Brnovich takes feds to court over ban on tax cuts

Brnovich takes feds to court over ban on tax cuts

Flanked by staffers, Attorney General Mark Brnovich explains Tuesday his decision to use state consumer fraud laws to sue two companies that manufacture and sell vaping devices. (Capitol Media Services photo by Howard Fischer)
 Attorney General Mark Brnovich  (Capitol Media Services photo by Howard Fischer)

Attorney General Mark Brnovich is asking a federal judge to rule that Arizona can take billions from the federal government in the new virus aid package without having to comply with a provision barring the state from using the cash for tax breaks.

In a new court filing March 25, Brnovich contends the provision in the American Rescue Plan Act of 2021 is, at the very least, ambiguous about how it affects the ability of the governor and state lawmakers to set their own fiscal policy.

“This ambiguity alone renders the tax mandate unconstitutional,” he wrote.

But even if it is clear – and Treasury Secretary Janet Yellen wrote to Brnovich telling him the conditions under which Arizona can slash taxes – the attorney general still argues that it was illegal for Congress to tell states they can’t use federal aid dollars to provide tax relief to businesses and individuals. He said the provision is “an unconstitutional attempt by Congress to usurp the sovereign taxing powers of the states.”

Hanging in the balance is the question of whether Gov. Doug Ducey can pursue his plan to cut $600 million in taxes and some even more bold proposals by GOP lawmakers for up to $1 billion in tax breaks without having to forfeit the identical amount in federal aid.

Put another way, Brnovich wants Arizona to be able to keep its $4.7 billion share of the $1.9 trillion package which includes $195.3 billion in aid to states and still provide tax cuts to individuals and businesses.

There was no immediate response from the Treasury Department which, along with Yellen, is the defendant in the lawsuit.

At the heart of the battle is language in the federal law that says states cannot use the money they are getting from the feds “to either directly or indirectly offset a reduction in the net tax revenue of each state.” That includes any change in state law or regulation that reduces rates or provides rebates, deductions or credits.

Any violation results in the state having to repay the government any reduction in taxes.

The problem, said Brnovich, starts with what he said is the vagueness of the language, particularly the part about indirectly offsetting tax cuts.

What makes the issue important for Arizona, he said, is that the state’s fiscal fortunes have changed.

On one hand, during the second quarter of last year – right as the virus hit and portions of the economy were closed – state revenues came in well below projections. That led lawmakers to craft a lower spending plan for the current fiscal year.

But what happened, Brnovich said, is that collections in two areas have been greater than expected.

First was a change in state law that now allows Arizona to collect sales tax from online retailers. Then there was a big increase in contracting and the taxes that go with it.

“Revenue for fiscal year 2021 has come in over projections resulting in a $1 billion surplus,” Brnovich said. “And the state now has an estimated surplus in terms of state revenues specifically.”

Now he said, lawmakers may want to use that money to improve the economy and “assist struggling businesses and individuals trying to make ends meet.” In fact, he noted, Ducey’s plan to cut taxes by $200 million this coming year, rising to $400 million the following budget year and $600 million the year after that had been proposed even before the feds enacted the relief package.

Brnovich said precluding legislative tax cuts to get the federal dollars puts Arizona in a no-win situation.

“States are in no position to turn down the federal government’s offer given their financial situations, which have been significantly strained by the COVID-19 pandemic,” he said, pointing out that Arizona’s $4.7 billion share amounts to close to 40% of the state general fund budget.

And its not just current tax cuts that are at issue.

He pointed out that the federal dollars can be used for not just current expenses. So any decision to accept the cash would preclude tax cuts in 2022 and 2023.

“It represents an unprecedented and unconstitutional intrusion on the separate sovereignty of the states through federal usurpation of one half of the state’s fiscal ledgers – control of their revenues,” he said.

Less clear is whether the federal law actually would preclude the kind of tax cuts being considered by Ducey and the Republican-controlled legislature.

“Nothing in the Act prevents states from enacting a broad variety of tax cuts,” Yellen wrote earlier this week to Brnovich. She said all the law does is preclude states from using their federal dollars to finance them.

“If states lower certain taxes but do not use the funds under the Act to offset those cuts – for example, by replacing the lost revenues through other means – the limitation of the Act is not implicated,” Yellen wrote.

But Brnovich said he’s not prepared to rely on Yellen’s assurances.

He pointed out that Sen. Joe Manchin, D-W. Va., who was a principal proponent of the provision, has said he views the language as blanket provision forbidding states from enacting any tax cuts through 2024. Brnovich cited a New York Times report that Manchin “argues that states should not be cutting taxes at a time when they need more money to combat the virus.”

No date has been set for the court to consider the complaint.