Kansas attorney general joins lawsuit to break chilling effect on state tax cuts

Question pivots on federal power to control indirect use of stimulus aid

Kansas Attorney General Derek Schmidt joined a dozen other attorneys general in support of a lawsuit challenging a federal law limiting direct and indirect use of COVID-19 stimulus funding to reduce state taxes. (Noah Taborda/Kansas Reflector)
Kansas Attorney General Derek Schmidt joined a dozen other attorneys general in support of a lawsuit challenging a federal law limiting direct and indirect use of COVID-19 stimulus funding to reduce state taxes. (Noah Taborda/Kansas Reflector)

TOPEKA — Kansas Attorney General Derek Schmidt jumped on the lawsuit bandwagon of states taking legal action to challenge constitutionality of a federal economic stimulus law preventing states from indirectly using emergency funding to lower taxes.

The action was timely because the House and Senate sent Democratic Gov. Laura Kelly a bill slashing state tax revenue by $285 million over a three-year period. The federal prohibition threatens the state’s authority to establish tax policy, the attorney general said.

Schmidt, who is a Republican candidate for governor in 2022, joined a dozen attorneys general in an Alabama lawsuit against the U.S. Treasury Department to erase action by Congress and President Joe Biden to restrain states from taking into account federal COVID-19 relief when making tax cuts.

“Of course, Congress may prohibit the use of federal funds to directly pay for state tax reductions,” Schmidt said. “But in this case, Congress also has tried to prohibit the ‘indirect’ use of federal aid to offset state tax reductions.”

He said Thursday such a “vague, sweeping federal prohibition” could thwart any change in state tax law resulting in less revenue being collected.

“The federal government cannot micromanage state taxes that way. We are concerned that the U.S. Treasury Department has not immediately and unequivocally made clear it will interpret this new federal law narrowly to avoid unlawfully encroaching on authority reserved to the states by our U.S. Constitution,” Schmidt said.

On March 16, Schmidt was part of a larger group of 21 attorneys general urging Treasury Secretary Janet Yellen to declare the stimulus law wouldn’t be interpreted to deny state sovereignty on tax issues. In response, Yellen said the law placed reasonable conditions on how states could use stimulus funding.

The law was intended to keep states from using the aid for non-pandemic expenditures beyond state revenue losses, including ideas for shoring up pension systems, rainy-day funds and to make changes in tax rates, rebates, deductions, credits or other mechanisms to delay tax increases.

Under the Kansas Legislature’s tax bill forwarded to Kelly, the standard deduction on income taxes paid by individual filers would be increased. The package included tax relief for businesses and individuals vetoed in 2019 by Kelly, who has warned legislators about recklessly reducing state revenue.

The House approved the bill 81-43 and the Senate concurred 30-10. It represented a reversal for the Senate after the GOP majority in that chamber pushed through a bill vastly exceeding the $285 million plan sent the governor.