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State Government Funds in New COVID-Relief Law Prohibits Tax Cuts

March 18, 2021

AGC Concerned About Impact on PPP Loan Forgiveness State Tax Treatment & More

The $1.9 trillion American Rescue Plan Act provides $219.8 billion to state and territorial governments to mitigate the fiscal effects stemming from the pandemic. Included at the last minute, however, is a clause that prohibits any state or territory receiving the aid “to either directly or indirectly offset a reduction in the net tax revenue of such State or territory.”  AGC is very concerned about the effects of this provision, including the impact on states taking actions to conform their state tax treatment of Paycheck Protection Program (PPP) loan forgiveness to the federal tax code.

This broad restriction applies to any actions taken by the states beginning March 3, 2021, and applying through the end of 2024.  If a state does pass legislation to reduce its “net tax revenue” during that period, AGC believes it would have to surrender any aid that it received equal to the amount of the reduction in taxes.  In other words, if a state cut taxes by $100 million dollars, it would lose out on $100 million in federal aid.

AGC is very concerned about the effects of this provision for a number of reasons.  For example, some state tax codes do not have “rolling conformity” with the federal tax code.  This legislation may require states that pass legislation to, for example, conform with the recent changes to the internal revenue code to allow businesses to fully deduct expenses associated with Paycheck Protection Program (PPP) loans, to raise taxes elsewhere.  Additionally, states that are considering legislation to pair an increase in their gas tax to fund infrastructure investment with an income tax cut may reconsider that proposal.

AGC is working with other stakeholders to send a letter to Secretary of the Treasury Janet Yellen to mitigate the impact of this provision by allowing any “conformity” legislation passed at the state level to not count as a reduction in “net tax revenue,” amongst other considerations.

If you have any questions or concerns, please contact Matthew Turkstra at (202) 547-4733 or matthew.turkstra@agc.org.

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