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Though corporate tax giveaway problems often arise at the state and local level, federal lawmakers could technically implement a fix for the whole nation. For decades, in fact, a few policymakers have pushed for Congress to use its power to regulate interstate commerce to end the race to the bottom on corporate handouts.

As this piece from 1995 argued, “For example, Congress could tax the receiving business on the direct and imputed value of these benefits, it could deny tax-exempt status on debt of states that offer such subsidies, or it could deny federal funding that would otherwise be payable to such states, much as it denies highway funds to states that fail to meet federal pollution standards.”

A version of that last suggestion may now be reality. Perhaps inadvertently, and definitely temporarily, but reality nonetheless.

Here’s what happened. The recently-enacted pandemic relief bill includes a provision meant to prevent states from using funds meant for COVID aid on tax cuts. Specifically, the laws says:

(A) IN GENERAL.—A State or territory shall not use the funds provided under this section or transferred pursuant to section 603(c)(4) to either directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.

Any state that does reduce revenue will have to pay back the Treasury Department by the same amount of the revenue reduction — so tax cuts will essentially have a double cost, as states will lose both the revenue they would have raised and an equal amount in recovery funds.

So what does this provision mean for corporate tax incentive programs? Well, a plain reading of the law would seem to cover new giveaway programs, as they lose revenue due to changes in law, regulation, or administrative interpretation. So states like Michigan that are considering creating incentive programs in the name of pandemic recovery probably want to think twice. The provision could also be applied to reauthorizations of existing programs — so Texas may have an issue with its big reauthorization of its Chapter 313 program. Administrative interpretation could even mean new awards under existing programs, depending on how they’re structured.

In any case, state lawmakers should be much more wary about doling out any corporate largesse, because it could very well cost them more than they bargain for, as they presumably need the funds provided by the federal relief bill, in one way or another.

But none of this, of course, is up to me. Treasury will be issuing guidance on exactly how the law works and how this provision will be implemented. To that end, 12 organizations, including my own, released a letter to Treasury this week calling on it “to ensure that the forthcoming guidance explicitly covers economic development incentives” at the state and local level.

To be clear, this would only be a temporary cessation in economic incentive hostilities, as the law’s prohibition on revenue losses only applies through 2024. But even that relatively tiny window would still provide two promising things: First, time to build evidence showing incentives aren’t worth the cost, since states will have to do without at least some of them and, as all the research in this area backs up, will probably be just fine. Second, time to work on solutions like the interstate compact without having to play whack-a-mole with new, bad programs all the time.

The general prohibition on using recovery funds to cut taxes has already caused state attorneys general, most of them Republicans, to complain and launch a lawsuit, but Treasury Secretary Janet Yellen is standing firm, thus far, on the general provision, if not any specifics. “It is well established that Congress may place such reasonable conditions on how States may use federal funding. Congress includes those sorts of reasonable funding conditions in legislation routinely, including with respect to funding for Medicaid, education, and highways,” she said.

If Treasury does indeed use this provision to crack down on corporate giveaways, then, it could be a big deal. I’ll keep a close eye on it and let you all know what happens next.

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This post initially appeared in a slightly different form on the author’s Substack, Boondoggle.

Pat Garofalo is the author of The Billionaire Boondoggle: How Our Politicians Let Corporations and Bigwigs Steal Our Money and Jobs, the Boondoggle newsletter, and the director of state and local policy at the American Economic Liberties Project.

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