May municipalities use ARP funds to make up lost revenue from delinquent tax collections? If so, what are the requirements to provide relief to delinquent taxpayers?

Municipalities will have the opportunity to use resources from the American Rescue Plan Act of 2021 (“ARP”) funds, such as the Coronavirus Local Fiscal Recovery Fund (“CLFRF”), to support government services impacted by revenue loss.^[1] It is unclear at this time whether municipalities will have greater flexibility related to tax reductions and outright tax relief than States and territories. Section 9901 of the ARP (amending 42 U.S.C. § 301-1305, at § 602(c)(2)(A)),^[2] which applies only to the direct State and territory allocations, includes the following language around the restriction on use of funds: 

“(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.” 

While the early interpretations of this section have discussed formal tax breaks or credits, this section uses the phrase “reduces any tax” vaguely before clarifying that this can occur through numerous mechanisms and not just a formal legislative or appropriation action.  

Based on the guidance issued by the Department of the Treasury regarding the earlier Coronavirus Relief Fund of the CARES Act, general financial support to beneficiaries that has a secondary impact of allowing individuals and entities the financial capacity to pay outstanding tax and utility liabilities for things such as rental assistance, food insecurity, job training, and healthcare costs may be allowable under CLFRF. However, guidance from the Treasury has yet to indicate what is allowable under the ARP. This guidance will ultimately indicate whether regulatory language will extend the above-mentioned prohibition on state use to local governments. In the meantime, municipalities should approach this topic cautiously and consider other types of financial assistance to households, small businesses, and non-profits impacted by COVID that do not include the direct forgiveness or relief of outstanding tax obligations. 

Last Revised: April 21, 2021