked it while they controlled the Senate in 2020.

Claiming an unconstitutional tax mandate

Ohio Attorney General Dave Yost filed an injunction request with the US District Court of Southern Ohio seeking to bar enforcement of what he calls the “tax mandate,” saying it is unconstitutional and exceeds Congress’ authority.

“The tax mandate thus gives the states a choice: They can have either the badly needed federal funds or their sovereign authority to set state tax policy. But they cannot have both,” the motion reads. “In our current economic crisis, that is no choice at all. It is a metaphorical ‘gun to the head’.”

Meanwhile, a coalition of 21 Republican attorneys general — led by Georgia, Arizona and West Virginia — wrote to Treasury Secretary Janet Yellen on Tuesday raising concerns about the provision, particularly the prohibition on “indirectly” offsetting tax cuts and the list of banned measures.

The letter included an array of tax moves that states are currently considering that officials worry could run afoul of the relief law. They include raising the standard deduction in Georgia, enacting tax credits in Indiana and trimming income taxes in Montana.

The attorneys general asked Yellen to confirm that the relief package, at most, precludes states from using the funds expressly for direct tax cuts rather than for the purposes listed.

What states can do, according to Treasury

The Treasury Department said that the law does not bar states from cutting taxes or require them to pay back their aid if they do.

“In other words, states are free to make policy decisions to cut taxes — they just cannot…