One of the provisions in the Biden administration’s $1.9 trillion American Rescue Plan of 2021 prohibits states from using the federal relief cash either directly or indirectly to reduce taxes. In response, Ohio, Arizona, Missouri and a host of other – mostly red – states have filed suit against the Biden administration challenging the prohibition. While those challenges make their way through federal court, the Department of the Treasury seems to be working to soften the perceived stance of the administration. A Treasury statement from just over a week ago clarifies that states are free to cut taxes without a penalty under the latest pandemic relief law with the caveat that they just can’t use the new federal funds to do so. The massive relief law provides states with $195 billion in new federal but also includes a clawback provision that would allow Washington to recapture those federal monies equal to any amount of tax reduction not paid for through other state revenues. Interestingly, the prohibition raises a broad array of questions about unemployment insurance cuts, delayed tax filing deadlines and small business grant programs. At the same time, some perceive the federal dictates as punishing those states that may have lived within their means over the past several years, while simultaneously bailing out those that have been more profligate in the spending with generous retirement and public employee benefit packages. The restriction could even be in play for several years, even through 2024.