Kentucky and Tennessee have urged a federal court to deny the government’s effort to dismiss their lawsuit challenging a provision in the COVID-19 relief act that bars the aid from being used to offset reductions in net tax revenue.
The states’ August 11 response brief in Kentucky v. Yellen asked the U.S. District Court for the Eastern District of Kentucky to grant summary judgment in their favor and deny the Justice Department's July 21 motion to dismiss the suit. The department's motion argued that the complaint lacks standing and opposed the states’ motion for summary judgment.
In their response brief, the states argued that they are injured by the provision because complying with it will, at the least, arguably limit their authority over tax policy.
The suit was filed by Kentucky Attorney General Daniel Cameron (R) and Tennessee Attorney General Herbert Slatery III (R). It challenges a provision in section 9901 of the American Rescue Plan Act (P.L. 117-2) that restricts aid from the act from being used by a state or territory 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.” States that violate the provision must repay the funds.
Kentucky and Tennessee filed a complaint for declaratory and injunctive relief in April, arguing that ARPA’s restriction is an unconstitutional power grab that usurps the states’ sovereign authority. The lawsuit claims that the provision violates the limits on Congress’s power to spend under Article I and the Constitution’s prohibition against commandeering.
The states later filed an amended complaint June 21 after Treasury issued guidance in May on the provision via an interim final rule. In that complaint the states argued that Treasury “is now interpreting the tax mandate as a broad ban that will prevent the states from lowering their taxes at all.”
In its July 21 motion, the Justice Department argued that the case is not yet ripe because the states “have not alleged conduct that could result in recoupment, and the Treasury Department has not indicated any imminent plans to recoup” from the states.
But the states countered on August 11 that the case is ripe under Article III because the states have standing and that the case “turns on issues that are ‘purely legal, and will not be clarified by further factual development.’”
The states have charged that the provision is unconstitutionally ambiguous, while the Justice Department argues that the provision gives “clear notice to a state official deciding whether to accept Rescue Plan funds that those funds are conditioned on the state's agreement not to use the funds to offset a reduction in net tax revenue resulting from changes in state law.”
But the states argued in their response brief that the defendants have failed to give a clear definition for the provision and have “brush[ed] off the ambiguities . . . by simply reciting its language and declaring it clear.”