A federal appeals court is set to weigh in on a simmering dispute over states’ use of pandemic relief funds in the American Rescue Plan Act.
The Sixth Circuit Court of Appeals next month will take up the U.S. Treasury Department’s appeals in a pair of lawsuits with Ohio and Kentucky over the so-called tax mandate in ARPA that restricts the use of stimulus funds to offset tax cuts.
At stake is not only how the states use the stimulus funds but also whether the federal government will be able to claw back the money it finds was improperly used.
“The risk is that states will be walking on eggshells waiting for selective enforcement by the Treasury Department and if you cross the [Biden] administration, you might have to repay billions of dollars,” said Joe Bishop-Henchman, the National Taxpayers Union Foundation's Vice President of Tax Policy and Litigation, which has filed amicus briefs in support of the states.
The Sixth Circuit will hear oral arguments in the State of Ohio v. Janet Yellen, Secretary of Treasury et al on January 26. Also in January, briefing will begin in the Commonwealth of Kentucky et al v. Yellen, with no date yet set for oral arguments.
The tax mandate has proven one of the most controversial aspects of the $1.9 trillion ARPA, which was passed in March. So far 20 states have filed six lawsuits challenging the provision. States received roughly $195 billion in flexible relief funds under the law, which must be used by Dec. 31, 2024. The money features two restrictions: that it may not be deposited into any pension funds and the tax mandate, which prohibits states and territories from using the funds “either directly or indirectly to offset a reduction in the net tax revenue.”
The law also requires that states self-report revenue for the three-year period and how it covered any shortfalls, giving Treasury the ability to recoup any funds it finds were used in violation of the tax mandate.
States have argued that ARPA exceeds Congress’ power under the Spending Clause of the Constitution because it’s ambiguous — mostly due to the word 'indirectly' in the statute — and that the mandate violates the 10th Amendment because it intrudes into state sovereignty by prohibiting states from reducing taxes for the next three years.
ARPA continues to operate under interim final rules, but final rules, when released, are not expected to address the conflict, said Bishop-Henchman.
Federal courts so far have mostly ruled in favor of the states, though two judges threw out complaints brought by Missouri and Arizona, saying the states lack standing. Arizona has appealed to the Ninth Circuit Court of Appeals, with arguments set for Jan. 13. No argument date has yet been set for Missouri, which appealed to the Eighth Circuit.
A U.S. District judge in the largest case, brought by West Virginia and including 12 other states, on Nov. 15
“The tax mandate’s restriction on direct or indirect state tax cuts pressures states into adopting a particular — and federally preferred — tax policy,” U.S. District Judge L. Scott Coogler wrote in his decision. “The inherent ambiguity in the text of the mandate may disincentive the plaintiff states from considering any tax reductions for fear of forfeiting ARPA funds. This is a federal invasion of state sovereignty.”
The Kentucky case is different from the others as the judge, who ruled in favor of Kentucky and Tennessee in September, based his argument on the fact that the tax mandate coerces states to adopt federal policy, said Bishop-Henchman.
“In the other two victories for the states, the judges emphasized the ambiguity of the statute,” he said. “Whereas in the Kentucky case, it’s about coercion, which is to say that even if Congress is being clear, it’s problematic in that it’s essentially ordering the states to engage in a certain tax policy,” he said. “Congress can’t condition federal funds in a way that states can’t say no."
The NTU will continue to file briefs in support of the states, Bishop-Henchman added.
“We’re making sure that there’s a national perspective in that so it’s not just parochial interest of one state, because this affects all states,” he said.
