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SO WHAT HAPPENS NOW? The tax world is wondering what to make of a provision in the coronavirus relief package inserted by Democrats just before the measure passed the Senate that seeks to ban states and localities from using their portion of new funding to cut taxes.

You certainly can understand the logic behind the Democrats’ move here: If those governments have the budget space to be offering tax relief, then they didnt really need any of the hundreds of billions of dollars in new relief funds from the most recent coronavirus relief measure.

The problems come with trying to turn that thought into a fleshed-out policy, and now lots of experts are anxiously awaiting how strict the Treasury guidance on that provision will be.

Money in budgets can be fungible, as they say, but Senate Democrats didnt write a lot of leeway into this particular provision, which says that funds from the most recent pandemic relief measure cant be used to either directly or indirectly offset revenue reductions.

So to some, that raises the question of whether states or localities that get relief money can cut taxes at all between now and 2024. And that particular provision comes into play as critics continue to say that the Democrats measure offered far more aid to states than last years state revenue figures warranted, and as states continue to rebound from the coronavirus at different speeds.

Idaho and Utah are moving tax cut legislation but these states are in legitimately good fiscal shape, said Richard Auxier of the Urban-Brookings Tax Policy Center, adding that those two states could spend their federal relief money and still have room for a tax cut from their own funds.

MORE ON THAT IN A BIT, but welcome to the Ides of March edition of Weekly Tax, where we will try to be as upfront as possible about all the various tax news. (Also, welcome back NCAA Tournament!)

Certainly been some chatter about this type of event recently: Today marks 108 years since the newly inaugurated Woodrow Wilson held the first presidential news conference and apparently he didnt really do it on purpose.

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BACK TO TAX CUTS: Mississippi and West Virginia are among the states considering big income tax cuts these days, but experts say that there are plenty of more under-the-radar state and local policies that could be barred under the new Covid-19 bill which is why theyre hoping for Treasury guidance as soon as possible.

What about states trying to expand their Earned Income Tax Credit or Child Tax Credit, something Democrats just passed in their own relief package? What about states that want to follow the coronavirus packages lead and exempt some $10,000 worth of unemployment benefits from taxes? Could they do that under this provision?

And what if states used relief funds to put money into their unemployment insurance trust funds, which in some places would prevent automatic business tax hikes? Does that count as delaying the imposition of any tax or tax increase, as barred by the new law?

Jared Walczak of the Tax Foundation noted that, presumably, states would be allowed to cut taxes if that was offset by revenue increases or growth elsewhere. The big unanswered question is how restrictive the Treasury guidance will be, and how it would handle, say, a situation where a state used some of the funds to pay the salaries of public health and public safety officials a permissible expense, but one that reduces the need for state outlays and then cuts taxes, either in 2021 or in a subsequent year, he said.

Another big question: Is this even legal? An increasing number of analysts on the right have their doubts, pointing to the Supreme Courts 2012 decision to uphold Obamacare to suggest the courts might find this provision too coercive. (In NFIB v. Sebelius, the Supreme Court threw out a provision that said that states couldnt get Medicaid funds without a Medicaid expansion.)

Even if it just said ‘directly,’ a court would analyze whether the condition attached to the funds is ‘mild encouragement’ or ‘commandeering the state government.’ However, ‘indirectly’ is a limitless term so it’s hard to see how such a restriction would be constitutional, said Joseph Bishop-Henchman of the National Taxpayers Union.

But Kirk Stark, a UCLA law professor, argued theres a difference between a state having to forfeit all of its Medicaid funds, and losing a funding infusion from a single bill. The differences are so substantial that the Court would have to dramatically expand the unconstitutionally coercive doctrine to strike down this provision, Stark said.

MORE NOTES ON THIS AND RELATED TOPICS: The child tax credit expansion included in the pandemic relief measure is on the books for almost another year, but the lobbying to keep it in place for longer is already well underway, as our Megan Cassella reported.

Some top Republicans, like Rep. Kevin Brady of Texas, the ranking member at House Ways and Means, are suggesting that its no sure thing that the expanded incentives sticks around. But heres a succinct quote from Rep. Ritchie Torres (D-N.Y.) that gets at why it might: Its fair to say the child tax credit was the most consequential but the least controversial provision of the American Rescue Plan. So theres reason for hope.

Moving quick: The latest round of stimulus checks are already starting to hit bank accounts, as Pro Taxs Brian Faler noted.

And the next potential reconciliation package? Pro Transpos Tanya Snyder noted that Democratic tax writers are going to find it difficult to find offsets for a big infrastructure package. One potential idea: A per-mile tax on commercial trucks that has some bipartisan support but is also, not surprisingly, not popular with the trucking industry.

Around the World

OVER TO EUROPE: It feels like its been building toward this, but leaders in Brussels are expected to let the world know in two weeks that theyre ready to pursue an EU-wide digital tax if the global tax talks look likely to fall short, according to our colleagues in Brussels.

To be clear: The draft guidelines outlining that move still hold out hope for the larger negotiations through the Organization for Economic Cooperation and Development to work out during the first half of 2021. But if not, the battle lines within the EU have been drawn for awhile: Larger economies like France, Italy and Spain all support a digital tax, while lower-tax members like Ireland and Luxembourg are on the other side.

Related note: Mathias Cormann, a former Australian finance minister, was chosen to be new OECD chief on Friday  winning a months-long contest that started with 10 contenders late last year, our Paul Dallison reported. Climate change groups have had their concerns abut Cormann, but his most immediate concern might be the global tax talks.

Around the Nation

GO TIME: The New Mexico legislature is making quick work of a measure that seeks to exchange further tax relief for people lower down the income scale for higher taxes on businesses and the wealthy, the Albuquerque Journal reports. Under the proposals, New Mexicos top individual income tax rate would rise from 5.9 percent to 6.2 percent, corporate tax cuts less than a decade old would get phased out and more people would gain access to tax credits for lower-income workers. The Senate tax committee cleared the measure on Saturday, though even some Democratic lawmakers wondered about raising taxes at a time when the states revenue situation was in pretty decent shape. Republican opponents added that the bill would hurt companies still struggling to get their footing because of the pandemic, but supporters say the measure is needed both to make New Mexicos tax system more progressive and less reliant on oil and natural gas.

HAPPENING THURSDAY – PLAYBOOK INTERVIEW WITH CONGRESSMAN LEE ZELDIN: The GOP has not won a statewide election in New York in nearly two decades. Rep. Lee Zeldin (R-N.Y.), an ally of former President Donald Trump, is one of several Republicans considering a challenge against embattled New York Gov. Andrew Cuomo. Join Playbook co-authors Tara Palmeri and Ryan Lizza for a conversation with Rep. Zeldin to discuss a potential gubernatorial run and how he is working with Democrats in Congress. REGISTER HERE.

Quick Links

President Joe Biden is looking at Gene Sperling to be czar for the Covid relief plan.

Treasury Secretary Janet Yellen says the Biden administration isn’t sure whether to go after a wealth tax.

Washington Post editorial page: “Its not too soon to start thinking about tax reform.”

Related note, via Bloomberg: “Tax Hikes on Rich Loom If Treasury Revives Hard Look at Estates.”

Did You Know?

New Mexico’s border with Mexico spans around 180 miles, or less than a tenth of the U.S.’s full southern border.