Federal judge in Ohio case rules federal government cannot control state income taxes

This is a very important ruling, which probably won't get too much coverage. It at least slows the central government efforts to encroach on certain individual state rights and policies.

Article from yesterday's Wall Street Journal.

Federal Judge Douglas Cole on Thursday ruled in Ohio’s favor in its challenge to the American Rescue Plan Act, aka the March spending blowout. The law granted state and local governments$350 billion but included a catch: The money could not be used to “either directly or indirectly offset a reduction in the net tax revenue.” The Biden Administration wants to steer funds to public employees instead of letting states cut taxes.

In blocking the tax-cut ban, Judge Cole criticized in particular the ambiguity of the mandate Washington placed on Ohio. The provision would let the Treasury Department challenge “essentially any reduction in the rate of any one or more state taxes,” he wrote, “even if other tax rates were increased.” His permanent injunction frees Columbus lawmakers from having to trade control over taxes for federal relief.

The judgment was well-timed, as the Legislature didn’t wait to put new tax cuts in place. On the same day as the ruling, Gov. DeWine signed the state’s 2021 budget, which lowers income-tax rates for all Ohio taxpayers. The reform eliminates the previous top rate of 4.8% on incomes above $221,000, and sets a new ceiling of 4% for all filers earning more than $111,000 a year. There are also rate cuts for each lower bracket.

Leaving more money in taxpayers’ hands makes sense amid a nationwide rebound in state tax revenue. Even without federal aid, states are benefiting from rising capital gains revenue from the housing and stock-market booms, as well as from recovering business sales. States such as New York and California are using the windfall to increase spending even more than they usually do, but Ohio is joining eight others that have cut taxes this year.

Judge Cole’s injunction is limited to Ohio, but separate lawsuits may soon determine whether other states accepting federal funds will also be spared Washington’s intrusion on their tax policies.

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The ruling should encourage more states to cut taxes this year. The Treasury may challenge tax cuts in court, but it would be wiser to learn from Ohio and retreat. Democrats want to stop tax competition among the states to slow migration from high-tax locales. But in doing so by federal order they have violated a core principle of the separation of powers.