Small Business Legal Center Moves to Block Federal Prohibition on State Tax Cuts

Date: May 19, 2021

An overreaching federal tax mandate is being challenged in court by 21 states with the support of NFIB.

In March, the American Rescue Plan (ARP) was signed into law. This $1.9 trillion stimulus bill provided much-needed relief for the small business community, such as the extension and expansion of the Employee Retention Tax Credit, extension of the Families First Coronavirus Response Act (FFCRA) paid leave tax credit, creation of the Restaurant Revitalization Fund (RRF) Grant program, and billions of dollars in direct aid to the States. You can read more about the ARP here. 

Unfortunately, as it relates to the much-needed direct aid to states, the ARP also included a section that prohibits states from lowering their taxes. The bill’s tax mandate says: 

“A State or territory shall not use the funds provided . . . to either directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation, or administrative interpretation . . . that reduces any tax . . . or delays the imposition of any tax or tax increase.” 

States that violate this part of the law must repay the ARP funds in “an amount equal to the amount of funds used in violation” of the prohibition. 

The vague wording of the mandate, such as the use of the word “indirectly”, means that it could be interpreted to prevent state legislatures from enacting any law reducing taxes or providing tax credits for small businesses.  

While testifying before the Senate Banking Committee, Treasury Secretary Janet Yellen acknowledged that what “directly or indirectly offsetting a tax cut” means is a “thorny question.”  

Numerous state legislatures are considering tax relief measures to help small businesses recover from the COVID-19 pandemic, measures that may preclude those states from much-needed ARP funds. 

The NFIB Small Business Legal Center argues that this tax mandate’s prohibition is overreaching, unconstitutional and harmful to small businesses, and has joined a coalition to strike the mandate down in court.  

NFIB is supporting 21 states challenging Congress’s overreach:  

The Legal Center has already filed briefs in OhioArizonaMissouri, and Alabama, and anticipates filing briefs in Texas and Kentucky in the coming weeks.  

If you’re concerned about the tax mandate or the prospect of increased taxes, take action now. Tell your Congressional representatives that your small business can’t afford a tax hike. 

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