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leading independent tax policy
research organization. Since 1937,
our research, analysis, and experts
have informed smarter tax policy
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Four Questions Treasury Must Answer
About the State Tax Cut Prohibition in
the American Rescue Plan Act
• The American Rescue Plan Act’s restriction on states’ Fiscal Recovery Funds
being used to directly or indirectly offset a net tax cut is vague and raises
difficult questions of interpretation and application. A broad interpretation of
this prohibition may be unconstitutional.
• This restriction potentially implicates a wide range of tax decisions, not just
rate reductions but also federal tax conformity, excluding unemployment
benefits from income taxation during the pandemic, adjusting standard
deductions, or awarding discretionary tax incentives.
• States will require answers to many questions, but particularly: (1) what
constitutes a net tax reduction? (2) how is a net tax reduction determined to
have resulted from a policy change? (3) which potential expenditures could
be deemed to create fiscal capacity for a net tax cut? and (4) how would
offsetting a tax reduction be defined, especially across multiple years?
• U.S. Department of Treasury guidance will be crucial as states seek to
navigate this new environment.
Vice President of State Projects
TAX FOUNDATION | 2
States are set to receive $195.3 billion in fiscal relief under the American Rescue Plan Act (ARPA),
equivalent to 20 percent of the annual tax collections of state governments.1 With state revenues
essentially flat in 2020 (a net decline of less than 0.2 percent), the greatest challenge