As if the tensions between Governor Sununu, the New Hampshire House and Senate were not enough to potentially gum up the state budget process, a controversial provision of the American Rescue Plan Act poses another challenge for lawmakers in Concord.
Section 9901 of the act prohibits states from applying the funds it distributes to “either directly or indirectly offset a reduction in net tax revenue arising from a change in law, regulation or administrative interpretation … that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit or otherwise) or delays the imposition of any tax or tax increase.”
In other words, states receiving money through the $1.9 trillion federal Covid relief bill can’t use that funding as a means of cutting taxes.
“This provision of the American Rescue Plan Act appears to effectively, for every dollar of state revenue lost to tax reductions, cost the state a dollar in federal aid,” said Phil Sletten, senior policy analyst at the New Hampshire Fiscal Policy Institute. “This dollar-fordollar reduction would further limit the resources available to invest in New Hampshire’s people and economy.”
The act specifies the legitimate uses of the fiscal relief distributed among states. The money can be applied against costs incurred in responding to the pandemic, including its adverse economic effects on households, businesses and nonprofit organizations.
Funds can supplement the pay of essential workers and cost of public services to the extent the pandemic depleted revenues for these purposes in the most recent fiscal year. And funds can be invested in water, sewer and broadband.
The act expressly prohibits transferring funds from these categories to offset net reductions in tax revenue.
The National Law Review describes the prohibition as “the most significant federal pre-emption of state tax policy in history” and anticipates state legislators and tax officials “will be scrutinized as their tax policy decisions are evaluated through the lens of this prohibition” for the next three years.
In New Hampshire, the biennial budget adopted by the House and now before the Senate is studded with tax cuts projected to reduce net revenues by $157.7 million in fiscal years 2022 and 2023. And, should lower tax rates and other tax changes carry into the next biennium, any reduction in net tax revenue could be subject to the prohibition through fiscal year 2024 and the first half of fiscal year 2025.
A House-proposed one-time $100 million cut in the $363 million raised by the Statewide Education Property Tax (SWEPT) since 2006 easily represents the largest share of the total net reduction in revenue. Although the SWEPT is collected and retained by municipalities — not remitted to the state — it is clearly a state tax liable to the prohibition.
In addition, proposals for reduced rates of the meals and rentals tax, business enterprise tax and business profits tax, along with limiting the business tax credit carryforward, are also included in the House budget proposal that is now in the Senate.
Thirteen states, led by West Virginia and with New Hampshire among them, have filed suit in federal district court in Alabama claiming Section 9901 of the American Rescue Plan is an unconstitutional infringement of the 10th Amendment. — MICHAEL KITCH
