Well, that didn’t take long. The first major bill passed by the new Democratic congressional majority and signed into law by our new president on March 11 had already provoked a constitutional challenge by March 17. The attorney general of Ohio filed suit against the Biden administration last Wednesday in the U.S. District Court for the Southern District of Ohio, alleging that the American Rescue Plan Act (ARPA) unconstitutionally and coercively limits the right of states to manage their internal fiscal policies: “This suit challenges an unconstitutional provision in the American Rescue Plan Act — a provision that allows the federal government to commandeer state taxing authority.”
If the use of “commandeer” in this context seems vaguely familiar, it’s probably a vestigial memory of the Obama administration’s failed attempt to exert equally questionable control over state budgets using the mandatory Medicaid provision of Obamacare. Fortunately, in NFIB v. Sebelius, the Supreme Court ruled 7-2 that such coercion is unconstitutional. Ohio’s ARPA challenge involves a provision whereby $195.3 billion in fiscal recovery aid will be distributed among the states and the District of Columbia. Beyond its effect on the federal budget deficit, this doesn’t seem particularly pernicious. The real problem arises from the restrictions the provision imposes on the power of the states to reduce taxes:
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.
This constitutionally dubious language was inserted into the legislation by the Democrats at the last minute, the New York Times reports, for the express purpose of interfering with the ability of the states to make changes in their tax codes. It is a deliberate and insolent attack by the federal government on state sovereignty and the doctrine of federalism. As Ohio Attorney General Dave Yost puts it in his Motion for Preliminary Injunction, “The Tax Mandate thus gives the States a choice: they can have either the badly needed federal funds or their sovereign authority to set state tax policy. But they cannot have both. In our current economic crisis, that is no choice at all. It is a metaphorical ‘gun to the head.’ ”
Ohio is by no means the only state where this surprise addition to ARPA caused an immediate uproar. The day before Ohio filed its lawsuit, 21 state attorneys general wrote to Treasury Secretary Janet Yellen to protest what they obviously consider to be an outrageous example of federal overreach: “This language could be read to deny States the ability to cut taxes in any manner whatsoever … Absent a more sensible interpretation from your department, this provision would amount to an unprecedented and unconstitutional intrusion on the separate sovereignty of the States.” Lest anyone mistake this response as mere political bluster, consider this reaction from the National Law Review:
This provision of ARPA is, in our view, the most significant federal pre-emption of state tax policy in history. For the next three years, legislators and tax administrators alike will be scrutinized as their tax policy decisions are evaluated through the lens of this prohibition. This level of congressional control over state tax policy decisions and fiscal autonomy likely violates the Tenth Amendment of the US Constitution and would dismay the framers’ basic notions of federalism.
The Tenth Amendment states, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” Consequently, because the Constitution doesn’t empower the federal government to set state taxing policy, Congress has no authority to impose the restrictions contained in this last-minute addition to ARPA. In response to the outcry caused by this provision, a Treasury spokesperson told the Associated Press that the provision isn’t meant as a blanket prohibition on tax cuts: “In other words, states are free to make policy decisions to cut taxes — they just cannot use the pandemic relief funds to pay for those tax cuts.”
This predictably flippant comment oversimplifies the problem, of course. If the provision in question were that clear, it would not be so controversial. It was ostensibly inserted in the legislation to prevent states from using COVID-19 relief money to fund tax cuts, but it is worded so nebulously that it defies any attempt to divine such a straightforward interpretation. Particularly problematic is its attempt to prohibit both direct and indirect diversion of relief funding to tax cuts and the wide array of actions included in that nebulous category. Any determined Treasury Department auditor can find multiple violations involving the “indirect” use of relief finds as they are defined in this provision.
State of Ohio v. Yellen will not be the last lawsuit filed against ARPA’s “Tax Mandate.” West Virginia Attorney General Patrick Morrisey, one of the 21 signatories to the letter quoted above, suggests that they are already strategizing about potential litigation. Their letter to Secretary Yellen threatens to take “appropriate action” if they don’t receive a satisfactory answer by March 23. It would also be wise for Yellen to wrap up the ARPA problem before the dreaded HR 1 is signed into law. Twenty state AGs have already committed to fighting the latter monstrosity with everything they’ve got. The Biden administration doesn’t want to find itself in a two-front constitutional war with the states during the run-up to 2022.