Tax Strings on Stimulus Funds Fuel Fight Over State Sovereignty

A state and local tax cut prohibition Congress included in the latest $1.9 trillion pandemic relief law has the Treasury Department in legal and political crosshairs over how states can—and cannot—use federal funding.

Democratic lawmakers placed that restriction on roughly $350 billion in aid included in March’s pandemic relief law (Public L. 117-2). States can’t use the funding—intended to help alleviate pandemic-induced budget problems—to “directly or indirectly” offer rate cuts, rebates, deductions, or credits.

Treasury Secretary Janet Yellen has acknowledged that department staff will have to thread the needle carefully in drafting guidance to states and ...