Tennessee Can Receive Federal COVID Money Even If It Cuts Taxes, Judge Rules

Tennessee should be allowed to receive billions of dollars in federal aid without committing to a ban on cutting taxes, according to a federal judge’s ruling. Tennessee and Kentucky challenged the tax cut restriction in the American Rescue Plan Act.

The federal government was trying to keep states from taking the money and just reducing their own spending and cutting taxes. The National Federation of Independent Business, however, argues that tax cuts should be just as much a part of stimulus as new spending. Tennessee director Jim Brown says the district court shared the NFIB’s view.

“As the judge said in the case, this amounted to a ‘coercive grant of federal money.’ And that was the impetus for the case,” Brown says. “What we argued in this case was that if they wanted to do tax cuts … then they should be able to do that.”

In his order (read here), Judge Gregory Van Tatenhove cites conversations between founding fathers Thomas Jefferson and Alexander Hamilton regarding the tension between federal and state power.

“The pandemic has many state and local governments treading water. The federal government’s rescue boat has arrived in the form of the ARPA [American Rescue Plan Act], but instead of offering a hand to hoist up its sinking co-sovereigns, it has offered a pen and paper listing conditions of rescue,” Van Tatenhove writes. “Out of all of the powers reserved to the states, there is no power more central to a state government’s sovereignty than the power to tax.”

The NFIB argued that cutting taxes should be seen as potential stimulus in the same way new spending is. In Tennessee, Brown says the NFIB is most interested in the state following through with fully repealing the privilege tax on high-earning occupations like attorneys, physicians and lobbyists. In 2013, professional athletes lobbied to have their $7,500 annual tax repealed.

The case was filed in tandem by the Commonwealth of Kentucky’s Attorney General Daniel Cameron and Tennessee Attorney General Herbert Slatery — both Republicans. The ruling can still be appealed by the federal government, but the decision allows the two states to take the money and, at least for now, consider tax cuts in the coming years.

According to a state spokesperson, Tennessee has not yet filed to receive its ARPA funds, though a National Council of State Legislatures database finds that most states have already certified and submitted plans.