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Mostly good news in rules on ARPA spending and taxes

On Monday, the US Treasury Department released an “interim final rule” on what states can do if they take money from the American Rescue Plan Act (ARPA). Based on the rule and the Tax Foundation’s summary, here are a few key points for North Carolina legislators and Gov. Roy Cooper.

  1. Tax reductions: Most importantly, the rule provides much more leeway to cut taxes than seemed possible. As long as tax revenue does not fall below the inflation-adjusted revenue for fiscal year (FY) 2018-19, a tax cut will not count as offset directly or indirectly with ARPA money. Revenue for FY 2021-22 is forecast to reach $27.3 billion, which is down slightly from the current fiscal year, but well above the $24.6 billion in actual revenue, adjusted for inflation, collected in FY 2018-19.
  2. Unemployment trust fund: North Carolina can use ARPA money to replenish the Unemployment Trust Fund “up to the pre-pandemic level.” With fewer restrictions on businesses and the summer travel season approaching, this would also be a good time to opt out of the Federal Pandemic Unemployment Compensation program, which would otherwise continue through September.
  3. PPP Loan Expenses: Legislators could conform to current law while keeping the places where state revenue law differs from the IRC. That would make business expenses paid with PPP loans deductible from state taxes, but legislators could not choose to conform to some portions of federal revenue law since May 2020 but not others.
  4. Pensions: Guidance does not allow states to make deposits to pension funds with ARPA money, but the state can use it for regular pension payments. Where North Carolina has a defined contribution system (UNC), it could provide bonus payments to state employees’ accounts.
  5. Retiree health benefits: Legislators are also free to pay down a portion of the $27.7 billion unfunded liability for retiree health benefits (OPEB) and create Retiree Health Savings Plans for individual state employees. Any state employee new to the State Health Plan in 2021 is ineligible for health coverage through the plan in retirement. An optional Retiree Health Savings Plan would be a new benefit for them and also provide value for other state employees.
  6. Local governments are free to cut taxes without limits for using ARPA money.

Whatever legislators do with the money, legislators should impose two rules on spending.

  1. Require every agency to account for ARPA money in new fund codes, as the University of North Carolina system has done, to improve tracking.
  2. Require the NC Pandemic Recovery Office (NC PRO) to provide receipts, disbursements, and expenditures online with minimal delay for all federal COVID funds to state government.

Joseph Coletti / Senior Fellow, Fiscal Studies

Joe Coletti is a senior fellow at the John Locke Foundation focused on fiscal policy issues. He previously headed the North Carolina Government Efficiency and Reform initiativ...