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Kentucky State Capitol

States Question Authority for COVID Relief Funds

In March 2021 President Biden signed the $1.9 trillion American Rescue Plan Act (ARPA). Later, in May, states received guidance from Treasury on how states could spend the funds, including a provision interpreted by many to mean that states receiving funds would be barred from implementing tax cuts.

Twenty states are involved in lawsuits over the restrictions. In a controversial lawsuit, Kentucky and Tennessee won on Friday when the federal court ruled that some ARPA restrictions were unconstitutional. The states argued that the tax mandate “is unconstitutionally ambiguous and coercive in violation of the Spending Clause, that it is not reasonably related to the federal interest in passing the ARPA,” among other things.

As reported by the Tax Foundation, the court ruled that the authority to tax lies with the state and that “Congress’s restriction of this crucial aspect of our system of fiscal federalism exceeded the powers afforded the federal government by the U.S. Constitution.”

The ruling is restricted to the plaintiff states and only clarifies the tax issues in those states, yet six lawsuits on this issue are underway involving 20 states. North Carolina does not have a lawsuit.

The ARPA restrictions had the potential to derail tax cuts included in the North Carolina House and Senate budget proposals, tax cuts that would have been proposed with or without the ARPA funds. The latest rulings show that North Carolina would be on solid ground to implement these cuts and should push for these cuts that would build upon the past decade of successful tax reforms.

Paige Terryberry / Fiscal Policy Analyst