Beltway Democrats are essentially barring GOP-led states from improving their competitiveness against high-tax Democratic states

WSJ editorial.

"Democrats in Congress aren’t satisfied with spending $1.9 trillion to help blue states and union friends. They’ve also launched a sneak attack against conservative states. Read their legislation’s lips: No new state tax cuts.

That’s the news from a provision added last week by Senate Democrats that limits how states and localities can use their $360 billion windfall. States can use the loot to provide government services, cover revenue losses during the pandemic and “respond to the public health emergency” or “its negative economic impacts, including assistance to households, small businesses, and nonprofits, or aid to impacted industries such as tourism, travel, and hospitality.”

Much of the relief will invariably flow to government union pension funds, which are underfunded in states like Illinois, New Jersey and Connecticut. To inoculate themselves from GOP attacks, Democrats specified in the bill that relief funds may not be used “for deposit into any pension fund.” But money is fungible. States can pay out of their general funds for pensions and use the federal cash for something else.

Majority Leader Chuck Schumer also snuck a provision into his “perfecting amendment” allowing states to use federal funds to provide “premium pay” of up to $13 an hour (and $25,000 total) to workers who are “performing such essential work” as defined by the Governor of each state.

But here’s the political gut punch. The bill explicitly bars states from cutting taxes. States “shall not use the funds,” the bill says, “to either directly or indirectly [our emphasis] offset a reduction in the net tax revenue” that results “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 increas

Wow. Democrats in Washington are trying to dictate to governors and state legislatures that they can’t change their tax laws if they accept their share of the $1.9 trillion. The sweeping prohibition would last through 2024, and the bill grants Treasury Secretary Janet Yellen authority to write regulations “as may be necessary or appropriate to carry” it out.

The language is so expansive that states could be limited from making any changes to their tax codes that reduce revenue even if they don’t use federal funds as direct offsets. Much will depend on how Ms. Yellen defines “indirectly.” States that don’t comply with her interpretation will have to repay federal funds.

Several states including West Virginia, Mississippi, Arkansas and Idaho are considering tax cuts to attract people and business. Some GOP legislatures also want to start or expand private-school choice programs that give tax credits to businesses and individuals that donate money for scholarships. Treasury could say these policies break the law. Beltway Democrats are essentially barring GOP-led states from improving their competitiveness against high-tax Democratic states.

Democrats in California recently approved $600 stipends for low-income residents and undocumented immigrants, and these and other handouts to liberal constituencies appear permissible under the bill as “assistance to households.” A corporate tax cut? No way.

The constitutionality of this is open to question. The Supreme Court’s “anti-commandeering” doctrine prohibits Congress from using federal funds to coerce states. But even if the tax cut ban doesn’t meet the Court’s legal test of coercion, it’s still an egregious affront to constitutional federalism. In the 2020 election, Democrats failed in their goal of retaking statehouses, but now they plan to control them anyway from Washington."