ARPA: Too Broad to Work Around?



State tax legislators and tax administrators could be operating in limbo for the next three years, according to some reports following the ongoing breakdown of the many provisions within the American Rescue Plan Act (ARPA) of 2021. While the plan assigns $350 billion in aid to states and localities, provisions within ARPA prevent those states and localities from using those funds to finance tax cuts, requiring that any funds used to do so be repaid to the federal government.

According to The National Law Review, the language of the provision (see below) essentially deters legislative or administrative action through 2024 “that could reduce state revenues by any means (deduction, credit, delay, rate change, etc.)”  if by taking that action could be construed as using federal aid funds to offset the tax deduction, be it directly or otherwise.

“A State or territory shall not use the funds provided under this section or transferred pursuant to section 603(c)(4) to either directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit or otherwise) or delays the imposition of any tax or tax increase.”

Taking it further, the Tax Foundation reiterates the crucial need for swift guidance from the U.S. Department of Treasury. It is undoubtedly the case that the $195.3 billion allocated to states by ARPA is greatly needed, and that businesses and individuals will be looking at state leadership, legislators and administrators for programs and assistance. However, according to the Tax Foundation, the greatest challenge for states will be figuring out how to spend the aid within the narrow scope of its acceptable spending parameters which are outlined below:

  1. “Respond to the public health emergency or its negative economic impacts, which includes aid to households, businesses, and impacted industries, and is likely to include covering the compensation of state health and public safety officials and current unemployment benefit claims, consistent with Treasury’s guidance on the Coronavirus Relief Fund, which was dedicated to similar purposes;
  2. Supplement the pay of essential workers;
  3. Pay for general government services to the extent of any pandemic-induced revenue losses in the most recent full fiscal year; and
  4. Make necessary investments in water, sewer, or broadband infrastructure.”

While a Treasury spokesperson reportedly stated that the provision does not bar states from enacting tax cuts that do not rely on federal aid, several questions remain. Namely, what constitutes a net tax reduction, how to determine if a policy change caused a net tax deduction, which potential expenditure creates fiscal capacity for net tax cut, and how would offsetting a tax reduction be defined, particularly across several years2?

With so many unknowns, it is far more likely that tax policy will be avoided altogether by most, if not all, states until further clarification is provided. As the MICPA continues to follow this topic closely, we invite our members to provide their feedback on social media or by submitting an article for review and possible publication.

  1. Kranz, Stephen P., et al. “Federal COVID-19 Relief Bill Brings State Tax Policy to a Grinding Halt.The National Law Review. 22 Mar. 2021. Accessed n 22 Mar. 2021.
  2. Walczak, Jared. “Four Questions Treasury Must Answer About…Tax Foundation. 18 Mar. 2021. Accessed on 22 Mar. 2021

Source: MICPA

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