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AG Derek Schmidt files suit against U.S. Treasury to protect state tax policy authority

Release Date: Apr 01, 2021

TOPEKA – (April 1, 2021) – One day after the Legislature gave final approval to compromise tax-relief legislation that received bipartisan support, Kansas Attorney General Derek Schmidt sued the Biden Administration to protect the state’s well-established authority to set its own tax policy without being micromanaged by the federal government.

Schmidt and a bipartisan group of 12 other attorneys general yesterday filed a federal lawsuit arguing federal Treasury Department officials cannot force states to relinquish control of their taxing authority in return for federal economic aid related to COVID-19. The states take specific issue with a provision in the latest federal stimulus bill that the attorneys general call one of the most egregious power grabs by the federal government in the nation’s history.

“Of course Congress may prohibit the use of federal funds to directly pay for state tax reductions,” Schmidt said. “But in this case, Congress also has tried to prohibit the ‘indirect’ use of federal aid to offset state tax reductions, and because money is fungible that kind of vague, sweeping federal prohibition may be interpreted broadly to call into question any change in state tax law that results in less revenue being collected. The federal government cannot micromanage state taxes that way. We are concerned that the U.S. Treasury Department has not immediately and unequivocally made clear it will interpret this new federal law narrowly to avoid unlawfully encroaching on authority reserved to the states by our U.S. Constitution.”

The attorneys general argue that the mandate could be used to claw back a share of a state’s stimulus allotment if federal authorities disagree with any state tax policy that has the effect of reducing state revenues. This creates an impermissible chilling effect on state lawmakers’ willingness to reduce the tax burdens on their citizens. The lawsuit seeks a federal court order that prohibits enforcement of the federal tax mandate on the states and declares it unconstitutional.

Earlier this month, Schmidt joined 20 other attorneys general seeking to avoid litigation by sending a letter to U.S. Treasury Secretary Janet Yellen asking her to confirm the federal legislation would not be implemented in a way that strips states of their taxing authority. However, the lawsuit filed yesterday argues her response did not place limits on the vague provision – uncertainty that she admitted exists in referring to the ambiguity as a “thorny” issue in testimony to Congress.

The attorneys general filed the lawsuit against the U.S. Department of Treasury, Secretary Yellen and the department’s Acting Inspector General Richard K. Delmar, who would be responsible for seeking any potential claw back of federal funds.

The lawsuit was filed in U.S. District Court for the Northern District of Alabama. A copy can be found at https://bit.ly/3fuDlKE.

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