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U.S. Treasury to issue new guidance on state tax provision in stimulus act

(Reuters) - The U.S. Treasury said on Tuesday it would issue further guidance on a contested provision in President Joe Biden’s $1.9 trillion coronavirus relief package that prohibits states from using stimulus money to replace revenue lost to tax cuts.

FILE PHOTO: A sign marks the U.S Treasury Department in Washington, U.S., August 6, 2018. REUTERS/Brian Snyder

The provision has drawn criticism from 21 Republican state attorneys general, with Ohio’s top lawyer suing the Biden administration last week, arguing that broad language in the American Rescue Plan Act violated the state’s constitutional right to determine its own tax policies.

Treasury Secretary Janet Yellen said in a written response to those concerns: “It is well established that Congress may place such reasonable conditions on how states may use federal funding.”

“Nothing in the act prevents states from enacting a broad variety of tax cuts,” Yellen said, refuting the attorneys general arguments that the stimulus measure denies states the ability to cut taxes in any manner whatsoever.

“It simply provides that funding received under the Act may not be used to offset a reduction in net tax revenue resulting from certain changes in state law,” Yellen said.

If states do use the funds to offset tax cuts, they will forfeit that amount from the total funds they receive, Yellen said.

If states lower certain taxes but use other means to offset the lost revenue - not stimulus funds - “the limitation in the act is not implicated,” Yellen said.

She said the Treasury’s further guidance would more specifically address issues raised by the attorneys general, along with additional details about how the provision will be administered.

Yellen said earlier on Tuesday that the Treasury would finalize rules governing the use of $350 billion in funding to aid states, municipalities, tribal governments and territories within 60 days, a move that would precede distribution of the funds, which are meant to replace revenues lost to the COVID-19 pandemic.

But if the tax provision ends up in a lengthy court fight, that could delay aid to state and local governments further.

Reporting by David Lawder; Editing by Chris Reese and Peter Cooney