Federal plan may pull the strings on Nebraska’s tax system

Federal plan may pull the strings on Nebraska’s tax system

President Biden signed the American Rescue Plan Act of 2021 (ARPA) into law shortly after its passage in Congress on March 11. While the plan is overwhelmingly popular with the American people, there is a small provision in the legislation causing some uncertainty and concern for Nebraska.

Under ARPA, states are eligible to receive a share of $219.8 billion in aid.

Setting any arguments about the amount of money aside, on page 579 of the bill there is a condition placed on states, if they choose to accept the money:

“A State or territory shall not use the funds…to either directly or indirectly offset a reduction in the net tax revenue of such State…that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise)”

As written, this provision is somewhat vague, creating more questions than answers. The ARPA directs the Department of the Treasury to interpret and implement the meaning of this provision, which is required to be published within 60 days. The Platte Institute is one of many groups across the country concerned that this broad statutory language could be implemented in such a way as to unconstitutionally tie the hands of Nebraska lawmakers in their work creating and implementing tax and spending plans for our state.

Article I of the U.S. Constitution gives Congress broad authority to raise taxes and spend monies for the general welfare. However, that broad authority must be read considering our federalist system of government, which reserves all other powers to the states and the people per the 10th Amendment which reads, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

So, the big question is – can Congress place conditions on federal funds provided to states? The short answer is yes, but only to an extent. For example, it was ruled constitutional when the federal government required South Dakota to raise its drinking age to 21 under threat of losing 5% of its highway money, whereas forcing states to expand Medicaid eligibility or lose all Medicaid funds was deemed unconstitutional.

However, these legal precedents, while valuable, do not address questions about the fiscal nature of the ARPA restriction. For example, Nebraska just posted its revenues for the 2020-21 fiscal year, which are 15.4% above forecasted projections and nearly $500 million more than collections posted one year ago. Nebraska is very well-positioned to make changes to its tax code without federal aid. So, how is the federal government going to determine whether the state used its “surplus” money or the “stimulus” money to make tax changes?

Another issue with this provision is that it allows states to use the federal aid until December 31, 2024. Does that also mean the prohibition on tax reductions lasts the same amount of time? Nebraska will elect a new governor next year along with a new crop of state senators. Under this Act, those newly elected officials may be precluded from implementing any fiscal policies that include a reduction in tax rate, a rebate, a deduction, or a credit. Under a broad interpretation of the law, that could mean future property tax relief is out of the question, since our current programs are designed around the increase of a tax credit or rebate.

The bottom line is that Nebraska should have the freedom to make its own tax policies in accordance with the needs of its residents. That’s why we have state legislatures under a federalist system, which is founded on the belief that state lawmakers are more accountable to the daily concerns of their residents than those in a far-off national capital.

If broadly implemented, ARPA will undermine Nebraska’s sovereignty by handing over Nebraska’s right to create state budgets, tax structures, and taxation levels to the federal government for several years. That is why we, along with many other groups across the nation, are signing a coalition letter to Treasury Secretary Janet Yellen voicing these concerns and calling for regulatory guidance that allows Nebraska to decide its own future.

Photo Courtesy U.S. Department of the Treasury

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