The Tax Cut Ban and the Constitution

Ohio sues to overturn Congress’s takeover of the states’ fiscal policy

WSJ editorial. Excerpts:

"While states can use the money to increase spending, Congress decreed that they can’t use it to cut taxes. “A state or territory shall not use the funds,” the bill says, “to either directly or indirectly offset a reduction in the net tax revenue” from a new law or regulation.

Because the mandate applies to “indirect” revenue offsets, states are at risk of violating the law for any tax reduction “during the covered period,” which stretches through 2024. Ohio’s lawsuit by Attorney General Dave Yost argues that “this coercive offer of federal funds violates the Constitution.”

Mr. Yost’s suit emphasizes two core features of the constitutional structure. The first is federalism—the “diffusion of power between the state and federal governments” that the Framers designed to protect liberty, including and especially when it comes to the taxing power.  

Congress can nudge states and offer fiscal incentives, but it can’t use “economic dragooning that leaves the states with no real option but to acquiesce.” Those were Supreme Court Chief Justice John Roberts ’ words in NFIB v. Sebelius (2012), striking down conditions Congress attached to ObamaCare’s state Medicaid expansion, which held hostage about 10% of state budgets. The $350 billion in the Covid bill represents about 9% of total state and local expenditures in 2018. Medicaid is a joint state-federal program, while state taxes are an area where states historically exercise control."

"This provision takes direct aim at that feature by hobbling the ability of states to compete for business and investment through their tax codes unless they turn down massive federal relief. Obstructing that competition was no doubt part of Democrats’ intention, as states like Illinois and New York grow less competitive."

"The federal restriction on state tax cuts, the lawsuit says, “allows Congress to quietly impose its preferred tax policies without having to pay the full political price for doing so.”"