Kentucky and Tennessee have filed suit to block the Treasury Department from enforcing a provision in the recently adopted federal COVID-19 relief law that prevents states from using aid to lower taxes, joining a growing number of states that have sued over the restriction.
The complaint, filed April 6 in the U.S. District Court for the Eastern District of Kentucky by Kentucky Attorney General Daniel Cameron (R) and Tennessee Attorney General Herbert H. Slatery III (R), seeks to enjoin Treasury from enforcing a provision of the American Rescue Plan Act of 2021 (P.L. 117-2) that was added to the bill by Senate Democrats.
The provision, found in section 9901 of the act, restricts federal aid from being used 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.”
The suit claims the restriction is an unconstitutional power grab that usurps the states’ sovereign authority.
Arizona Attorney General Mark Brnovich (R) filed a motion April 5 to block Treasury from enforcing the restriction, in the latest development in the state’s lawsuit over the provision. The motion seeks to enjoin the provision’s enforcement as it applies to Arizona.
Arizona’s suit, filed March 25, came shortly after Treasury Secretary Janet Yellen responded in a March 23 letter to Brnovich and a coalition of Republican attorneys general about their concerns regarding the provision. Yellen said in the letter that “nothing in the act prevents states from enacting a broad variety of tax cuts," but that it “simply provides that funding received under the act may not be used to offset a reduction in net tax revenue resulting from certain changes in state law.”
“If states lower certain taxes but do not use funds under the act to offset those cuts — for example, by replacing the lost revenue through other means — the limitation in the act is not implicated,” the Treasury secretary wrote.
Yellen also responded to concerns that the provision could be unconstitutional, noting that it is “well established that Congress may place such reasonable conditions on how states may use federal funding.”
"Congress includes those sorts of reasonable funding conditions in legislation routinely, including with respect to funding for Medicaid, education, and highways. Here, the act provides a broad outlay of federal funds, and accordingly includes restrictions to ensure that those funds are properly applied. Earlier COVID-19 relief measures providing state funding also included restrictions that barred states from spending those funds on certain ineligible expenditures,” Yellen added.
Treasury did not respond to a request for comment on the lawsuits by press time.
In the April 5 motion, Brnovich argues that the language in the provision is ambiguous because “its text gives no clarity on what amounts to an indirect offset or a reduction in net tax revenue, or what baseline should be used to determine when a reduction has taken place.”
Brnovich asserts that the ambiguity makes the provision unconstitutional and unenforceable and that the restriction would run afoul of the U.S. Constitution because it violates:
the “relatedness requirement”;
South Dakota v. Dole because a state’s choice to accept the aid in 2021 could undermine state sovereignty in future years; and
the Supreme Court’s anti-commandeering test.
The attorney general also says there is a disconnect between Congress’s intent with the provision and Treasury's understanding of it.
“Even supporters of the law cannot agree on what it does: the Secretary of the Treasury has contended — seemingly in contradiction with the provision’s architect, Senator Manchin — that the tax mandate is only meant to prohibit states from using aid money to fund tax cuts,” Brnovich argued, referring to Sen. Joe Manchin III, D-W.Va.
Ohio Attorney General Dave Yost (R) is seeking to block the provision’s enforcement, at least as applied to Ohio. Yost filed a motion for preliminary injunction in the U.S. District Court for the Southern District of Ohio on March 17, in which he claims that Congress exceeded its authority by requiring states to choose between accepting stimulus funds or keeping their sovereign authority to reduce taxes.
Missouri Attorney General Eric S. Schmitt (R) on behalf of the state filed a complaint March 29 with the U.S. District Court for the Eastern District of Missouri, seeking to block the provision’s enforcement and have it declared unconstitutional and severable from the act.
And a bipartisan group of attorneys general in 13 states filed suit March 31 in the U.S. District Court for the Northern District of Alabama, seeking to prevent the department and other agencies or employees from enforcing the provision. Those states argue that the provision is an unconstitutional exercise of federal power that violates the Constitution's 10th Amendment and the anti-commandeering doctrine.