States deserve fiscal flexibility

The American Rescue Plan, recently signed into law, contains a number of flaws. Many provisions appear to have been hastily drafted. Many provisions are vague and punt hard decisions to various government agencies, presumably under the notion the issues are hard to figure out but, somehow, government bureaucrats are expected to do so.

One example of this lies in the new Coronavirus State Fiscal Recovery Fund, a slush fund constructed for the U.S. Department of Treasury to dole out money to states. Allowable uses of those funds amount to basically anything a state wants to spend money on, with next to nothing in terms of constraints or restrictions.

Nonetheless, there are two restrictions in the law.

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One is a state may not use recovery funds “for deposit into any pension fund.” Of course, that does not prevent a state from using funds to beef up other post-employment benefits for public-sector workers. And, it does not prevent use of federal funds to make pension payments they would otherwise make using state funds. So, the restriction is merely window dressing.

The only other restriction is that any state wishing to provide tax relief may do so, but only at a punishable cost. If a state’s net revenue, or some component of net revenue, falls because of tax relief, then its Coronavirus State Recovery Fund payment from the federal government will be cut by the amount of the tax relief.

What does this mean?

Consider, as an example, the American Rescue Plan’s waiver of federal tax liability on up to $10,200 of unemployment compensation income. In crafting this legislation, my Democrat colleagues decided that this form of tax relief is acceptable. However, suppose a state government decides it would like to waive state taxation of unemployment compensation income up to some level, in its citizens’ interests.

The American Rescue Plan stipulates the state will be financially punished by the federal government.

If a state wants to provide tax relief in the interest of economic recovery, and to help people return to earning their livelihoods, the American Rescue Plan says the state will be financially punished by the federal government.

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If a state decides to use funds to replenish depleted Unemployment Insurance trust funds, so it does not have to raise taxes on employers in the near term during an economic recovery, it can be financially punished by the American Rescue Plan.

My Republican colleagues and I raised substantive questions about this provision during the parliamentarian’s consideration of the legislation prior to the vote on the Senate floor. Unfortunately, Democrats were not interested in providing states the fiscal flexibility to determine what is best for their citizens.

What is the public policy justification of taking away fiscal flexibility and fiscal discretion to which states are entitled? The drafters of the bill seem to have decided to make a political statement using denial of fiscal flexibility to states to say that they do not like tax cuts. Not only is that not good public policy, but it serves to further divide, rather than advance bipartisanship.

There are also significant questions about the legality of the provision, and how the offending provision could even be implemented. It provides so much latitude for the administration to decide, at the federal level, what it deems appropriate or inappropriate state fiscal policy that the Treasury secretary is essentially unconstrained in implementation. That invites and allows insertion of too much partisan politics into federal and state relations.

The vague nature of the offending provision invites lawsuits. It also injects more uncertainty into state fiscal policy decisions — as states try to sort out fiscal priorities and voter wishes, while a potential federal punishment hangs over them.

As ranking member of the Finance Committee, I filed an amendment during debate of the American Rescue Plan to strike the provision of the American Rescue Plan that instructs the Treasury Department to financially punish any state or territory that wishes to provide tax relief to its citizens. I have introduced identical legislation in the Senate.

The provision serves no useful purpose.

It doesn’t serve to “rescue” the American people. It interferes in states’ — like Idaho’s — ability to provide tax relief to its citizens to reduce the burden on working families.

It has nothing to do with the pandemic, and potentially everything to do with partisan politics.

And, as supporters of the American Rescue Plan must know, it will do nothing more than impede an economic recovery in states.

Crapo is ranking member of the Senate Finance Committee.