Texas, Mississippi and Louisiana have sued the Biden administration over a mandate in the American Rescue Plan that they say prevents states from cutting taxes.
The states, led by Texas, argue the federal government is violating the constitution by prohibiting states that receive federal COVID-19 aid from using the money to “directly or indirectly” offset tax revenue reduction.
“This is yet another attempt by the federal government to unlawfully exert control over how sovereign states operate,” said Texas Attorney General Ken Paxton. “While hiding behind a deceptively friendly name, the Act effectively removes Texas’ ability to lower taxes while granting Secretary of the Treasury Janet Yellen power to take back federal aid funds if they disagree with state tax policies.”
The problem, Mr. Paxton said, is if Texas decided not to enforce an unemployment or payroll tax on a struggling small business, the whole state would be stripped of pandemic funding.
The three states’ 18-page complaint was filed Tuesday in federal court. The states are asking the court to declare the law’s tax mandate unenforceable.
A spokesperson from the White House did not immediately respond to a request for comment.
In March, Ms. Yellen denied the provision would interfere with a state’s tax policies, and said the administration is creating further guidance for the states.
“Nothing in the Act prevents States from enacting a broad variety of tax cuts,” she said in a letter to Arizona Attorney General Mark Brnovich, who previously raised concerns over the mandate.
Texas is set to receive $16.45 billion from the American Rescue Plan, while Louisiana is set to receive $3.1 billion. The funds expected for Mississippi are not detailed in the lawsuit.
The federal money was allocated to states based on unemployment rates and population.