U.S. Again Moves to Dismiss ARPA Lawsuit in Kentucky Federal Court

COMMONWEALTH OF KENTUCKY, et al.,
Plaintiffs,
v.
JANET YELLEN, in her official capacity as Secretary of the Treasury, et al.,
Defendants.

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF KENTUCKY

DEFENDANTS' REPLY IN SUPPORT OF MOTION TO DISMISS OR,
IN THE ALTERNATIVE, MOTION FOR SUMMARY JUDGMENT

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TABLE OF CONTENTS

INTRODUCTION

ARGUMENT

I. Plaintiffs have failed to establish jurisdiction.

II. Plaintiffs fail to state a claim on the merits.

CONCLUSION

TABLE OF AUTHORITIES

Cases

Arizona v. Yellen, 2021 WL 3089103 (D. Ariz. July 22, 2021)

Arlington Cent. Sch. Dist. Bd. of Educ. v. Murphy, 548 U.S. 291 (2006)

Ashcroft v. Iqbal, 556 U.S. 662 (2009)

Ass'n of Priv. Sector Colleges & Univs. v. Duncan, 681 F.3d 427 (D.C. Cir. 2012)

Babbitt v. United Farm Workers, 442 U.S. 289 (1979)

Bell v. New Jersey, 461 U.S. 773 (1983)

Bennett v. Ky. Dep't of Educ., 470 U.S. 656 (1985)

Bennett v. New Jersey, 470 U.S. 632 (1985)

Benning v. Georgia, 391 F.3d 1299 (11th Cir. 2004)

California v. Texas, 141 S. Ct. 2104 (2021)

Charles v. Verhagen, 348 F.3d 601 (7th Cir. 2003)

Children's Hosp. Ass'n of Tex. v. Azar, 933 F.3d 764 (D.C. Cir. 2019)

City of Los Angeles v. Barr, 929 F.3d 1163 (9th Cir. 2019)

Clapper v. Amnesty Int'l USA, 568 U.S. 398 (2013)

Coll. Sav. Bank v. Fla. Prepaid Postsecondary Educ. Expense Bd., 527 U.S. 666 (1999)

Coyle v. Smith, 221 U.S. 559 (1911)

Cutter v. Wilkinson, 423 F.3d 579 (6th Cir. 2005)

DaimlerChrysler Corp. v. Cuno, 547 U.S. 332 (2006)

Davis ex rel. Lashonda D. v. Monroe Cnty. Bd. of Educ., 526 U.S. 629 (1999)

Hackford v. Babbitt, 14 F.3d 1457 (10th Cir. 1994)

In re U.S. Off. of Pers. Mgmt. Data Sec. Breach Litig., 928 F.3d 42 (D.C. Cir. 2019)

Irving Indep. Sch. Dist. v. Tatro, 468 U.S. 883 (1984)

J.W. Hampton, Jr., & Co. v. United States, 276 U.S. 394 (1928)

Jackson v. Birmingham Bd. of Educ., 544 U.S. 167 (2005)

Kansas v. United States, 214 F.3d 1196 (10th Cir. 2000)

Lujan v. Defs. of Wildlife, 504 U.S. 555 (1992)

Massachusetts v. Mellon, 262 U.S. 447 (1923)

Mayweathers v. Newland, 314 F.3d 1062 (9th Cir. 2002)

Missouri v. Yellen, 2021 WL 1889867 (E.D. Mo. May 11, 2021)

Munn v. Illinois, 94 U.S. 113 (1876)

Murphy v. Nat'l Collegiate Athletic Ass'n, 138 S. Ct. 1461 (2018)

Nat'l Fed'n of Indep. Bus. v. Sebelius, 567 U.S. 519 (2012)

Nat'l Park Hosp. Ass'n v. Dep't of Interior, 538 U.S. 803 (2003)

New York v. United States, 505 U.S. 144 (1992)

Nielsen v. Preap, 139 S. Ct. 954 (2019)

Ohio v. Yellen, 2021 WL 2712220 (S.D. Ohio July 1, 2021)

Oklahoma v. U.S. Civ. Serv. Comm'n, 330 U.S. 127 (1947)

Pennhurst State Sch. & Hosp. v. Halderman, 451 U.S. 1 (1981)

Petit v. U.S. Dep't of Educ., 675 F.3d 769 (D.C. Cir. 2012)

Planned Parenthood of Greater Ohio v. Hodges, 917 F.3d 908 (6th Cir. 2019)

Quill Corp. v. North Dakota By & Through Heitkamp, 504 U.S. 298 (1992)

R.J. Reynolds Tobacco Co. v. Durham Cnty., 479 U.S. 130 (1986)

Reno v. Condon, 528 U.S. 141 (2000)

Rostker v. Goldberg, 453 U.S. 57 (1981)

Rust v. Sullivan, 500 U.S. 173 (1991)

Sabri v. United States, 541 U.S. 600 (2004)

Sch. Dist. of City of Pontiac v. Sec'y of the Dep't of Educ., 584 F.3d 253 (6th Cir. 2009)

Smith v. Berryhill, 139 S. Ct. 1765 (2019)

South Dakota v. Dole, 483 U.S. 203 (1987)

South Dakota v. Wayfair, Inc.,138 S. Ct. 2080 (2018)

Susan B. Anthony List v. Driehaus, 573 U.S. 149 (2014)

United States v. Butler, 297 U.S. 1 (1936)

United States v. Lipscomb, 299 F.3d 303 (5th Cir. 2002)

United States v. Miami Univ., 294 F.3d 797 (6th Cir. 2002)

United States v. Morrison, 529 U.S. 598 (2000)

Utah v. Babbitt, 137 F.3d 1193 (10th Cir. 1998)

Va. Dep't of Educ. v. Riley, 106 F.3d 559 (4th Cir. 1997)

W. Va. Dep't of Health & Hum. Res. v. Sebelius, 649 F.3d 217 (4th Cir. 2011)

Whitman v. Am. Trucking Ass'ns, 531 U.S. 457 (2001)

Statutes

4 U.S.C. § 114

42 U.S.C. § 802

Pub. L. No. 105-227, 112 Stat. 2681 § 1101 (1998)

Pub. L. No. 114-125, 130 Stat. 122 § 992 (2016)

Regulations

86 Fed. Reg. 26,786 (May 17, 2021)

Other Authorities

Directly, Oxford English Dictionary Online, https://www.oed.com/view/Entry/53307

Indirectly, Oxford English Dictionary Online, https://www.oed.com/view/Entry/94534

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INTRODUCTION

Through the American Rescue Plan Act, Congress has generously provided nearly $200 billion to mitigate the fiscal impacts of the pandemic on States and the District of Columbia. 42 U.S.C. § 802. Congress also gave States wide flexibility to use those funds while specifying that the federal money could not be used to directly or indirectly offset a reduction in net tax revenue resulting from certain changes in state law, id. § 802(c)(2)(A), and gave the Secretary of the Treasury the power to “issue such regulations as may be necessary or appropriate to carry out” Section 802, id. § 802(f). The Treasury Department exercised this authority by issuing a lengthy and detailed Interim Final Rule. Coronavirus State and Local Fiscal Recovery Funds, 86 Fed. Reg. 26,786 (May 17, 2021). In addition to implementing the permissible uses of Rescue Plan funds, the Rule outlines a step-by-step process that Treasury will follow to determine whether States are impermissibly using Rescue Plan funds to offset net tax revenue reductions. Id. at 26,807. Kentucky has certified that it will comply with the Act and Treasury regulations and accepted its first tranche of several billion dollars. Tennessee says it will do so too.

This lawsuit by those two Plaintiff States — seeking to prematurely enjoin the offset provision — is one of six around the country. In two of the three cases already decided, district courts in Missouri and Arizona dismissed nearly identical complaints for lack of standing. See Arizona v. Yellen, 2021 WL 3089103, at *6 (D. Ariz. July 22, 2021), appeal filed, No. 21-16227 (9th Cir. July 26, 2021); Missouri v. Yellen, 2021 WL 1889867, at *5 (E.D. Mo. May 11, 2021), appeal filed, No. 21-2118 (8th Cir. May 18, 2021). This Court should do the same because Plaintiffs lack all three elements for pre-enforcement standing under Susan B. Anthony List v. Driehaus, 573 U.S. 149, 159 (2014). They have not plausibly pleaded, let alone proved, that the offset provision prohibits any conduct they intend to pursue, that there is a credible threat of enforcement from the offset provision, or that they have suffered any other cognizable injury. And the States certainly cannot manufacture standing by misreading the offset provision. Recoupment proceedings, should they ever occur, would be the proper context for addressing Plaintiffs' challenge to this grant condition.

In any event, Plaintiffs fail to state a claim on the merits. The offset provision is not ambiguous because “nobody questions the [offset provision] exists as a condition to [States] accepting the [Rescue Plan] funds,” and “[i]n that regard, Congress fulfilled its duty under” the Spending Clause. Arizona, 2021 WL 3089103, at *3. Not to mention that the offset provision provides far more information than the Spending Clause requires, explaining the nature and scope of the funding condition. Plaintiffs' coercion and commandeering arguments fare no better and should be rejected because Plaintiffs were (and are) free to decline Rescue Plan funds if they dislike the offset provision. Nothing happens if States do so, a result that all Justices deemed acceptable in Nat'l Fed'n of Indep. Bus. v. Sebelius, 567 U.S. 519 (2012) [hereinafter “NFIB”]. Not only should Plaintiffs' final-judgment motion be denied, but their case should be dismissed for lack of standing and failure to state a claim.

ARGUMENT

I. PLAINTIFFS HAVE FAILED TO ESTABLISH JURISDICTION.

The party that invokes federal jurisdiction must establish its standing at every stage of the litigation “for each claim [it] seeks to press,” DaimlerChrysler Corp. v. Cuno, 547 U.S. 332, 352 (2006)), with a burden of proof that increases “with the manner and degree of evidence required at the successive stages of litigation,” Lujan v. Defs. of Wildlife, 504 U.S. 555, 561 (1992). So for final judgment, Plaintiffs must adduce actual evidence to prevail. Id. But Plaintiffs have not sufficiently pleaded, much less proved, that they can satisfy Article III's requirements.

The Court should dismiss this case for lack of subject matter jurisdiction, as two other district courts have now done in similar cases. See Arizona, 2021 WL 3089103, at *6; Missouri, 2021 WL 1889867, at *5.

A. Plaintiffs have neither pleaded nor proved the required elements for pre-enforcement standing.

As explained, when a plaintiff seeks to enjoin the future enforcement of a statute, “the injury-in-fact requirement” demands that the plaintiff “allege[ ] 'an intention to engage in a course of conduct arguably affected with a constitutional interest, but proscribed by a statute, and [that] there exists a credible threat of [enforcement] thereunder.'” Driehaus, 573 U.S. at 159 (quoting Babbitt v. United Farm Workers, 442 U.S. 289, 298 (1979)); see id. at 161–67 (analyzing these three elements separately).

Here, Plaintiffs lack all three elements, relying on only mistaken interpretations of the offset provision or speculation about enforcement. First, the course of conduct that is proscribed by statute is not changing state taxes or reducing state tax revenues. Rather, the offset provision restricts a State only from using Rescue Plan funds to “offset a reduction in the net tax revenue . . . resulting from a change in law.” 42 U.S.C. § 802(c)(2)(A). As other courts have put it, “State tax cuts are not proscribed by the ARPA,” and States are “free to propose and pass tax cuts as [they] see[ ] fit.” Missouri, 2021 WL 1889867, at *4; Arizona, 2021 WL 3089103, at *5 (finding that Arizona lacked standing in this context because it did not “claim to have directly or indirectly used ARPA funds to supplement a reduction in its net income”). Plaintiffs are wrong to say they need only argue that the statute “intrudes on state taxing authority” to satisfy this element. Pls.' Combined Reply 10, ECF No. 37. What matters is whether their “intended future conduct” — which, by the evidence presented here, entails enacting changes in state tax law — is “'arguably . . . proscribed'” by the offset provision. Driehaus, 573 U.S. at 162 (quoting Babbitt, 442 U.S. at 298). Because such conduct is not prohibited,¹ Plaintiffs have neither alleged nor proved any intent to violate the offset provision and they cannot establish standing under Driehaus. Id. at 162–63.

For similar reasons, Plaintiffs have not engaged in a “course of conduct” that is “arguably affected with a constitutional interest.” Driehaus, 573 U.S. at 159. Again, the offset provision does not even arguably “intrude on state taxing authority,” Pls.' Reply 10, because it merely restricts a State's ability to use federal funds distributed under the Rescue Plan to offset a reduction in net tax revenue. No State has a sovereign interest in using federal funds for that purpose, so the States' “sovereign power to set [their] own tax policy is not implicated by the [Rescue Plan].” Missouri, 2021 WL 1889867, at *4.

On the contrary, the Supreme Court has repeatedly made clear that Congress has a sovereign interest in conditioning the receipt of federal funds “on the States' complying with restrictions on the use of those funds, because that is the means by which Congress ensures that the funds are spent according to its view of the 'general Welfare.'” NFIB, 567 U.S. at 580 (plurality opinion); see Sabri v. United States, 541 U.S. 600, 608 (2004) (“The power to keep a watchful eye on expenditures . . . is bound up with congressional authority to spend in the first place.”); Oklahoma v. U.S. Civ. Serv. Comm'n, 330 U.S. 127, 143 (1947) (explaining that Congress has the “power to fix the terms upon which its money allotments to [S]tates shall be disbursed”).

Finally, Plaintiffs have not come close to proving that there is a “credible threat of [enforcement]” (i.e., recoupment of misspent funds). Driehaus, 573 U.S. at 159. They even acknowledge that “Treasury has not yet enforced the Tax Mandate . . . because the law is brand new and the States are just beginning to receive their Rescue Plan funds.” Pls.' Reply 11. That is exactly the point: it is far too soon to tell whether Plaintiffs may face recoupment proceedings for any misused funds. For that to happen, the Plaintiff States would have to certify they will comply with the offset provision (Tennessee has not), receive ARPA funds, make a change in state law that reduces net tax revenue, and then use Rescue Plan funds to offset that reduction in revenue. Plaintiffs have neither pleaded nor proved that those steps have occurred or will imminently occur, especially any net-tax-revenue reduction or any impermissible offset. So no threat of enforcement is credible any time soon. Two other courts have properly denied standing on this basis. See Missouri, 2021 WL 1889867, at *4 (denying standing because “recoupment is not triggered by a reduction in State tax revenue, it is triggered by a State's use of federal recovery fund[s] to offset a reduction in its net tax revenue,” which was not imminent); Arizona, 2021 WL 3089103, at *5 (denying standing because Arizona did not “claim to have directly or indirectly used ARPA funds to supplement a reduction in its net income” or “even claim the tax cut will result in a reduction in Arizona's net income”).

The nature of the offset provision, already clear from the statutory text, is confirmed by the Rule, which outlines a comprehensive step-by-step process that Treasury will follow to determine whether States are impermissibly using Rescue Plan funds to offset net-tax-revenue reductions. See 86 Fed. Reg. at 26,807. So regardless of whether Plaintiffs misinterpret the offset provision as prohibiting any tax reductions, the Treasury Department — charged with enforcing the offset provision — has affirmatively rejected that reading. Under the Rule, “[a] recipient government would only be considered to have used [Rescue Plan] Funds to offset a reduction in net tax revenue . . . if, and to the extent that, the recipient government could not identify sufficient funds from sources other than the [Rescue Plan] Funds to offset the reduction in net tax revenue.” Id. And state tax-law changes that increase tax revenue, certain spending cuts, and organic revenue growth — increased tax revenue from existing sources due to, for example, an improved economy — can all be used to “offset” net-tax-revenue reductions. Id.; 86 Fed. Reg. at 26,809–10.

Plaintiffs have said nothing concrete about any reduction in net tax revenue, how they intend to offset it, or whether any such offsets would contravene the Rule. See generally Am. Compl. ¶¶ 31–51, ECF No. 23; Pls.' Reply 1–13. Their attempted reliance on the enforcement of other federal statutes generally and on Treasury's defense of this provision in litigation are insufficient. Pls.' Reply 11. In Driehaus, for example, the Supreme Court found a credible threat of enforcement only due to “past enforcement” of the challenged statute, a probable cause finding that the plaintiff had already violated the statute, the possibility that “any person” — not just the enforcing agency — could file a complaint, and the frequency of enforcement proceedings to find a credible threat of enforcement. 573 U.S. at 164–67. None of that is true here. So Plaintiffs have not presented plausible allegations — let alone evidence — that there is any credible threat of enforcement, and this too defeats standing. See Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009).

Plaintiffs' additional citations regarding pre-enforcement challenges are unavailing. Pls.' Reply 12. Those cases involved conditions that affected more than just how a recipient could use new federal funds. NFIB, 567 U.S. at 540, 542 (States stood to lose existing funding); South Dakota v. Dole, 483 U.S. 203, 205–06 (1987) (same); New York v. United States, 505 U.S. 144, 154 (1992) (States required to take title to radioactive waste and stood to lose access to disposal sites); Planned Parenthood of Greater Ohio v. Hodges, 917 F.3d 908, 911 (6th Cir. 2019) (recipients were informed “that the new law would require the State to end their contracts under the programs”).² At bottom, Plaintiffs have developed no factual record demonstrating “an intention to engage in a course of conduct arguably affected with a constitutional interest, but proscribed by a statute, and [that] there exists a credible threat of [enforcement] thereunder.” Driehaus, 573 U.S. at 159 (quoting Babbitt, 442 U.S. at 298). Because they have not, and because such a showing is required for pre-enforcement standing, the Court should deny Plaintiffs' motion and dismiss this action.³

B. Plaintiffs' other purported injuries do not establish standing.

Perhaps recognizing their problem with Driehaus, Plaintiffs advance two theories of injury they purportedly are already experiencing: to their sovereignty and to their pocketbooks. Pls.' Reply 1–10. But any injury that does not meet the requirements of Driehaus is not sufficiently “concrete and particularized” enough to satisfy Article III at this stage. Lujan, 504 U.S. at 560; Clapper v. Amnesty Int'l USA, 568 U.S. 398, 416 (2013) (explaining that plaintiffs “cannot manufacture standing merely by inflicting harm on themselves based on their fears of hypothetical future harm that is not certainly impending”). In any event, these two other purported injuries are not cognizable.

To begin, the States appear to have (rightly) abandoned the litany of cases about state sovereignty that Defendants previously distinguished. Compare Defs.' Opp'n 12–14, with Pls.' Reply 1–7. Plaintiffs can identify no analogous case to support their novel harm-to-sovereignty theory for a condition on the use of funds like the offset provision. As Defendants, the Rule, and the Missouri and Arizona courts have all stated: merely enacting a tax cut does not implicate — or violate — the offset provision. Defs.' Opp'n 5–6; 86 Fed. Reg. 26,786; Missouri, 2021 WL 1889867, at *3–4; Arizona, 2021 WL 3089103, at *5. That provision does not implicate any sovereign interest in setting tax policy or narrow any tax policy options. Nor do Plaintiffs argue they have a sovereign interest in spending conditioned federal dollars to offset reductions in net tax revenue. The offset provision only authorizes recoupment of misused funds sometime in the future. And that reality forecloses Plaintiffs' attempt to end-run Driehaus.

Plaintiffs spend pages arguing that the Court must accept their incorrect reading of the offset provision and attacking one case Defendants cited. Pls.' Reply 2–7. But, as explained, the Court should not uncritically accept Plaintiffs' legal argument about the offset provision's plain meaning. See note 1, supra. And by rejecting standing premised on “the imposition . . . of an [allegedly] unconstitutional option either to” sacrifice “a part of [the State's] reserved rights” or lose the conditioned funds, Massachusetts v. Mellon confirms why this Court should reject Plaintiffs' similarly “abstract questions . . . of sovereignty” as a cognizable injury. 262 U.S. 447, 479–80, 485–86 (1923). In sum, Plaintiffs never demonstrate how the offset provision concretely harms their sovereignty and appear content to simply question how it might if the Court were to misread its plain language.

Finally, Plaintiffs' alleged pocketbook-injury argument is unsupported and unsupportable. They have not challenged the source of the Rescue Plan's reporting requirements: the statutory provision requiring a “detailed accounting” of “all modifications to” States' “tax revenue sources during the covered period,” 42 U.S.C. § 802(d)(2), or the reporting requirements implemented in the Rule. So Plaintiffs cannot overcome controlling precedent, which does not allow standing premised on harms from unchallenged statutory provisions because such harms are not traceable to the provision at issue. California v. Texas, 141 S. Ct. 2104, 2119 (2021). Indeed, each cost Plaintiffs allege depends on §802(d)(2)'s requirement of a “detailed accounting” of “all modifications to” state “tax revenue sources during the covered period,” not the offset provision's condition on the use of funds. See Pls.' Reply 7–8. Additionally, Plaintiffs' evidence applies only to Tennessee, which has not even certified compliance with ARPA or received any Rescue Plan funds. Decl. of Howard Eley, (“Eley Decl.”), ¶¶ 5–10 ECF No. 25-3.⁴ Without challenging § 802(d)(2) or the Rule–and without even challenging all of the offset provision itself, see Defs.' Opp'n 15 n.5 — this theory is a nonstarter. Even if this theory could get off the ground, it would fail for the simple reason that the Rule allows States to use Rescue Plan funds to cover reporting costs. 86 Fed. Reg. at 26,822.⁵ So States need not use their own resources to meet the reporting requirements at all and any decision to do so would amount to a self-inflicted injury insufficient for standing.

As explained, the proper context for addressing a State's challenge to a grant condition would be enforcement proceedings, if and when they occur. See, e.g., Arlington Cent. Sch. Dist. Bd. of Educ. v. Murphy, 548 U.S. 291 (2006); Bennett v. Ky. Dep't of Educ., 470 U.S. 656, 669 (1985); Bennett v. New Jersey, 470 U.S. 632, 637 (1985). The limits on this Court's Article III jurisdiction do not give way to Plaintiffs' preference for a premature constitutional ruling.

II. PLAINTIFFS FAIL TO STATE A CLAIM ON THE MERITS.

On the merits, Plaintiffs have not demonstrated that the offset provision is unconstitutionally ambiguous, that it is coercive, or that it is unrelated to the purpose of ARPA.

A. The offset provision is not unconstitutionally ambiguous.

Plaintiffs contend that the offset provision is unconstitutionally ambiguous. Pls.' Reply 14–20. But Plaintiffs' arguments misunderstand the nature of the constitutional inquiry. To be constitutionally valid, a statute must simply make clear that acceptance of federal funds obligates States to comply with a condition. Id. That is exactly what the Rescue Plan does: “a state official who is engaged in the process of deciding whether the State should accept [Rescue Plan] funds and the obligations that go with those funds” would “clearly understand that one of the obligations of the Act is the obligation” not to use Rescue Plan funds to offset a net-tax-revenue reduction resulting from changes in state law. Arlington Cent. Sch. Dist., 548 U.S. at 296. As one court recently held, “nobody questions the [offset provision] exists as a condition to [States] accepting the funds,” and “[i]n that regard, Congress fulfilled its duty under Pen[n]hurst and Arlington Central.” Arizona, 2021 WL 3089103, at *3.

Precedent on Spending Clause unambiguity establishes that Congress must only make clear that acceptance of federal money obligates the States to comply with a condition. In Pennhurst — the origin of the Spending Clause unambiguity requirement — the Supreme Court held that “if Congress intends to impose a condition on the grant of federal moneys, it must do so unambiguously.” Pennhurst State Sch. & Hosp. v. Halderman, 451 U.S. 1, 17 (1981) (emphasis added). There, the statute provided money to States and contained a “bill of rights” provision specifying that mentally disabled citizens “have a right to appropriate treatment, services, and habilitation for such disabilities” to be provided “in the setting that is least restrictive of the person's personal liberty.” Id. at 13. The Court held that these statements “represent general statements of federal policy, not newly created legal duties” and “in no way suggests that the grant of federal funds is 'conditioned' on a State's funding the rights described therein.” Id. at 23. The Pennhurst Court then explicitly recognized that a State's obligations may be “largely indeterminate,” so long as Congress gives “clear notice to the States that they, by accepting funds under the Act, would indeed be obligated to comply with” the condition. Id. at 24–25.

Numerous Spending Clause cases — in the Supreme Court, the Sixth Circuit, and other Circuits — all confirm that States make an “informed choice” when Congress simply makes clear that acceptance of federal money obligates the States to comply with a condition. Id. at 25. The Supreme Court itself has repeatedly affirmed that “there [i]s sufficient notice under Pennhurst where a statute ma[kes] clear that some conditions [a]re placed on the receipt of federal funds.” Jackson v. Birmingham Bd. of Educ., 544 U.S. 167, 183 (2005); Davis ex rel. Lashonda D. v. Monroe Cnty. Bd. of Educ., 526 U.S. 629, 650 (1999). And the Circuits have done the same, holding that the Spending Clause is satisfied where a “statute's intention to impose a condition is expressed clearly,” even though the operation of a funding condition “is perhaps unpredictable.” Mayweathers v. Newland, 314 F.3d 1062, 1067 (9th Cir. 2002); Cutter v. Wilkinson, 423 F.3d 579, 586 (6th Cir. 2005) (“Nothing more is required under Pennhurst, which held that Congress need provide no more than 'clear notice' to the states that funding is conditioned upon compliance with certain standards.”); Charles v. Verhagen, 348 F.3d 601, 607–08 (7th Cir. 2003) (“[T]he exact nature of the conditions may be 'largely indeterminate,' provided that the existence of the conditions is clear. . . .”); Benning v. Georgia, 391 F.3d 1299, 1307 (11th Cir. 2004) (“The federal law in Pennhurst was unclear as to whether the [S]tates incurred any obligations at all by accepting federal funds, but [the statute at issue] is clear that [S]tates incur an obligation when they accept federal funds, even if the method for compliance is left to the [S]tates.”). Congress must only “make the existence of the condition itself — in exchange for the receipt of federal funds — explicitly obvious.” Mayweathers, 314 F.3d at 1067.

Plaintiffs argue that “[n]o case supports the Defendants' claim that the meaning of a statutory spending condition can be ambiguous so long as the existence of the condition is clear.” Pls.' Reply 18. But that is precisely the upshot of the many cases applying Chevron deference to regulations implementing spending conditions. Id. “Chevron deference 'is premised on the theory that a statute's ambiguity constitutes an implicit delegation from Congress to the agency to fill in the statutory gaps.'” Smith v. Berryhill, 139 S. Ct. 1765, 1778 (2019) (some quotation marks omitted). In all of those cases, therefore, the details of the statutory spending condition must have been ambiguous because otherwise there would be nothing for the agency to interpret.⁶ But none of those cases then declared the spending conditions in question unconstitutional — as Plaintiffs now demand — because the Spending Clause inquiry is focused only on whether Congress made clear that acceptance of federal funds obligates States to comply with a condition.

If Plaintiffs were correct, then numerous statutes would be arguably unconstitutional. That includes the ReligiousLand Use and Institutionalized Persons Act (“RLUIPA”), which the Sixth Circuit upheld in Cutter despite repeated acknowledgments that the funding condition in that statue is “unpredictable.” Cutter, 423 F.3d at 586; Mayweathers, 314 F.3d at 1067. Other funding regimes, like Medicaid and education statutes, could also be called into question, even though courts have deferred to regulations implementing such statutes for decades. See, e.g., Irving Indep. Sch. Dist. v. Tatro, 468 U.S. 883, 891–92 (1984) (Education of the Handicapped Act); Children's Hosp. Ass'n of Tex. v. Azar, 933 F.3d 764, 770 (D.C. Cir. 2019) (Medicaid); Petit v. U.S. Dep't of Educ., 675 F.3d 769, 778 (D.C. Cir. 2012) (IDEA); United States v. Miami Univ., 294 F.3d 797, 811-15 (6th Cir. 2002) (Family Educational Rights and Privacy Act).

Contrary to Plaintiffs' contention, the Supreme Court's decision in Arlington Central did not change the relevant Spending Clause inquiry. Pls.' Reply 17–18. There, the Supreme Court examined whether the specific conduct at issue — payment of expert fees — clearly existed in the statute as a funding condition. Arlington Cent. Sch. Dist. Bd., 548 U.S. at 296. As in Pennhurst, the Court performed a statutory analysis, determining that expert-fee payments were not a statutory funding condition because the statute's text was insufficiently broad to place States on notice that they might need to pay expert fees. Id. at 297–99. But nothing in Arlington Central changed the proper Pennhurst analysis that courts have continued to apply, including one court deciding the exact issue here. Arizona, 2021 WL 3089103, at *3–4 (“[N]obody questions the [offset provision] exists as a condition to [States] accepting the funds,” and “[i]n that regard, Congress fulfilled its duty under Pen[n]hurst and Arlington Central.”).⁷

When Pennhurst (and the legion of other cases) are properly applied, agency regulations have no bearing on the Spending Clause analysis. If a statutory funding condition exists, the implementing agency could regulate the details of the condition subject to the Administrative Procedure Act and other typical constraints; if not, any agency regulation imposing funding conditions would be unauthorized by the statute. That is the upshot of the Riley case cited by Plaintiffs. Pls.' Reply 19; Va. Dep't of Educ. v. Riley, 106 F.3d 559, 568 (4th Cir. 1997) (en banc) (reasoning that an agency could not, by regulation, act ultra vires by imposing spending conditions that did not exist as part of the statute). And that's exactly all that Pennhurst requires: Congress must provide only “clear notice to the States that they, by accepting funds under the Act, would indeed be obligated to comply with” a condition. Pennhurst, 451 U.S. at 25. The idea is simply to keep Congress from “surprising participating States with post-acceptance or retroactive conditions.” NFIB, 567 U.S. at 584 (quoting Pennhurst, 451 U.S. at 25).

Here, Congress made abundantly clear that the acceptance of Rescue Plan funds obligates a State to comply with the offset provision, easily passing muster under binding Supreme Court and Sixth Circuit precedent. 42 U.S.C. § 802(c)(2) (delineating “[f]urther restriction[s] on the use of funds,” including the offset provision, which governs a State's “use [of] the funds provided under this section”). As one court recently held in this context, “nobody questions the [offset provision] exists as a condition to [States] accepting the funds,” and “[i]n that regard, Congress fulfilled its duty under” Spending Clause precedents. Arizona, 2021 WL 3089103, at *3.

But the Rescue Plan does not just provide the existence of a condition; it explains the nature and scope of the condition as well. By its plain terms, the offset provision only applies when a State uses Rescue Plan funds to “offset” a reduction in “net” tax revenue resulting from changes in state law. 42 U.S.C. § 802(c)(2)(A). The meaning of “offset” is undisputed, and a state official would clearly understand that one of the obligations of accepting Rescue Plan funds is not to use those funds as an offset for a reduction in net tax revenue caused by state tax cuts. Taken together, the statute's language simply ensures that States are not using federal funds to finance state tax cuts that decrease net tax revenue.

Plaintiffs chiefly take issue with the use of the word “indirectly.” See Pls.' Reply 14–15. But Defendants have already explained (and provided examples) of direct and indirect offsets. See Defs.' Opp'n 19. For example, assuming no other changes, a State could not receive $2 billion in Rescue Plan funds, cut its income tax by an amount equal to $2 billion, and use the Rescue Plan funds to offset the revenue loss. That would be using Rescue Plan funds to “directly” offset a net-tax-revenue reduction. 42 U.S.C. § 802(c)(2)(A); see Directly, Oxford English Dictionary Online, available at https://www.oed.com/view/Entry/53307 (last visited August 24, 2021) (defining “directly” as “[i]n a direct manner or way”). Similarly, again assuming no other changes, a State could not use Rescue Plan funds to replace $2 billion in planned state expenditures on COVID-19 testing and then use the $2 billion it had originally budgeted for that purpose to offset a $2 billion reduction in state income tax. That would be using Rescue Plan funds to “indirectly” offset a net-tax-revenue reduction. 42 U.S.C. § 802(c)(2)(A); see Indirectly, Oxford English Dictionary Online, available at https://www.oed.com/view/Entry/94534 (last visited August 24, 2021) (defining “indirectly” as “through some intervening person or thing”); see also 86 Fed. Reg. at 26,807, 26,810 (providing further details on how Treasury will implement the phrase “directly or indirectly offset”).

Defendants at no point suggested that the word “indirectly” is “irrelevant,” as Plaintiffs now claim. Pls.' Reply 15 & n.3. The point is simply that the adverbs “directly or indirectly” cannot transform something that is not an “offset” into an offset. See Defs.' Opp'n 18–19. Those words merely underscore that a State cannot circumvent the offset provision by using grant funds not to pay directly for a tax cut but to pay for other expenditures, while using funds usually directed toward those other expenditures to cover the tax cut. Congress routinely uses the phrase “directly or indirectly” in that fashion to emphasize the breadth of a statutory dictate. See, e.g., Ass'n of Priv. Sector Colleges & Univs. v. Duncan, 681 F.3d 427, 444 (D.C. Cir. 2012) (“Congress phrased the relevant provision broadly — employing words and phrases like 'any' and 'directly or indirectly.'”).

Especially in the context of an emergency aid statute that Congress enacted quickly, “[t]here are far too many circumstances affecting the States in different ways for Congress to have envisioned all aspects of compliance and noncompliance.” Charles, 348 F.3d at 608. Instead, “Congress permissibly conditioned the receipt of federal money in such a way that each State is made aware of the condition and is simultaneously given the freedom to tailor compliance according to its particular . . . circumstances.” Benning, 391 F.3d at 1307 (quoting Charles, 348 F.3d at 608). That is straightforwardly allowed by the Spending Clause. Id. Plaintiffs' argument — that Congress itself must essentially specify minute details of a funding condition — is wrong. See Pls.' Reply 19–20; Ohio v. Yellen, 2021 WL 2712220, at *12 (S.D. Ohio July 1, 2021) (“[O]ne thing is certain — exactitude is not necessary” for funding conditions.). “[I]t is simply impossible” for Congress to “delineate every instance in which a State may or may not comply with” the offset provision. Charles, 348 F.3d at 608; Mayweathers, 314 F.3d at 1067; Arizona, 2021 WL 3089103, at *3–4. As the Supreme Court has admonished, “every improper expenditure” need not be “specifically identified and proscribed” in the statute. Bennett v. Ky. Dep't of Educ., 470 U.S. at 666; Jackson, 544 U.S. 167 at 183 (reiterating Bennett); Davis, 526 U.S. at 650 (same); see W. Va. Dep't of Health & Hum. Res. v. Sebelius, 649 F.3d 217, 223 (4th Cir. 2011) (“Congress need not spell out every condition with flawless precision for a provision to be enforceable.”).

The Court should find the offset provision plainly within Congress's Spending Clause authority because “[i]t made the existence of the condition upon which [States] could accept funds explicitly obvious.” Arizona, 2021 WL 3089103, at *4 (citation omitted). And States are not without recourse if they dislike the offset provision or have concerns about its ambiguity: they may decline the Rescue Plan funds, seek a better bargain in the halls of Congress, or work cooperatively with the Treasury Department. See Bennett, 470 U.S., at 669 (describing a conditional grant program “an ongoing, cooperative program” in which “grant recipients ha[ve] an opportunity to seek clarification of the program requirements”); Charles, 348 F.3d at 608 (explaining that States who dislike the ambiguity of an imposed condition “certainly could have refused federal funding”). But because declaring an Act of Congress unconstitutional is “the gravest and most delicate duty that” federal courts are “called on to perform,” Rostker v. Goldberg, 453 U.S. 57, 64 (1981) (quotation marks omitted), “[d]ue respect for the decisions of a coordinate branch of Government demands that [courts] invalidate a congressional enactment only upon a plain showing that Congress has exceeded its constitutional bounds,” United States v. Morrison, 529 U.S. 598, 607 (2000); Reno v. Condon, 528 U.S. 141, 148 (2000); Munn v. Illinois, 94 U.S. 113, 123 (1876). Plaintiffs have not come close to making such a showing here.

B. The offset provision is not coercive or commandeering.

Plaintiffs fare no better in arguing that the offset provision violates the Tenth Amendment and unconstitutionally coerces States into accepting Rescue Plan funds with the attendant conditions. Pls.' Reply 23–27.⁸ The offset provision is, by any measure, a modest restriction on an otherwise generous outlay of federal funds. It simply ensures that Congress's substantial monetary outlay will be used as intended for the Act's public-health and economic-recovery purposes. If Plaintiffs disliked the offset provision, they were (and are) free to simply decline the federal money.

As an initial matter, Plaintiffs now indicate that the offset provision is coercive only if “broadly interpreted” (i.e., that the offset provision bans all state tax cuts). Id. at 23–24. No party has advocated for that broad interpretation, and Treasury has affirmatively rejected the broad interpretation. See Defs.' Opp'n 23. That alone should defeat Plaintiffs' claim.

In any event, Plaintiffs misconstrue the governing law. As Defendants explained, Congress has full “authority to condition the receipt of funds on the States' complying with restrictions on the use of those funds, because that is the means by which Congress ensures that the funds are spent according to its view of the 'general Welfare.'” NFIB, 567 U.S. at 580; Defs.' Opp'n 23–24. That is exactly what Congress has done here: titled “[f]urther restriction on the use of funds,” the offset provision only applies to a State's “use [of] the funds provided under this section.” 42 U.S.C. § 802(c)(2) (emphases added). So a coercion analysis is inapplicable because Congress here is not “pressuring the States to accept policy changes” independent of the new federal funds. NFIB, 567 U.S. at 580. And even if such an analysis applied, Plaintiffs would still lose under NFIB. The key aspect of the Medicaid expansion that NFIB found to be coercive was that Congress “penalize[d] States that choose not to participate in that new program by taking away their existing Medicaid funding.” Id. at 585 (emphasis added); see Defs.' Opp'n 24–25. As one court recently explained in rejecting this exact argument, the Rescue Plan “will not revoke any federal funding [States] enjoyed prior to accepting. The downside to declining the ARPA funds is just that — [States] would not have received ARPA funds.” Arizona, 2021 WL 3089103, at *5.

Plaintiffs fault Defendants for “not talk[ing] about the enormity of the federal funds at issue.” Pls.' Reply 25. But that is for good reason: the amount of funding at issue in NFIB was only relevant to the preexisting funding that would be withdrawn if States declined the Medicaid expansion. See Defs.' Opp'n 25. Compare NFIB, 567 U.S. at 582 (finding that a threatened loss of preexisting Medicaid funds — ten percent of States' overall budgets — was coercive), with Dole, 483 U.S. at 211 (finding that a threatened five-percent loss of preexisting highway funds was not coercive). After all, “[t]hreat of loss, not hope of gain, is the essence of economic coercion.” United States v. Butler, 297 U.S. 1, 81 (1936) (Stone, J., dissenting). And all Justices in NFIB agreed that, despite the amount of funding at issue, “Congress could have made just the new funding provided under the ACA contingent on acceptance of the terms of the Medicaid Expansion.” NFIB, 567 U.S. at 687–88 (joint dissent); id. at 576, 585 (plurality opinion) (same); id. at 624–46 (Ginsburg, J., concurring in part) (finding no coercion). That holding defeats Plaintiffs' argument that the sheer amount of offered funding is dispositive, regardless of whether the funding is being newly provided or eliminated. Notably, the offset provision is more modest than the prospective funding condition that all Justices in NFIB indicated was permissible: a State does not lose all of its Rescue Plan funding if it violates the offset provision, but only the amount it uses as an improper offset. See 42 U.S.C. § 802(e)(1).

Plaintiffs' argument that the offset provision intrudes on States' sovereign authority to set tax policy fares no better. Pls.' Reply 26–27. The offset provision does not affect the States' ability to cut taxes; it simply precludes States from using federal funds to offset a reduction in net tax revenue. See Section II.A., supra. More fundamentally, though, Plaintiffs continue to misunderstand both the Spending Clause and the Tenth Amendment. It has long been established that “Congress can use [its Spending Clause] power to implement federal policy it could not impose directly under its enumerated powers.” NFIB, 567 U.S. at 578; Coll. Sav. Bank v. Fla. Prepaid Postsecondary Educ. Expense Bd., 527 U.S. 666, 686 (1999) (same); Dole, 483 U.S. at 207 (same); Butler, 297 U.S. at 66 (same). And “[r]equiring States to honor the obligations voluntarily assumed as a condition of federal funding before recognizing their ownership of funds simply does not intrude on their sovereignty.” Bell v. New Jersey, 461 U.S. 773, 790 (1983); Sch. Dist. of City of Pontiac v. Sec'y of U.S. Dep't of Educ., 584 F.3d 253, 283 (6th Cir. 2009) (Sutton, J., concurring) (“[T]he Tenth Amendment, the Eleventh Amendment and the Constitution's other structural limitations on congressional authority do not limit properly enacted spending-clause legislation.”).⁹

Like maintenance-of-effort requirements — a longstanding feature of Spending Clause legislation that ensures federal grants are used to supplement and not supplant state spending — the offset provision is plainly constitutional. Maintenance-of-effort requirements implicate a State's spending power, a core state function, yet such requirements are unquestionably permissible tools to ensure that the funds appropriated by Congress are used for their intended purposes. See, e.g., Bennett v. Ky. Dep't of Educ., 470 U.S. at 659 (Title I of the Elementary and Secondary Education Act “prohibited the use of federal grants merely to replace state and local expenditures”).

Indeed, Congress routinely prohibits States from passing certain tax laws without violating the Tenth Amendment. See, e.g., 4 U.S.C. § 114(a) (providing that States may not “impose an income tax on any retirement income of an individual who is not a resident or domiciliary of such State”); Pub. L. No. 105-227, 112 Stat. 2681, 2719 § 1101 (1998) (“Internet Tax Freedom Act,” providing that no “State or political subdivision thereof shall impose . . . taxes on Internet access” or “multiple or discriminatory taxes on electronic commerce” (made permanent by Pub. L. No. 114-125, 130 Stat. 122, 281 § 992 (2016))); R.J. Reynolds Tobacco Co. v. Durham Cnty., 479 U.S. 130, 155 (1986); Quill Corp. v. North Dakota By & Through Heitkamp, 504 U.S. 298, 318 (1992) (“Congress is [ ] free to decide whether, when, and to what extent the States may burden interstate mail-order concerns with a duty to collect use taxes.”), overruled on other grounds by South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018); see also Murphy v. Nat'l Collegiate Athletic Ass'n, 138 S. Ct. 1461, 1478–79 (2018).

Because Plaintiffs had (and have) “a legitimate choice whether to accept the federal conditions in exchange for federal funds,” NFIB, 567 U.S. at 578, their coercion and Tenth Amendment arguments should be rejected. They were or are free to reject the federal money, and their voters know where to turn if they like, or dislike, the State's choice. Id. (explaining that “state officials can fairly be held politically accountable for choosing to accept or refuse the federal offer”); New York, 505 U.S. at 144.

C. The offset provision is related to the purpose of ARPA.

Plaintiffs also incorrectly argue that the offset provision is not sufficiently related to the Rescue Plan's purposes. Pls.' Reply 20–23. But the archetypal condition that is related to the purposes of federal spending is one that ensures “that public funds [are] spent for the purposes for which they were authorized.” Rust v. Sullivan, 500 U.S. 173, 196 (1991). And that's exactly what the offset provision does: it merely specifies how States may use the newly appropriated federal funds to ensure that they are used for the public-health and economic-recovery purposes of the Act. See Sabri, 541 U.S. at 608; Oklahoma, 330 U.S. at 143; Section II.B., supra. Congress did not provide the Rescue Plan funds as a means to replace purposeful decreases in net tax revenue; it provided the money to help States economically recover from the pandemic in ways they otherwise could not.

This is more than sufficient to meet the “minimal standard of rationality” required of Spending Clause legislation. Benning, 391 F.3d at 1308; see also New York, 505 U.S. at 172 (finding funding conditions sufficiently related where “both the conditions and the payments embody Congress' efforts to address the pressing problem of radioactive waste disposal”); Dole, 483 U.S. at 208–09 (finding that the federal interest in a uniform drinking age was sufficiently related to States' receipt of highway funds); United States v. Lipscomb, 299 F.3d 303, 322 n.97 (5th Cir. 2002) (quoting Kansas v. United States, 214 F.3d 1196, 1199 (10th Cir. 2000)). In fact, Plaintiffs point to no case, and Defendants are aware of none, in which a court has struck down a funding condition on relatedness grounds. See City of Los Angeles v. Barr, 929 F.3d 1163, 1175 (9th Cir. 2019) (recognizing that the relatedness standard “is not demanding” and that “the Court has never struck down a condition on federal grants based on this relatedness prong”).

Again, Plaintiffs point to the “broad interpretation of the Tax Mandate's restriction” as evidence of a constitutional infirmity. Pls.' Reply 21. But, as noted above, no party is advocating for this broad interpretation, and Treasury has affirmatively rejected that interpretation with the Rule. Section II.B., supra. And as Defendants previously argued, Defs.' Opp'n 9, there is no reason why this Court should depart from the statute's text, the Rule's implementation of that text, or the principle that courts should avoid (rather than create) constitutional issues, Nielsen v. Preap, 139 S. Ct. 954 (2019), all to invalidate or enjoin a broad reading of the offset provision that Defendants have not adopted. Plaintiffs' relatedness argument should be rejected.

CONCLUSION

For the reasons explained above, the Court should deny Plaintiffs' motion for summary judgment and dismiss the Amended Complaint or grant summary judgment in favor of Defendants.

DATED: August 25, 2021

Respectfully submitted,

BRIAN M. BOYNTON
Acting Assistant Attorney General

BRIAN D. NETTER
Deputy Assistant Attorney General

ALEXANDER K. HAAS
Director, Federal Programs Branch

BRIGHAM J. BOWEN
Assistant Director, Federal Programs Branch

MICHAEL P. CLENDENEN
STEPHEN EHRLICH
CHARLES E.T. ROBERTS
Trial Attorneys
Civil Division, Federal Programs Branch
U.S. Department of Justice
1100 L Street, NW
Washington, DC 20005
Phone: (202) 305-8628
Email: charles.e.roberts@usdoj.gov

Counsel for Defendants