A lawsuit filed by Kentucky and Tennessee challenging a provision in the federal COVID-19 relief law that bars the act’s funds from being used to offset reductions in net tax revenue should be dismissed for lack of standing, according to the Department of Justice.
The Department of Justice filed a motion July 21 to dismiss the suit filed by Kentucky Attorney General Daniel Cameron (R) and Tennessee Attorney General Herbert Slatery III (R). The suit argues that the provision violates the limits on Congress’s power to spend under Article I and the Constitution’s prohibition against commandeering.
The motion also opposes the states’ motion for summary judgment, filed June 23 in the U.S. District Court for the Eastern District of Kentucky.
At issue is a provision in section 9901 of American Rescue Plan Act of 2021 (P.L. 117-2) that restricts aid from the act from being used by a state or territory to “either directly or indirectly offset a reduction in the net tax revenue of such state or territory resulting from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.” States that do so would have to repay the funds.
However, the Department of Justice’s motion to dismiss argues that the states’ complaint “suffers from multiple jurisdictional defects and rests on a fundamental misunderstanding of both the challenged statute and the governing law.” Because the provision’s plain text addresses only a reduction in a state’s net tax revenues, states can reduce some taxes and increase others and are free to change their tax laws as they see fit, according to the motion. “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.”
The department argues that the complaint should be dismissed for lack of standing because the states “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.” It also argues that the states fail to state a claim on the merits because their complaint seeks to invalidate portions of the American Rescue Plan Act based on “speculative concerns about possible future disputes.”
Kentucky and Tennessee filed a complaint for declaratory and injunctive relief in April, claiming that ARPA's restriction is an unconstitutional power grab that usurps the states’ sovereign authority. The states later filed an amended complaint June 21 after Treasury issued guidance in May on the provision via an interim final rule, in which the states argue that Treasury “is now interpreting the tax mandate as a broad ban that will prevent the states from lowering their taxes at all.”
In a June 21 joint motion for a scheduling order, the parties agreed that the case can likely be resolved without discovery and asked the court to approve a briefing schedule that "will allow for an efficient resolution of this case."
The U.S. Chamber of Commerce and the National Federation of Independent Business Small Business Legal Center on July 12 filed a motion for leave to file an amicus brief in support of Kentucky and Tennessee in their motion for summary judgment, as did the National Taxpayers Union Foundation on July 21.
The lawsuit is one of six filed by state attorneys general challenging the provision.