Oklahoma Attorney General John O’Connor on Thursday heralded a federal court ruling that ensures Oklahomans will benefit both from federal relief dollars and from tax cuts enacted by the state earlier this year.
“This is a great victory for the State and for our new State Reserved Powers Protection initiative started by the Legislature, which fights federal overreach,” O’Connor said in a statement praising U.S. District Judge L. Scott Coogler’s decision. The case was heard in Alabama.
O’Connor and the attorneys general of 12 other states filed a lawsuit challenging a provision of the American Rescue Plan Act that stipulated that states receiving pandemic relief funds could not use those dollars to offset tax cuts. Oklahoma received about $3.2 billion of the $195 billion allocated in flexible relief funds that went to states.
Justice Department lawyers defending the provision in court argued the provision was added to ensure that the funds would be used for pandemic recovery, not to “replace purposeful decreases in net tax revenue,” according to court filings.
But the guidance on use of ARPA funds was vague enough to discourage states receiving relief funds from enacting any kind of tax cuts for the next three years, the court found.
“The Tax Mandate’s restriction on direct or indirect state tax cuts pressures States into adopting a particular – and federally preferred – tax policy,” Coogler wrote in his decision. “The inherent ambiguity in the text of the mandate may disincentive the plaintiff states from considering any tax reductions for fear of forfeiting ARPA funds. This is a federal invasion of State sovereignty.”
The threat of losing ARPA funds did not dissuade Oklahoma lawmakers from enacting tax cuts this year. Lawmakers voted to reduce the top individual income tax rate from 5% to 4.75% in 2022, reducing collections by an estimated $170 million for the year. Corporate income taxes were reduced from 6% down to 4%, reducing collections by an estimated $110 million for the year.
House Speaker Charles McCall, R-Atoka, joined O’Connor in announcing the states’ victory, noting that Oklahoma lawmakers weren’t going to allow their hands to be tied by the federal directive.
“Oklahoma could grant tax relief for businesses and all citizens this year while also making record education and savings investments because our state manages its own finances extremely well,” McCall said. “Even though Oklahoma never would have been subject to the attempted restriction due to surplus state revenues, it was important to stand up and challenge this obvious federal overreach. We appreciate the attorney general’s office for continuing to push back against unconstitutional federal policy by using the authority and funding authorized by the Legislature for that important purpose.”
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