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A. INELIGIBLE USES OF FUNDS UNDER THE ARPA STATUTE <br />1. OFFSET A REDUCTION IN NET TAX REVENUE <br />For states and territories (recipient governments347), section 602(c)(2)(A)—the offset <br />provision —prohibits the use of SLFRF funds to directly or indirectly offset a reduction in net tax <br />revenue resulting from a change in law, regulation, or administrative interpretation348 during the <br />covered period. If a state or territory uses SLFRF funds to offset a reduction in net tax revenue <br />resulting from a change in law, regulation, or interpretation, the ARPA provides that the state or <br />territory must repay to Treasury an amount equal to the lesser of (i) the amount of the applicable <br />reduction attributable to the impermissible offset and (ii) the amount of SLFRF funds received <br />by the state or territory. A state or territory that uses SLFRF funds to offset a reduction in net tax <br />revenue does not forfeit its entire allocation of SLFRF funds (unless it misused the full allocation <br />to offset a reduction in net tax revenue) or any non-SLFRF funding. <br />The interim final rule implements these conditions by establishing a framework for states <br />and territories to determine the cost of changes in law, regulation, or interpretation that reduce <br />tax revenue and to identify and value the sources of funds that will offset—i.e., cover the cost <br />of —any reduction in net tax revenue resulting from such changes. The interim final rule <br />recognizes three sources of funds that may offset a reduction in net tax revenue other than <br />SLFRF funds: organic revenue growth, increases in revenue due to policy changes (e.g., an <br />increase in a tax rate), and certain cuts in spending. <br />347 In this sub -section, "recipient governments" refers only to states and territories. In other sections, "recipient <br />governments" refers more broadly to eligible governments receiving funding from the SLFRF. <br />348 For brevity, this phrase is referred to as "changes in law, regulation, or interpretation" for the remainder of this <br />Supplementary Information. <br />316 <br />