When Congress passed the American Rescue Plan Act (ARPA) in March of last year, a key point of contention was the provision of hundreds of billions of dollars in additional aid to state and local governments that had by and large gotten their fiscal situations back under control. But excessive as that aid was, the federal government has now twice attempted to use those funds to hold state policymaking hostage.
The first controversy arose from legislative language, inserted at the eleventh hour, that prevented states from using ARPA funds to “directly or indirectly” offset tax cuts. This vague wording raised questions about whether states could cut taxes at all if they accepted federal funds, given that it could conceivably be argued that federal funds were “indirectly” used to offset the revenue reduction.
Even though the Treasury Department here did not attempt to enforce the strictest possible interpretation, it still stuck by the argument that the federal government could attempt to prevent states from using the aid to cut taxes in any way. This ruling led to multiple lawsuits alleging an impermissible encroachment upon state sovereignty, and the Treasury Department has already suffered losses in court.
But apparently Treasury has still not learned its lesson. Since the passage of ARPA, policy experts had urged the Treasury Department to affirm that states could use federal funds to replenish their unemployment insurance (UI) trust funds. After all, most states’ funds have been depleted by the pandemic, and nine have had to borrow just under $40 billion from the federal government to pay its obligations.
Not only is it an area of need, but federal funds represent a one-time cash infusion — meaning that they are ill-suited for funding recurring expenses. Replenishing UI trust funds, is a way to use one-time funds for a one-time purpose.
Initially, Treasury seemed to be doing the right thing. In April of 2021, soon after the passage of ARPA, Treasury released a guidance stating that states could indeed use ARPA funds to replenish their UI trust funds.
That should have been the end of the matter. But buried on page 106 of the latest Treasury guidance issued last month, Treasury made up a new twist — states that use ARPA funds to replenish their UI trust funds cannot reduce UI benefits in any way until 2025.
This comes not from ARPA, or any other legislative language. It is simply Treasury’s own condition, attached at its own whim.
Fortunately for states, this final rule does not become effective until April 1. That means that states have until then to pass legislation using ARPA funds to replenish their UI trust funds without being bound by Treasury’s added condition.
Even so, this remains an utterly arbitrary restriction on states’ authority. The lack of legislative basis puts the Treasury Department on extremely shaky legal footing, and — as the result of the other attempt to restrict state use of ARPA funds shows — even legislative restrictions on state use of federal funds can be unconstitutional if it is deemed to be impermissibly coercive on the part of the federal government.
This condition attached to any state that uses ARPA funds in a fiscally responsible manner is foolish and unnecessary. But in the meantime, the best thing that states that wish to replenish their UI trust funds with ARPA funds can do is to do so now, before April 1, 2022, to avoid Treasury’s restriction.
