U.S. 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' MOTION TO DISMISS OR, IN THE ALTERNATIVE, MOTION FOR SUMMARY JUDGEMENT, AND OPPOSITION TO PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT

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TABLE OF CONTENTS

INTRODUCTION

BACKGROUND

LEGAL STANDARDS

ARGUMENT

CONCLUSION

TABLE OF AUTHORITIES

Cases

Abbott Labs. v. Gardner, 387 U.S. 136 (1967)

Alascom Inc. v. FCC, 727 F.2d 1212 (D.C. Cir. 1984)

Alaska v. U.S. Dep't of Transp., 868 F.2d 441 (D.C. Cir. 1989)

Alfred L. Snapp & Son, Inc. v. Puerto Rico, 458 U.S. 592 (1982)

Ariz. State Legislature v. Ariz. Independent Redistricting Comm'n, 576 U.S. 787 (2015)

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

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

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

Baptist Mem'l Hosp. — Golden Triangle, Inc. v. Azar, 956 F.3d 689 (5th Cir. 2020)29

Barnes v. E-Sys., Inc. Grp. Hosp. Med. & Surgical Ins. Plan, 501 U.S. 1301 (1991)13

Basicomputer Corp. v. Scott, 973 F.2d 507 (6th Cir. 1992)32

Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007)

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)

Blum v. Bacon, 457 U.S. 132 (1982)

Bucklew v. Precythe, 139 S. Ct. 1112 (2019)

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)

Citizens Bank of Md. v. Strumpf, 516 U.S. 16 (1995)

City of Cleveland v. Ohio, 508 F.3d 827 (6th Cir. 2007)

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

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

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)

eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006)

Fac. Senate of Fla. Int'l Univ. v. Winn, 616 F.3d 1206 (11th Cir. 2010)

Forum for Acad. & Institutional Rights, Inc. v. Rumsfeld, 291 F. Supp. 2d 269 (D.N.J. 2003)

Grand Trunk W. R.R. Co. v. Consol. Rail Corp., 746 F.2d 323 (6th Cir. 1984)

Gruver v. La. Bd. of Supervisors for La. State Univ. Agric. & Mech. Coll., 959 F.3d 178 (5th Cir. 2020)

Harris v. Olszewski, 442 F.3d 456 (6th Cir. 2006)

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

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

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

Lane Cnty. v. Oregon, 74 U.S. 71 (1868)

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

Maine v. Taylor, 477 U.S. 131 (1986)

Maryland v. King, 567 U.S. 1301 (2012)

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

Matter of Dunn, 988 F.2d 45 (7th Cir. 1993)

Mayhew v. Burwell, 772 F.3d 80 (1st Cir. 2014)

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

Miss. Comm'n on Env't Quality v. EPA, 790 F.3d 138 (D.C. Cir. 2015)24

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

Munaf v. Geren, 553 U.S. 674 (2008)

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 ex rel. Celebrezze v. U.S. Dep't of Transp., 766 F.2d 228 (6th Cir. 1985)

Ohio v. Yellen, 2021 WL 1903908 (S.D. Ohio May 12, 2021)

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)

Pub. Serv. Comm'n of Utah v. Wycoff Co., 344 U.S. 237 (1952)

Religious Sisters of Mercy v. Azar, 2021 WL 191009 (D.N.D. Jan. 19, 2021)

Rimini St., Inc. v. Oracle USA, Inc., 139 S. Ct. 873 (2019)

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

S.C. Dep't of Educ. v. Duncan, 714 F.3d 249 (4th Cir. 2013)

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

Sampson v. Murray, 415 U.S. 61 (1974)

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

Snider v. Creasy, 728 F.2d 369 (6th Cir. 1984)

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

Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016)

Steward Mach. Co. v. Davis, 301 U.S. 548 (1937)

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

Tex. Off. of Pub. Util. Couns. v. FCC, 183 F.3d 393 (5th Cir. 1999)

Texas v. United States, 787 F.3d 733 (5th Cir. 2015)

Texas v. United States, 809 F.3d 134 (5th Cir. 2015)

Travis v. Pennyrile Rural Elec. Coop., 399 F.2d 726 (6th Cir. 1968)

Trump v. New York, 141 S. Ct. 530 (2020)

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)

United States v. Oakland Cannabis Buyers' Coop., 532 U.S. 483 (2001)

Van Wyhe v. Reisch, 581 F.3d 639 (8th Cir. 2009)

Voisine v. United States, 136 S. Ct. 2272 (2016)

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

Walters v. Nat'l Ass'n of Radiation Survivors, 468 U.S. 1323 (1984)

Warshak v. United States, 532 F.3d 521 (6th Cir. 2008)

Wash. State Grange v. Wash. State Republican Party, 552 U.S. 442 (2008).

Webster v. Reprod. Health Servs., 492 U.S. 490 (1989)

Westside Mothers v. Olszewski, 454 F.3d 532 (6th Cir. 2006)

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

Wyoming ex rel. Crank v. United States, 539 F.3d 1236 (10th Cir. 2008)

Constitutional Provisions

U.S. Const. art. I, § 8, cl. 1

Statutes

20 U.S.C. § 241e (1970)

28 U.S.C. §2201

42 U.S.C. § 801

42 U.S.C. § 802

42 U.S.C. § 803

American Rescue Plan Act. See Pub. L. No. 117-2, § 9901(a), 135 Stat. 4 (2021), (codified at 42 U.S.C. §§ 802–805)

Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-137, § 5001, 134 Stat. 281, 501 (2020) (codified at 42 U.S.C. § 801)

Rules

Fed. R. Civ. P. 56(a)

Federal Rule of Civil Procedure 12(b)(1)

Federal Rule of Civil Procedure 12(b)(6)

Regulations

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

Other Authorites

Offset, Black's Law Dictionary (11th ed. 2019)

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INTRODUCTION

As part of the American Rescue Plan Act, Pub. L. No. 117-2, 135 Stat. 4 (2021) (“Rescue Plan” or “Act”), Congress appropriated nearly $200 billion in new funding for state governments. 42 U.S.C. § 802. Congress made these new federal funds available for state efforts to respond to the public health emergency created by the COVID-19 pandemic and to its economic effects and gave States considerable flexibility to use these new federal funds, including by funding state-level government services and by providing assistance to households, small businesses, and industries. Id. § 802(c). To ensure that States would use these new funds for the broad categories of state expenditures it identified, Congress specified that States cannot use the federal funds to offset a reduction in net tax revenue resulting from changes in state law. Id. § 802(c)(2)(A) (the “offset provision”). That is a straightforward exercise of Congress's well-settled Spending Clause authority to attach conditions that “preserve its control over the use of federal funds.” Nat'l Fed'n of Indep. Bus. v. Sebelius, 567 U.S. 519, 579 (2012) [hereinafter “NFIB”] (plurality opinion).

The Plaintiff States claim that this provision violates the anti-commandeering principle and that it is unconstitutionally ambiguous, unrelated to the purpose of the Act, and coercive. See Am. Compl. ¶¶ 52–83, ECF No. 23; Pls.' Mot. for Summary J. 19–37, ECF No. 25 (“Pls.' Mot.”). Plaintiffs' Complaint, however, suffers from multiple jurisdictional defects and rests on a fundamental misunderstanding of both the challenged statute and the governing law.

First, the challenged statute. Because the offset provision's plain text addresses only a reduction in a State's “net tax revenues,” 42 U.S.C. § 802(c)(2)(A) (emphasis added), a State is free to cut some taxes and increase others and may change its tax law as it believes appropriate. And even if a State chooses to make changes that result in a reduction in net tax revenue, the Act bars a State only from using Rescue Plan funds — as opposed to other means — to offset that reduction. Id. The Act also makes clear that if a State chooses to use Rescue Plan funds to offset a reduction in net tax revenue resulting from changes in state law, the only consequence would be a loss of monies commensurate with the amount of federal funding misused for that offset. See id. § 802(e).

Second, the law. As an initial matter, Plaintiffs lack Article III standing because they have not alleged that any hypothetical tax cut would decrease net tax revenue, or that they plan to use Rescue Plan funds to offset that theoretical reduction. Because Plaintiffs have not alleged any intention to use the federal funds in a way not permitted under the Act, they lack standing to challenge the offset provision. Relatedly, the States' challenge is not ripe because Plaintiffs have not alleged conduct that could result in recoupment, and the Treasury Department has not indicated any imminent plans to recoup from the Plaintiff States. Particularly given the extraordinary nature of Plaintiffs' request for preenforcement injunctive relief based on the purported unconstitutionality of a federal statute, it is critical to ensure that they have satisfied the jurisdictional prerequisites for this suit. They have not.

Plaintiffs' Complaint also fails to state a claim on the merits. Federal statutes that place conditions on how a State can use federal funds are commonplace and present no constitutional concern. Such provisions reflect the commonsense proposition that when Congress gives money to States for a particular purpose, it may place conditions on a State's acceptance of the funds to ensure that the funds are in fact used for the intended purpose. The Rescue Plan allows States to deploy the considerable funds provided for a broad array of purposes related to the COVID-19 pandemic and its effects. Congress acted well within constitutional bounds by conditioning the receipt of Rescue Plan funds on the State's agreement to use funds for those purposes and not to offset a reduction in net tax revenue resulting from changes in state law.

Plaintiffs' Complaint seeks to invalidate portions of the Rescue Plan based on the States' speculative concerns about possible future disputes. 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), this Court should deny Plaintiffs' motion for summary judgment and dismiss the Amended Complaint or grant summary judgment in favor of Defendants.

BACKGROUND

A. Statutory and Regulatory Background

In March 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). See Pub. L. No. 116-137, § 5001, 134 Stat. 281, 501 (2020) (codified at 42 U.S.C. § 801). The CARES Act established a $150 billion “Coronavirus Relief Fund” for States, tribal governments, and localities for 2020. See 42 U.S.C. § 801(a). That fund covers costs that are “necessary expenditures incurred due to the public health emergency” that “were not accounted for in the budget[s]” of those governments. Id. § 801(d). If recipients do not use the funds for the permitted purposes, the Act permits the Treasury Department to recoup the amount of any misused funds. Id. § 801(e).

On March 11, 2021, Congress enacted the American Rescue Plan Act. See Pub. L. No. 117-2, § 9901(a) (codified at 42 U.S.C. §§ 802–805). The Rescue Plan establishes an additional “Coronavirus State Fiscal Recovery Fund,” allocating another $220 billion to broadly “mitigate the fiscal effects” of the pandemic on States, territories, and Tribal governments through 2024. 42 U.S.C. § 802(a)(1); see id. § 803(a) (additional $130 billion for localities). Nearly $200 billion is allocated for the States and the District of Columbia. Id. § 802(b)(2)(A).

The Rescue Plan provides States with considerable latitude, in scope and duration, to use the funds for pandemic-related purposes. Through 2024, a State may use the funds “to cover costs incurred”:

(A) to respond to the public health emergency with respect to the Corona-virus Disease 2019 (COVID–19) or its negative economic impacts, including assistance to households, small businesses, and nonprofits, or aid to impacted industries such as tourism, travel, and hospitality;

(B) to respond to workers performing essential work during the COVID–19 public health emergency by providing premium pay to eligible workers of the State, territory, or Tribal government that are performing such essential work, or by providing grants to eligible employers that have eligible workers who perform essential work;

(C) for the provision of government services to the extent of the reduction in revenue of such State, territory, or Tribal government due to the COVID– 19 public health emergency relative to revenues collected in the most recent full fiscal year of the State, territory, or Tribal government prior to the emergency; or

(D) to make necessary investments in water, sewer, or broadband infrastructure.

Id. § 802(c)(1). While CARES Act funds were limited to covering previously unbudgeted costs of necessary expenditures incurred due to the public health emergency, the Rescue Plan allows States to use the funds for “government services” to the extent the pandemic has resulted in a “reduction in revenue.” Id. § 802(c)(1)(C). The Rescue Plan also permits recipients to use the funds to respond broadly to the public-health emergency and its negative economic effects, to support essential workers during the pandemic, and to invest in certain infrastructure areas. Id. § 802(c)(1)(A), (B), (D).

The Rescue Plan includes two “further restrictions” to ensure that the broad outlay of funds is used for the identified purposes while funds are available. 42 U.S.C. §802(c)(2). One limitation (not challenged here) provides that a State may not “deposit” Rescue Plan funds “into any pension fund.” Id. § 802(c)(2)(B). The other limitation (at issue here) provides in relevant part that a State:

shall not use the funds provided under [§ 802] . . . 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.

Id. § 802(c)(2)(A).¹

By its terms, this funding condition applies only to reductions in “net” tax revenue. Id. This limitation on the use of federal funds is not implicated at all by a State's choice to modify its tax code — including by cutting taxes — if the changes, taken together, do not result in a reduction of net tax revenue. If a State chooses to reduce its net tax revenue, moreover, the only limitation is that it may not “use” the Rescue Plan funds to “offset” that reduction. Id. And if a State chooses to do so, the State will be required to repay only the amount of funds used to offset the “reduction to net tax revenue” or “the amount of funds received,” whichever is less. Id. § 802(e).

The Rescue Plan also authorizes the Secretary of the Treasury “to issue such regulations as may be necessary or appropriate to carry out” the applicable statutory provisions. Id. § 802(f). On May 10, 2021, Treasury posted an Interim Final Rule implementing the Rescue Plan, which was published in the Federal Register the following week. See 86 Fed. Reg. 26,786 (May 17, 2021) (“the Rule”). The Rule sets forth a framework for determining when a State has used Fiscal Recovery Funds to “directly or indirectly offset” a reduction in net tax revenue:

B. Factual and Procedural Background

On April 6, 2021, Kentucky and Tennessee brought this suit alleging that the offset provision of § 802(c)(2)(A) is unconstitutional. Am. Compl. ¶ 8. On May 14, 2021, Kentucky certified to the Department of the Treasury its intent to use Rescue Plan funds for permissible purposes under 42 U.S.C. § 802(d)(1), and the Department of the Treasury subsequently issued Kentucky its first tranche payment of $1,091,618,645.45. Tennessee has not yet certified but alleges that it will do so and that it expects to receive approximately $3.725 billion. Niknejad Decl. ¶ 5, ECF No. 25-2. Although Plaintiffs allege that they have enacted or are considering changes in state law that could reduce net tax revenue, they do not allege that they intend to use Rescue Plan funds to offset such a reduction. See Am. Compl. ¶¶ 42–43. Plaintiffs nonetheless request injunctive and declaratory relief against any future enforcement of the offset provision. See id. 25–26.

LEGAL STANDARDS

To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(1), a plaintiff bears the burden to establish a court's jurisdiction. Lujan v. Defs. of Wildlife, 504 U.S. 555, 561 (1992). It is “presume[d] that federal courts lack jurisdiction unless the contrary appears affirmatively from the record.” DaimlerChrysler Corp. v. Cuno, 547 U.S. 332, 342 n.3 (2006) (citation omitted).

Under both Rule 12(b)(1) and Rule 12(b)(6), to survive a motion to dismiss, a complaint must contain “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). This “plausibility” standard “asks for more than a sheer possibility that a defendant has acted unlawfully.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation omitted). “Where a complaint pleads facts that are 'merely consistent with' a defendant's liability, it 'stops short of the line between possibility and plausibility of “entitlement to relief.”'” Id. (quoting Twombly, 550 U.S. at 557). While the Court accepts well-pleaded factual allegations as true, “mere conclusory statements” and “legal conclusion[s] couched as . . . factual allegation[s]” are “disentitle[d] . . . to th[is] presumption of truth.” Id. at 678, 681 (citation omitted).

Alternatively, a court may grant summary judgment “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). A permanent injunction requires not only success on the merits, but also a demonstration that (1) the movant has suffered an irreparable injury; (2) remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) an equity remedy is warranted after balancing the hardships; and (4) the public interest would not be disserved by a permanent injunction. eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006). “In a case of actual controversy within [a district court's] jurisdiction,” the Declaratory Judgment Act also authorizes the court, in its discretion, to “declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.” 28 U.S.C. § 2201.

ARGUMENT

I. PLAINTIFFS LACK ARTICLE III STANDING.

In assessing the Plaintiff States' Amended Complaint, this Court must determine whether they have established jurisdiction, including Article III standing. Munaf v. Geren, 553 U.S. 674, 691 (2008). To satisfy the “irreducible constitutional minimum” of standing, the States must first demonstrate “a concrete and particularized” injury in fact that is “actual or imminent.” Lujan, 504 U.S. at 560–61. 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.'” Susan B. Anthony List v. Driehaus, 573 U.S. 149, 159 (2014) (quoting Babbitt v. Farm Workers, 442 U.S. 289, 298 (1979)); see id. at 161–67 (analyzing these three elements separately). In other words, the prospect of enforcement must be “sufficiently imminent” to create a concrete injury. Id. at 159.

A. Plaintiffs cannot manufacture standing by misreading the offset provision.

Plaintiffs cannot meet Driehaus's standard because their asserted injuries are hypothetical and speculative. The Amended Complaint is silent as to how the States intend to use Rescue Plan funds, nowhere even suggesting that they plan to use them in a manner inconsistent with the offset provision. Under that provision, a State may not use the new federal funds to offset a reduction in net tax revenue that results from certain changes in state law. 42 U.S.C. § 802(c)(2)(A). But there is no allegation that Kentucky or Tennessee intends to use Rescue Plan funds to offset any reductions in its net tax revenue that might result from any changes they might choose to adopt. Merely proposing or adopting a tax cut is not itself the “course of conduct arguably affected with a constitutional interest” and “proscribed by a statute” required for preenforcement standing. Driehaus, 573 U.S. at 159 (quoting Babbitt, 442 U.S. at 298); see Am. Compl. ¶¶ 42–43 (describing tax-law changes or proposals in Kentucky and Tennessee). The offset provision restricts a State only from using Rescue Plan funds to offset a reduction in net tax revenue resulting from a change in state law; it does not prohibit the proposal or adoption of any tax change, as the States seem incorrectly to believe. E.g., Pls.' Mot. 5–7. Plaintiffs even acknowledge that the offset provision is susceptible to an interpretation that does not prohibit any tax-law change. E.g., Am. Compl. ¶ 32 (“Congress appears to have conditioned its Covid-19 relief funds for the States on a promise that the States will not lower taxes on their residents for four years.” (emphasis added)); ¶ 35 (asserting the offset provision “can readily be understood as” a broad prohibition (emphasis added)); ¶ 36 (relying on a media report in attempting to broaden the provision's meaning); ¶ 39 (describing the offset provision as “potentially breathtakingly broad” (emphasis added)). Yet they offer 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 Rescue Plan that Defendants have not adopted. In short, the offset provision is not as onerous as Plaintiffs think it could be read to be; nor can such a broad and incorrect reading justify standing. Accordingly, the first two Driehaus elements are lacking: the States lack plausible allegations that they intend to misuse Rescue Plan funds and that the conduct they do intend to pursue (merely enacting tax cuts) is proscribed by a statute. 573 U.S. at 159, 161– 63.

The States also lack any plausible allegation that “there exists a credible threat of” enforcement, id. at 159, 163–66 — that is, recoupment of misspent funds. To the contrary, the Rule and the Secretary's statement only discredit such an idea because both make plain that only impermissible offsets are disallowed, not simply any tax-law change. 86 Fed. Reg. at 26,806–10; see Pls.' Mot. 5 (quoting ECF No. 23-2). The States are the proverbial “masters of their complaint[ ]” and must take responsibility for the allegations included — or not included — therein. Webster v. Reprod. Health Servs., 492 U.S. 490, 492 (1989). And, at summary judgment, the States also must adduce actual evidence to justify standing. Lujan, 504 U.S. at 560. They have done neither.

Given the nature of the Plaintiffs' preenforcement facial challenge to a federal statute, it is especially critical to ensure that the jurisdictional prerequisites for this suit are satisfied. See Pub. Serv. Comm'n of Utah v. Wycoff Co., 344 U.S. 237 (1952). Because those prerequisites are lacking, this Court should follow the lead of the Missouri court and dismiss the case. See Missouri v. Yellen, 2021 WL 1889867, at *5 (E.D. Mo. May 11, 2021), appeal filed, No. 21-2118 (8th Cir. May 18, 2021). The Missouri court explained, in a case similar to this one, that the State lacked preenforcement standing because “State tax cuts are not proscribed by the ARPA” and “Missouri's sovereign power to set its own tax policy is not implicated by the ARPA.” Id. at *4. Rather, Congress simply “both appropriated recovery funds and placed a condition on a State's receipt of the funds.” Id. Therefore, the State “does not face a credible threat of prosecution if it decides to pass tax cutting measures” because “the ARPA does not prohibit a State from implementing its own tax policy.” Id. In other words, “recoupment is not triggered by a reduction in State tax revenue, it is triggered by a State's use of federal recovery funds to offset a reduction in its net tax revenue.” Id.

B. Plaintiffs' theories of standing based on state sovereignty or supposed compliance costs are unsupported by law or fact.

Unable to demonstrate that the Rescue Plan restricts any conduct that the Plaintiff States intend to undertake, let alone that any recoupment is imminent, the States assert two main theories of standing: a general intrusion on their “sovereign authority to set tax policy” and supposed compliance costs. Pls.' Mot. 10–18; see also Am. Compl. ¶ 12 (mentioning a third theory regarding certification that the States do not pursue in their brief). In doing so, Plaintiffs again fundamentally misunderstand the Rescue Plan, as well as the Rule. And, in any event, neither theory justifies preenforcement standing here.

First, as discussed, “[t]he [Rescue Plan] does not prohibit States from proposing, enacting, or implementing legislation that cuts taxes for its citizens and businesses.” Missouri, 2021 WL 1889867, at *4. To ensure that the new federal funds are used for the purposes Congress permitted and not others that it chose not to support, the Act requires a State to agree that it will not use the federal funds to offset a reduction in net tax revenue resulting from changes in state law. The Rescue Plan does not prohibit a State from cutting taxes; 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 its own tax policy is not implicated by the [Rescue Plan].” Id. Quite the opposite: 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; see South Dakota v. Dole, 483 U.S. 203, 207 (1987) (“In considering whether a particular expenditure is intended to serve general public purposes, courts should defer substantially to the judgement of Congress”). Put simply, “[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).

Plaintiffs' reliance on their sovereign taxation authority also cannot be reconciled with the Supreme Court's decision in Massachusetts v. Mellon, which made clear that Article III jurisdiction is not satisfied by raising “abstract questions . . . of sovereignty.” 262 U.S. 447, 485 (1923). There, Congress had enacted through the Spending Clause a maternity program that permitted States to accept funding to protect the health of mothers and infants and provided that violating the program's conditions could result in the withholding of funds. Id. at 478–79, 484-85. Massachusetts brought suit, alleging that the statute “imposed upon the [S]tates an illegal and unconstitutional option either to yield to the federal government a part of their reserved rights or lose their share of the moneys appropriated.” Id. at 482. The Supreme Court held that the State's “naked contention that Congress has usurped the reserved powers of the several [S]tates by the mere enactment of the statute” was insufficient to establish an Article III case or controversy. Id. at 483. Instead, the Court held that Massachusetts was required to allege that a sovereign interest was “actually invaded or threatened” by “the actual or threatened operation of the statute,” id. at 485 — precisely what Plaintiffs have failed to demonstrate here. Plaintiffs have not alleged any plan to use Rescue Plan funds to offset a reduction in net tax revenue resulting from a change in state law, and even then, only federal money — not state power — would be at stake.²

The only authorities that Plaintiffs cite from the funding-condition context are inapposite here. Pls.' Mot. 15–16; see Forum for Acad. & Institutional Rights, Inc. v. Rumsfeld, 291 F. Supp. 2d 269, 286 (D.N.J. 2003) (subsequent history omitted) (law schools forced to choose between exercising First Amendment rights and losing funding); see also Texas v. United States, 787 F.3d 733, 749 (5th Cir. 2015) (State forced to choose between losing state funds and raising taxes or fees); Sch. Dist. of Pontiac v. Sec'y of U.S. Dep't of Educ., 584 F.3d 253, 278 (6th Cir. 2009) (en banc) (Sutton, J., concurring) (relying on sufficient threat of enforcement, based on plaintiffs' stated intent not to comply with a condition and a history of the government enforcing the condition, to agree to find standing). Here, the States retain their sovereign authority to set tax policy because the offset provision only limits one potential use of new federal funds. The States have no constitutional right to spend new federal funds however they would prefer, see Section II.A infra, so no constitutional right is at stake if a State chooses to accept Rescue Plan funds.

The other authorities that the States cite to assert a cognizable injury only underscore its absence here. See Pls.' Mot. 10–16; Am. Compl. ¶ 12. Several decisions addressed concrete injuries, not present here, to state interests. See Ariz. State Legislature v. Ariz. Independent Redistricting Comm'n, 576 U.S. 787, 793 (2015) (“authority to draw congressional districts”); Texas v. United States, 809 F.3d 134, 155 (5th Cir. 2015) (“financial loss”); Tex. Off. of Pub. Util. Counsel v. FCC, 183 F.3d 393, 448–49 (5th Cir. 1999) (“authority” over an aspect of telecommunications regulation).³ Other decisions addressed whether a defined state statute had been preempted by federal law. See Ohio ex rel. Celebrezze v. U.S. Dep't of Transp., 766 F.2d 228, 232–33 (6th Cir. 1985); Alaska v. U.S. Dep't of Transp., 868 F.2d 441, 443 (D.C. Cir. 1989); Matter of Dunn, 988 F.2d 45, 46–47 (7th Cir. 1993); Wyoming ex rel. Crank v. United States, 539 F.3d 1236, 1242 (10th Cir. 2008); see also Barnes v. E-Sys., Inc. Grp. Hosp. Med. & Surgical Ins. Plan, 501 U.S. 1301, 1304 (1991) (Scalia, J., in chambers).⁴ And another addressed whether Congress could prescribe the form of currency by which a State's citizens could pay the State taxes. Lane Cnty. v. Oregon, 74 U.S. 71, 76–77 (1868). No similar potential invasion of a state legislative prerogative or of state sovereignty is implicated here; the offset provision does not narrow any state policymaking options except when it comes to how States may use new federal dollars.

At bottom, everyone agrees that Kentucky and Tennessee should “be free to set taxes based on their own views of sound policy” and “free to consider and adopt the full range of tax policies they are constitutionally entitled to enact.” Pls.' Mot. 16. The offset provision does not limit that freedom; it merely embodies Congress's decision against paying for state tax cuts with these new federal dollars.

Second, standing cannot be based on the States' supposed “pocketbook injury” for several reasons. Pls.' Mot. 16; see Am. Compl. ¶ 12. To begin, every funding condition imposes some compliance costs, yet courts have consistently identified enforcement proceedings, should they ever occur, as the proper context for addressing a State's challenge to grant conditions. 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). Plaintiffs identify no reason to depart from that normal course here. Indeed, under the States' novel theory, every federal grant would injure any recipient by virtue of the recipient's administrative costs in simply receiving the grant, processing it, or reporting on the grant's uses. That cannot be.

Plaintiffs' compliance-cost theory also fails because any supposed costs are not traceable to the sole statutory provision they challenge: the offset provision. Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1547 (2016); see Am. Compl. ¶ 12 (citing the Rule, which Plaintiffs do not challenge, and a separate statutory provision that Plaintiffs do not challenge, 42 U.S.C. § 802(d)(2), as the sources of “calculation and reporting requirements”). The Supreme Court recently rejected this exact standing theory — premised on harms from unchallenged statutory provisions — because it was not traceable to the provision at issue. California v. Texas, 141 S. Ct. 2104, 2119 (2021). Indeed, § 802(d)(2) requires a “detailed accounting” of “all modifications to” state “tax revenue sources during the covered period” and would do so regardless of whether the Plaintiffs' requested relief were granted. See Am. Compl. 26.⁵

Even if standing could somehow be based on compliance costs, the States have not substantiated any such costs here. Plaintiffs neither plausibly allege nor adduce evidence of any specific, predicted “administrative burden.” Am. Compl. ¶ 12. Nor could they, because the Rule allows States to use Rescue Plan funds to cover administrative costs, 86 Fed. Reg. at 26,822, so Kentucky and Tennessee need not spend any state resources at all. Contra Pls.' Mot. 16–18 (citing cases involving economic costs that were not paid for by the challenged action or actions that threatened existing federal funds). The Rule also makes clear that States may use their own existing budgeting, modeling, and reporting methods and that Treasury stands ready to work cooperatively with States on reporting. 86 Fed. Reg. at 26,786, 26,809–10. So the list of “processes” and “resources” that Plaintiffs cite as burdens are mistaken, and the cases they rely on inapposite. See Pls.' Mot. 17–18.

C. This case is not ripe.

For similar reasons, even if the Plaintiff States had Article III standing, their challenge to the offset provision would not be ripe. “Ripeness is a justiciability doctrine designed 'to prevent the courts, through avoidance of premature adjudication, from entangling themselves in abstract disagreements over administrative policies,” and “also to protect the agencies from judicial interference until an administrative decision has been formalized and its effects felt in a concrete way by the challenging parties.'” Nat'l Park Hosp. Ass'n v. Dep't of Interior, 538 U.S. 803, 807–08 (2003) (quoting Abbott Labs. v. Gardner, 387 U.S. 136, 148–149 (1967)). Plaintiffs' claimed harm here rests on the potential recoupment of some Rescue Plan funds from the States. See Am. Compl. ¶ 60. “The mere potential for future injury, however, is insufficient to render an issue ripe for review.” Alascom Inc. v. FCC, 727 F.2d 1212, 1217 (D.C. Cir. 1984); see also Trump v. New York, 141 S. Ct. 530, 535 (2020) (per curiam). Recoupment would be possible only if, at some point, the States enact tax-law changes, and only if their net tax revenues fall as a result, and only if the States then decide to use Rescue Plan funds to offset that reduction. With potential recoupment nowhere in sight, the States' challenge is premature. See Missouri, 2021 WL 1889867, at *3–5.

There must be some “concrete action applying [Treasury's] regulation to [a State's] situation in a fashion that harms or threatens to harm [it]” before adjudicating its challenge. Nat'l Park Hosp. Ass'n, 538 U.S. at 808; see Fac. Senate of Fla. Int'l Univ. v. Winn, 616 F.3d 1206, 1209 n.8 (11th Cir. 2010) (“[A] final conclusion on that issue can await a post-enforcement, asapplied challenge on a less speculative record than exists here.”). Courts are “reluctan[t] to grant relief in the face of facial, as opposed to as applied, attacks on statutes,” let alone preenforcement facial attacks, where a court would be prematurely interpreting “statutes on the basis of factually barebones records.” Warshak v. United States, 532 F.3d 521, 529 (6th Cir. 2008) (en banc) (quoting Wash. State Grange v. Wash. State Republican Party, 552 U.S. 442, 450 (2008)).

Again, the Missouri court's analysis is instructive. The court found that the case was not ripe because “Missouri ask[ed] the Court to determine the scope of the [offset provision] well in advance of any adverse effect and in a wholly, nonactionable hypothetical context,” and because further factual development would aid the court's determination. Missouri, 2021 WL 1889867, at *5. The court further explained that the offset provision “does not require Missouri to engage in, or refrain from, any conduct, including legislative conduct regarding tax policy,” and “Missouri's purported injuries to legislative proceedings and the prospect of recoupment of federal recovery funds are too abstract and remote to constitute significant hardship.” Id. This Court should conclude the same.

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

On the merits, Plaintiffs have not come close to demonstrating that Congress exceeded the bounds of its Spending Clause authority. The Constitution empowers Congress to raise and spend revenue to “provide for the common Defence and general Welfare of the United States.” U.S. Const. art. I, § 8, cl. 1. Congress “may, in the exercise of its spending power, condition its grant of funds to the States upon their taking certain actions that Congress could not require them to take, and that acceptance of the funds entails an agreement to the actions.” Coll. Sav. Bank v. Fla. Prepaid Postsecondary Educ. Expense Bd., 527 U.S. 666, 686–87 (1999); NFIB, 567 U.S. at 576; Dole, 483 U.S. at 207.

Congress's Spending Clause authority is subject to certain limitations. Congress must use this power in pursuit of “the general welfare” and ensure that its “conditions on the receipt of federal funds” are related to the federal interest. Dole, 483 U.S. at 207. Spending Clause conditions also must not violate “other constitutional provisions” or be “coercive.” Id. at 208, 211. Finally, Congress's “desire[ ] to condition the States' receipt of federal funds” must be unambiguous. Id. at 207.

In this case, Plaintiffs contend that the offset provision exceeds these limitations and therefore is not a valid exercise of Congress's Spending Clause authority and violates the Tenth Amendment. Am. Compl. ¶¶ 52–83. As noted above, Plaintiffs do not claim that any particular state enactment will lead to recoupment; Plaintiffs instead challenge the condition as a facial matter. The States therefore bear a significant burden to demonstrate that the offset provision is “unconstitutional in all its applications”: they “must show that there is no set of circumstances under which the law would be valid.” Bucklew v. Precythe, 139 S. Ct. 1112, 1127 (2019); see also Wash. State Grange, 552 U.S. at 450; Warshak, 532 F.3d at 521. And in evaluating the Act's facial constitutionality, “[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). Here, Congress has validly exercised its Spending Clause authority, and Plaintiffs' contentions have no merit.

A. Congress validly exercised its Spending Clause authority to restrict the use of Rescue Plan funds.

The Rescue Plan is a lawful exercise of Congress's Spending Clause authority. Designed to assist in the Nation's economic recovery during and following a pandemic, the Rescue Plan appropriates nearly $200 billion in new federal funding for States and the District of Columbia. 42 U.S.C. § 802(b)(3), (c)(1). With that funding, States have considerable flexibility to “mitigate the fiscal effects” of the COVID-19 pandemic as they see fit within the broad parameters specified by Congress. Id. § 802(a)(1), (c)(1). Unsurprisingly, Congress sought to ensure that its monetary outlay would be used as intended. To that end, it included a guardrail that prohibits States that choose to accept the federal money from using those funds to “directly or indirectly offset a reduction” in “net tax revenue” resulting from changes in state law. Id. § 802(c)(2)(A).

The offset provision is a modest restriction on an otherwise generous outlay of federal funds. By its plain terms, the offset provision applies only when a State uses Rescue Plan funds to “offset” a reduction in “net” tax revenue resulting from changes in state law. Id. That restriction is not implicated if reductions in some taxes are balanced with increases in others because no “net” tax revenue reduction would then occur. A State also does not transgress the limitation if it does not “use” Rescue Plan funds to “offset” a reduction in net tax revenue. Id. The term “use” connotes “volitional” “active employment” of federal funds. Voisine v. United States, 136 S. Ct. 2272, 2278–79 (2016). And the term “offset” means “[t]o balance” or “compensate for.” Offset, Black's Law Dictionary (11th ed. 2019). The Act's reference to States' “directly or indirectly” offsetting a reduction in net tax revenue does not alter the statutory meaning. Both “directly” and “indirectly” are adverbs that cannot “alter the meaning of the word” that they modify (here, “offset”). Rimini St., Inc. v. Oracle USA, Inc., 139 S. Ct. 873, 878 (2019). It remains the case that the statute restricts only the use of Rescue Plan funds to offset reductions in net tax revenue resulting from changes in state law, not every tax reduction. If Congress had sought to prohibit every reduction in taxes, Am. Compl. ¶ 35, it could have said so explicitly.

Taken together, the offset provision's language simply ensures that States are not employing federal funds to finance state tax cuts that decrease net tax revenue. See Citizens Bank of Md. v. Strumpf, 516 U.S. 16, 19 (1995) (describing “offset” as balancing out a specific loss with another specific gain). 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 reduction in net tax revenue. 42 U.S.C. § 802(c)(2)(A). 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 reduction in net tax revenue. Id. But States routinely offset reductions in net tax revenue by other means. And even if a State impermissibly uses Rescue Plan funds to offset a reduction in net tax revenue, the consequence is proportional to the misuse: the State would be required to repay only the portion of the federal money it used to offset the reduction in net tax revenue (not to exceed the amount of the federal grant). Id. § 802(e).

The Rule confirms this straightforward interpretation. The Rule requires that States demonstrate how they covered the costs of any tax cuts from sources other than Rescue Plan funds, such as by raising other sources of revenue, cutting spending in certain areas, or using revenue derived from increased economic growth. 86 Fed. Reg. at 26,807. Only if a State cannot demonstrate how it paid for its tax cuts without using Rescue Plan funds will Treasury consider that amount to have been directly or indirectly offset with the federal funds, and thus potentially subject to recoupment. Id.; see also id. at 26,810 (explaining, for example, that “prevent[ing] recipient governments from using Fiscal Recovery Funds to supplant State or territory funding in the eligible use areas, and then us[ing] those State or territory funds to offset tax cuts,” “ensure[s] that Fiscal Recovery Funds are not used to 'indirectly' offset revenue reductions due to covered changes”).

Congress has broad leeway in establishing permissible uses of federal funds. And Congress has an overriding interest in ensuring that the new Rescue Plan funds will be used for the broad categories of state expenditures it identified and not others Congress chose not to support. 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”).

Plaintiffs contend that the Rescue Plan's conditions on the use of funds are not related to the funding program. Am. Compl. ¶ 64–71. But it is difficult to imagine how they could be more related to the funding program because they specify the uses to which a State may and may not devote the federal funds.⁶ That sort of statutory condition is by definition “germane[ ]” because it ensures that federal funds are used for the public-health and economic-recovery “federal purposes” of the Rescue Plan spending program. Dole, 483 U.S. at 207–08. Congress acted well within its Spending Clause authority by both describing broad categories of permissible uses and proscribing certain narrow uses to achieve its objectives. This more than satisfies the “minimum rationality” required of Spending Clause legislation. United States v. Lipscomb, 299 F.3d 303, 322 (5th Cir. 2002) (quoting Kansas v. United States, 214 F.3d 1196, 1199 (10th Cir. 2000)); see New York v. United States, 505 U.S. 144, 172 (1992) (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 germane to States' receipt of highway funds); see also Benning v. Georgia, 391 F.3d 1299, 1308 (11th Cir. 2004). The offset provision simply ensures that Rescue Plan funds “are spent according to [Congress's] view of the 'general Welfare.'” NFIB, 567 U.S. at 580. Other Spending Clause case law illustrates that the Rescue Plan and its offset provision advance a valid federal purpose: provisions that require States to maintain their existing fiscal efforts as a condition of receiving federal funds are an uncontroversial and familiar exercise of Congress's spending power.

In Bennett v. Kentucky Department of Education, 470 U.S. 656 (1985), for example, the Supreme Court explained that, “[i]n order to assure that federal funds would be used to support additional services that would not otherwise be available,” the regulations implementing Title I of the Elementary and Secondary Education Act of 1965 “from the outset prohibited the use of federal grants merely to replace state and local expenditures.” Id. at 659. After receiving complaints that Title I funds were nonetheless being used to replace state and local funds that otherwise would have been spent for participating children, Congress amended Title I in 1970 to require that Title I funds be used “to supplement and, to the extent practical, increase the level of funds that would, in the absence of such federal funds, be made available from nonFederal sources for the education of pupils participating in programs and projects assisted under this subchapter,” and “in no case, as to supplant such funds from nonFederal sources.” Id. at 660 (quoting 20 U.S.C. § 241e(a)(3)(B) (1970)). Federal auditors later found that certain Kentucky programs had violated that provision, and the Secretary of Education required Kentucky to repay the federal funds that had been misused. Id. at 661. The Supreme Court upheld that determination, explaining that the State “gave certain assurances as a condition for receiving the federal funds, and if those assurances were not complied with, the Federal Government is entitled to recover amounts spent contrary to the terms of the grant agreement.” Id. at 663, 673–74.

In accord with the Supreme Court's decision, courts of appeals have applied and upheld similar provisions in an array of Spending Clause statutes. For example, in Mayhew v. Burwell, 772 F.3d 80, 82 (1st Cir. 2014), the First Circuit upheld the Affordable Care Act's requirement that States accepting Medicaid funds maintain their state-level Medicaid eligibility standards for children for a specified period. The Mayhew court held that this requirement “is constitutional, fitting easily within congressional spending power to condition federal Medicaid grants.” Id.; see also, e.g., S.C. Dep't of Educ. v. Duncan, 714 F.3d 249, 252 (4th Cir. 2013) (describing provision in the Individuals with Disabilities Education Act, which generally requires the Secretary to reduce a State's grant by the amount the State has failed to maintain spending for special education for children with disabilities); Kansas, 214 F.3d at 1197 (noting similar requirement in the Temporary Assistance to Needy Families program).

As these cases reflect, statutory provisions that prevent federal funds from being used to displace state efforts are both common and undoubtedly within Congress's authority. In the cases discussed above, States were required to maintain a certain level of spending; the federal funds could not be used to displace existing State funding. Here, the Rescue Plan's offset provision is even less proscriptive: it does not mandate any particular spending or taxation level but instead merely prevents States from using federal funds to offset a reduction in net tax revenue resulting from a change in state law. Although federal funding conditions are often specific to the particular state program at issue, Rescue Plan funding is not confined to any particular state program or activity — it broadly covers “government services” and “negative economic impacts,” among other potential uses. 42 U.S.C. § 802(c)(1). Congress gave States the additional flexibility to determine which of the broadly defined permissible uses of the new funds are most appropriate to their circumstances. And consistent with that generous, four-year outlay of flexible funding, Congress simply sought the assurance that States would not displace their own tax-revenue sources with the federal funds that Congress had appropriated for other purposes.

B. The Rescue Plan is not coercive or commandeering.

Plaintiffs do not dispute that Congress can generally prohibit States from using federal grants to fund state tax cuts, and they do not argue that they have a constitutional right to use federal funds to make up for a shortfall caused by a State's decision to decrease net tax revenues. But they nevertheless urge that the offset provision is coercive and an intrusion on their sovereign taxing authority. Am. Compl. ¶¶ 12, 73–83.

As an initial matter, Plaintiffs' coercion argument also rests on a mischaracterization of the offset provision. As explained above, this provision simply limits a State's ability to “use” Rescue Plan funds to “offset” a reduction in “net tax revenue” resulting from changes in state law. See Section II.A, supra. Plaintiffs are thus wrong to insist that the offset provision “prohibit[s] the States from enacting any tax relief.” Am. Compl. ¶ 35; see also id. ¶ 70 (incorrectly claiming that the offset provision “impos[es] a broad ban on lowering tax revenue”).

Plaintiffs' coercion argument is also based on a fundamental misunderstanding of governing law. The Supreme Court has made clear that “Congress may attach appropriate conditions to federal taxing and spending programs to preserve its control over the use of federal funds.” NFIB, 567 U.S. at 579; Steward Mach. Co. v. Davis, 301 U.S. 548, 590– 91 (1937); see also New York, 505 U.S. at 171 (not undertaking a “coercion” inquiry where “Congress has placed conditions — the achievement of the milestones — on the receipt of federal funds”). So the coercion inquiry is not implicated where, as here, Congress merely restricts how States use newly appropriated federal money 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; see, e.g., Gruver v. La. Bd. of Supervisors for La. State Univ. Agric. & Mech. Coll., 959 F.3d 178, 183–84 (5th Cir. 2020); Miss. Comm'n on Env't Quality v. EPA, 790 F.3d 138, 179 (D.C. Cir. 2015); Religious Sisters of Mercy v. Azar, 2021 WL 191009, at *25 (D.N.D. Jan. 19, 2021), appeal pending on other grounds, No. 21-1890 (8th Cir.). And that is exactly what Congress has done here: the offset provision is titled “[f]urther restriction on use of funds” and only applies to a State's “use [of] the funds provided under this section” to offset a reduction in net tax revenue resulting from a change in state law. 42 U.S.C. § 802(c)(2) (emphases added). The States are free to do anything they want with their own money or tax schemes, including cutting taxes, providing rebates, increasing spending, or cutting expenditures. They must simply refrain from using the federal money to “directly or indirectly offset a reduction in net tax revenue” resulting from state tax-law changes. 42 U.S.C. § 802(c)(2).

Even if coercion analysis did apply, Plaintiffs would lose under NFIB. See Am. Compl. ¶ 75. Unlike the statute challenged here, the Affordable Care Act provision at issue in NFIB threatened States with the loss of their preexisting Medicaid funding if they declined to take part in the ACA's expansion of Medicaid coverage. NFIB, 567 U.S. at 576. In the controlling opinion, the Chief Justice explained that the statute's primary constitutional flaw was the threat to cut off all existing Medicaid funding if a State did not agree to the Medicaid expansion.⁷ Id. at 579–80. As the opinion summarized, “Congress is not free” to “penalize States that choose not to participate in that new program by taking away their existing Medicaid funding.” Id. at 585 (emphases added).

By contrast, the only funds regulated by the offset provision are the funds that Congress appropriated as part of the Rescue Plan itself. See 42 U.S.C. § 802(a)–(c). Unlike in NFIB, States do not suffer the “penalty” of losing preexisting funds if they decline Rescue Plan funds. See NFIB, 567 U.S. at 585. Indeed, all Justices in NFIB agreed that “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) (same); id. at 625 (Ginsburg, J., concurring in part and dissenting in part) (same). That is exactly what Congress has done here. In fact, the Rescue Plan is notably more modest than the prospective funding condition that NFIB indicated was permissible because it is not an all-or-nothing proposition: even if a State were to use Rescue Plan funds to offset a reduction in net tax revenue, it could lose no more than those funds used for the offset. Compare 42 U.S.C. § 802(e)(1), with NFIB, 567 U.S. at 576, 585 (explaining that Congress could make the entirety of the new federal funds provided — totaling $100 billion per year — contingent on a State's adoption of that new program), and id. at 687–88 (joint dissent). So the requirement in the Rescue Plan that States use federal funds for specified purposes and not for others — including to offset a reduction in net tax revenue — is no more “coercive” than any type of restriction on the receipt of federal funds that the Supreme Court has held to be a valid exercise of Congress's Spending Clause authority. See, e.g., New York, 505 U.S. at 171; Dole, 483 U.S. at 211; Bennett, 470 U.S. at 663; Steward Mach., 301 U.S. at 590–91.

Finally, Plaintiffs' effort to characterize the offset provision as impermissible commandeering under the Tenth Amendment should also be rejected. Am. Compl. ¶¶ 80–83. The Supreme Court has repeatedly affirmed 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, 527 U.S. at 686 (same); Dole, 483 U.S. at 207 (same); United States v. Butler, 297 U.S. 1, 66 (1936) (same). The inquiry under both the Spending Clause and the Tenth Amendment is whether the challenged “provision is inconsistent with the federal structure of our Government established by the Constitution.” New York, 505 U.S. at 177; NFIB, 567 U.S. at 578–79. And because nothing in the Act “force[s] the States to implement a federal program,” NFIB, 567 U.S. at 578–79, Plaintiffs' commandeering argument fails.

Plaintiffs cannot avoid this conclusion with the novel argument that the offset provision is unconstitutional because “the power to tax one's citizens” is a “feature of State sovereignty that the federal government cannot intrude on.” Pls.' Mot. 37. The offset provision does not regulate “a State's power to tax”; it simply precludes a State from using federal funds to offset a reduction in net tax revenue resulting from a change in state law. More fundamentally, though, “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, 527 U.S. at 686 (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, 461 U.S. at 790; City of Pontiac, 584 F.3d at 283 (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.”). So it makes no difference whether this case involves the offset provision or a statutory provision that, for example, prohibited a State from using federal funds to relocate the State's seat of government. Cf. Pls.' Mot. 37. Both are constitutional.

In cases like this one — where “a State has a legitimate choice whether to accept the federal conditions in exchange for federal funds” — the “state officials can fairly be held politically accountable for choosing to accept or refuse the federal offer.” NFIB, 567 U.S. at 578; New York, 505 U.S. at 168 (“Where Congress encourages state regulation rather than compelling it . . . state officials remain accountable to the people.”). If the Plaintiff States dislike the funding condition, or any other provision of the Act, they are free to decline the generous federal aid in whole or in part. Their voters know where to turn if they like, or dislike, the States' choice.

C. The Rescue Plan provides clear notice of the funding condition.

Plaintiffs fare no better in urging that the offset provision is unconstitutionally ambiguous. Am. Compl. ¶¶ 53–62. In Pennhurst State School & Hospital v. Halderman, the Supreme Court declared that “if Congress intends to impose a condition on the grant of federal moneys, it must do so unambiguously.” 451 U.S. 1, 17, 24 (1981). But that is not an onerous requirement: a State's obligations under a funding condition 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” certain conditions. Id. 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); see City of Los Angeles v. Barr, 929 F.3d 1163, 1174–75 (9th Cir. 2019).

Here, “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 a change in state law. Arlington Cent. Sch. Dist. Bd. of Educ. v. Murphy, 548 U.S. 291, 296 (2006). The Act establishes conditions on the use of funds (§ 802(c)), requires States to certify that they will use the funds for the intended purposes and to report those uses (§ 802(d)), and informs States that the potential consequence of non-compliance is the recoupment of no more than the portion of the funds used to offset a net tax revenue reduction (§ 802(e)). The Act further permits the Secretary to implement its provisions by regulation. Id. § 802(f).

These provisions give 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. “Nothing more is required under Pennhurst, which held that Congress need provide no more than 'clear notice' to the [S]tates that funding is conditioned upon compliance with certain standards.” Cutter v. Wilkinson, 423 F.3d 579, 586 (6th Cir. 2005) (citing Pennhurst, 451 U.S. at 25); see Jackson v. Birmingham Bd. of Educ., 544 U.S. 167, 183 (2005) (noting that the Supreme Court has held “there was sufficient notice under Pennhurst where a statute made clear that some conditions were placed on the receipt of federal funds”); Davis ex rel. Lashonda D. v. Monroe Cnty. Bd. of Educ., 526 U.S. 629, 650 (1999) (same).

“[I]t is simply impossible” for Congress to “delineate every instance in which a State may or may not comply with” a funding condition. Charles v. Verhagen, 348 F.3d 601, 607 (7th Cir. 2003); see Mayweathers v. Newland, 314 F.3d 1062, 1067 (9th Cir. 2002); Van Wyhe v. Reisch, 581 F.3d 639, 650 (8th Cir. 2009) (“[S]etting forth every conceivable variation in the statute is neither feasible nor required.”); see Bennett, 470 U.S. at 666 (explaining that “every improper expenditure” need not be “specifically identified and proscribed” in the statute); Jackson, 544 U.S. 167 at 183 (same); Davis, 526 U.S. at 650 (same). “There 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; 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.”). Instead, Congress must simply “make the existence of the condition itself — in exchange for the receipt of federal funds — explicitly obvious.” Mayweathers, 314 F.3d at 1067; Charles, 348 F.3d at 607 (“[T]he exact nature of the conditions may be 'largely indeterminate,' provided that the existence of the conditions is clear, such that States have notice that compliance with the conditions is required.” (emphasis added)); Benning, 391 F.3d at 1307 (“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 states incur an obligation when they accept federal funds, even if the method for compliance is left to the [S]tates.” (emphasis added)).

When properly applied, Pennhurst and its progeny instruct that Congress must simply make clear that acceptance of federal funds obligates the State to comply with a condition; any particularized questions can be addressed by agency regulations and by other formal or informal guidance. See Bennett, 470 U.S. at 669 (explaining that “grant recipients ha[ve] an opportunity to seek clarification of the program requirements” from the agency if they are “uncertain” about their obligations). Contra Ohio v. Yellen, 2021 WL 2712220, at *16 (S.D. Ohio July 1, 2021). Courts thus have routinely accorded Chevron deference to regulations that implement federal spending programs (such as Medicaid and education statutes), an impossibility if any ambiguity in a funding condition rendered the statute unconstitutional. See, e.g., Blum v. Bacon, 457 U.S. 132, 141 (1982); Harris v. Olszewski, 442 F.3d 456, 467–68 (6th Cir. 2006); Westside Mothers v. Olszewski, 454 F.3d 532, 543–44 (6th Cir. 2006); City of Cleveland v. Ohio, 508 F.3d 827, 843 (6th Cir. 2007); United States v. Miami Univ., 294 F.3d 797, 814–15 (6th Cir. 2002); Snider v. Creasy, 728 F.2d 369, 371–73 (6th Cir. 1984); Irving Indep. Sch. Dist. v. Tatro, 468 U.S. 883, 891–92 (1984); Baptist Mem'l Hosp. – Golden Triangle, Inc. v. Azar, 956 F.3d 689, 692–93 (5th Cir. 2020); Children's Hosp. Ass'n of Tex. v. Azar, 933 F.3d 764, 770 (D.C. Cir. 2019); Petit v. U.S. Dep't of Educ., 675 F.3d 769, 778 (D.C. Cir. 2012); see also City of Los Angeles, 929 F.3d at 1174–81 (affirming constitutionality under the Spending Clause while also applying Chevron deference); Pls.' Mot. 27 (arguing, contrary to binding authority, that agencies can never interpret an ambiguous Spending Clause statute).⁸ And that is exactly what Congress envisioned here by expressly authorizing Treasury “to issue such regulations as may be necessary or appropriate to carry out” the provision of funds and the associated conditions. 42 U.S.C. § 802(f).

But agency regulations should have no bearing on the Spending Clause analysis. If a statutory funding condition exists, the implementing agency can regulate the details of the condition subject to the Administrative Procedure Act and the other typical constraints; if not, any agency regulation imposing funding conditions would be unauthorized by the statute. The offset provision easily clears that bar, especially because “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.” Charles, 348 F.3d at 607. But even if the bar were higher, it would make no difference. The Rescue Plan provides in direct terms that States cannot use the federal funds to offset a reduction in net tax revenue resulting from changes in state law. See Section II.A, supra. A more onerous standard would conflict with Pennhurst, numerous other Spending Clause precedents, and the well-settled rule that Congress may confer decisionmaking authority on agencies if it “lay[s] down by legislative act an intelligible principle.” Whitman v. Am. Trucking Ass'ns, 531 U.S. 457, 472 (2001).

III. THE COURT SHOULD NOT ENJOIN THE OFFSET PROVISION OR DECLARE IT UNCONSTITUTIONAL.

Even if the Court finds a constitutional defect in the offset provision, neither a permanent injunction nor a declaratory judgment is appropriate.

A. Plaintiffs are not entitled to a permanent injunction.

A court, in its “equitable discretion,” may enter a permanent injunction if a plaintiff can demonstrate:

(1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.

eBay, 547 U.S. at 391 (citations omitted).

Plaintiffs fails each of these requirements. “An injunction against [even] threatened legal action will not issue if the party will have an adequate opportunity to fully present his defenses and objections in the legal action he seeks to enjoin.” Travis v. Pennyrile Rural Elec. Coop., 399 F.2d 726, 729 (6th Cir. 1968). Even if the Plaintiff States were to use Fiscal Recovery Funds to offset a reduction in net tax revenue and face potential recoupment by the Secretary, any such recoupment proceedings would present “an adequate opportunity” to present its defenses. Id.; see 86 Fed. Reg. at 26,811–12 (detailing the recoupment process, including a “reconsideration process [that] provides a recipient the opportunity to submit additional information it believes supports its request” for reconsideration). Because the Plaintiff States may assert their constitutional argument as a “legal defense” to a recoupment action, they “therefore [have] an adequate remedy.” Travis, 399 F.2d at 729. And if the States were unable to succeed in such hypothetical future proceedings, the result would simply be that they have to repay money — the quintessential example of harm that is not irreparable. See Sampson v. Murray, 415 U.S. 61, 90 (1974); Basicomputer Corp. v. Scott, 973 F.2d 507, 511 (6th Cir. 1992). With potential recoupment nowhere in sight, Plaintiffs' challenge is “premature” and no injunction should issue. Travis, 399 F.2d at 729.

By contrast, enjoining an Act of Congress would unquestionably impose irreparable harm on the federal government and contravene the public interest. See United States v. Oakland Cannabis Buyers' Coop., 532 U.S. 483, 497 (2001) (emphasizing that “a court sitting in equity cannot ignore the judgment of Congress, deliberately expressed in legislation” (quotation marks omitted)); see also Maryland v. King, 567 U.S. 1301, 1303 (2012) (Roberts, C.J., in chambers) (“[A]ny time a [government] is enjoined by a court from effectuating statutes enacted by representatives of its people, it suffers a form of irreparable injury.” (citation omitted)). “The presumption of constitutionality which attaches to every Act of Congress is not merely a factor to be considered in evaluating success on the merits, but an equity to be considered in favor of [the government] in balancing hardships.” Walters v. Nat'l Ass'n of Radiation Survivors, 468 U.S. 1323, 1324 (1984) (Rehnquist, J., in chambers). An injunction would thus irreparably harm the United States and undermine the public interest. That is only more evident here, where the legislation at issue is a direct response to a national health and economic emergency of historic proportions.

B. The Court should not issue a declaratory judgment.

A court may issue a declaratory judgment “[i]n a case of actual controversy within its jurisdiction.” 28 U.S.C. §2201(a). Assuming the threshold requirements of standing and ripeness are met, the Court may consider various factors in determining whether to issue a declaratory judgment, including whether the declaratory judgment would serve a useful purpose in clarifying the legal relations and whether there is an alternative remedy that is better or more effective. Grand Trunk W. R.R. Co. v. Consol. Rail Corp., 746 F.2d 323, 326 (6th Cir. 1984).

Here, a declaratory judgment is not necessary to clarify any legal relations. As discussed above, the Rescue Plan — especially in combination with the unchallenged Rule — provides more than sufficient clarity. And if the Plaintiff States have any lingering questions, “Treasury encourages State, local, and Tribal governments in particular to provide feedback and to engage with Treasury regarding issues that may arise regarding all aspects of th[e] [Rule] and Treasury's work in administering the Fiscal Recovery Funds.” 86 Fed. Reg. at 26,788.

A declaratory judgment also should not issue because there is an alternative remedy available: the States may assert their constitutional arguments as a defense to a recoupment action. This alternative is superior to a declaratory judgment because a recoupment action may never come to pass at all, either because the States do not use Fiscal Recovery Funds to offset a reduction in net tax revenue or because the Secretary may exercise her enforcement discretion not to seek recoupment. See Ohio v. Yellen, 2021 WL 1903908, at *14 (S.D. Ohio May 12, 2021) (“[T]here is no reason to believe that the Secretary will exercise [her recoupment] powers any time soon.”). The Plaintiffs' request for declaratory judgment should therefore be denied.

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: July 21, 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

Charles E.T. Roberts
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

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ORDER

This matter is before the Court on Defendants' motion to dismiss or, in the alternative, motion for summary judgment. The Court, having been sufficiently advised, ORDERS that the motion is GRANTED.

Dated this ___ day of ___________, 2021.