Assemblyman Adam C. Gray (D-Merced) released the following statement after revelations the federal coronavirus aid bill prohibits states from passing small business tax cuts.
“I introduced legislation earlier this year to provide a COVID-19 tax credit for small and essential businesses. My bill was set to be heard in committee today, but the State Legislature has now been forced to sideline dozens of tax credits after it was revealed the federal stimulus bill bans states from cutting taxes.
“Because California’s billionaires are making record profits on Wall Street, Congress has banned small businesses on Main Street from receiving a tax cut. This prohibition even applies to struggling businesses that have received zero dollars in federal and state aid.
“This is a critical year in the State Legislature where we have a real opportunity to permanently lower California’s infamously high taxes. Instead, Congress has stopped that effort before it even got started. What’s worse, they placed no such prohibition on tax increases, opening the door for special interests to pursue billions of dollars in tax hikes.
“I am urging California’s Congressional delegation to reverse this provision immediately. Small businesses are the backbone of our economy. We cannot abandon them just as we are beginning to see light at the end of the tunnel.”
Senate amendments to the American Rescue Plan Act (ARPA) prohibit using any of the $350 billion in State and Local Fiscal Recovery Funds to cut taxes. According to Jared Walczak, vice president of State Projects with the Center for State Tax Policy at the Tax Foundation, many are concerned that states which accept the funds could be prohibited from implementing tax cuts between now and 2024— “an astonishing level of federal interference in states’ fiscal affairs.”
Many state tax cut proposals could run afoul of the federal legislation even if most observers wouldn’t consider the cuts to have relied on the federal aid, Walczak writes.
The American Rescue Plan Act allocates $350 billion to state and local governments, $195.3 billion of it to state governments. Some states have experienced meaningful revenue declines. But many don’t have losses to offset, so they would have to identify other ways to spend a large infusion of one-time money.
Some might like to use the money for tax relief, Walczak writes, but the Senate amendment prohibits that. There are other restrictions too, raising serious questions of how states are supposed to spend all this money if they can only use it in limited ways.
More information on the implications of the federal tax cut ban can be found online at: taxfoundation.org/american-rescue-plan-state-tax-cuts-treasury/