One of the big demographic trends over the last few years has been Americans leaving high-taxing states for those that tax less. The Sunbelt and Texas have seen a big influx because of this trend.
Cutting taxes, we might infer on the basis of this evidence, is a good way for a state to attract new residents and businesses. What if states couldn’t cut their taxes?
A provision in the $1.9 trillion COVID rescue bill, so called, would prevent red states (and blue states, too, though they are not quite so tempted to tax-cutting) from cutting their taxes. The state of Ohio is the first to sue about this provision, but more than 20 other state attorneys general have written Treasury Secretary Janet Yellen that the provision represents “the greatest attempted invasion of state sovereignty by Congress in the history of our Republic.”
The editorial board of the Wall Street Journal addresses this matter this morning:
Democrats didn’t flip a single state legislative chamber or governor’s mansion in the 2020 election, while Republicans flipped three. Yet through their Covid bill Democrats are trying to partially nullify these election results by mandating that state governments cannot pass tax cuts as a condition of receiving aid. Ohio on Wednesday sued the Treasury to enjoin the mandate, and the case is an early test of progressive ambitions to upset the constitutional balance.
The $1.9 trillion bill marketed as Covid relief includes $350 billion in federal aid to states and localities. While states can use the money to increase spending, Congress decreed that they can’t use it to cut taxes. “A state or territory shall not use the funds,” the bill says, “to either directly or indirectly offset a reduction in the net tax revenue” from a new law or regulation.
Because the mandate applies to “indirect” revenue offsets, states are at risk of violating the law for any tax reduction “during the covered period,” which stretches through 2024. Ohio’s lawsuit by Attorney General Dave Yost argues that “this coercive offer of federal funds violates the Constitution.”
This could make cutting taxes impossible, or at least a high-risk undertaking, for individual states. It would mean that low-taxing states could not offer residents of less fiscally-continent states an alternative. It is also an alarming affront to federalism.