Yet another court ruling has come out against a congressional attempt to limit states’ ability to set their own tax rates.
On March 11, 2021, President Biden signed the American Rescue Plan Act into law, allocating nearly $200 billion to states to mitigate the fiscal effects of the COVID pandemic. But in a historically unprecedented move, Congress attached a condition on the receipt of ARPA funds: The states must surrender their core taxing power.
A provision in the law prohibits states from using ARPA funds “to either directly or indirectly offset a reduction in the net tax revenue … resulting from a change in law, regulation, or administrative interpretation … that reduces any tax.” ARPA further authorizes the Treasury to claw back any funds spent in violation of the “Tax Cut Ban” (a.k.a., the “tax mandate”).
A number of states have contested the ban. In a decision on April 8, 2022, the U.S. District Court for the Northern District of Texas handed down a ruling that permanently prohibits the Treasury from enforcing the ban against Texas, Louisiana and Mississippi. The ruling is the third consecutive win for states at the district court level in suits over the law – Ohio et a. v. Yellen, West Virginia et al. v. Yellen, and now, Texas et al. v. Yellen.
Has the Tax Cut Ban already affected state tax rates? “It’s difficult to say what the precise counterfactual would be if the Tax Cut Ban had not been included in ARPA,” said Sheng Li, litigation counsel at the New Civil Liberties Alliance, which filed amicus briefs on behalf of the state in all three cases. “That said, however, I think it would be fair to say that the Tax Cut Ban is expressly designed to discourage states from cutting their residents’ taxes. And it has likely achieved that purpose, at least to some degree. Indeed, the states themselves claim this to be the case in their lawsuits.”
In fact, that’s one of the central questions running through all of the Tax Cut Ban cases — how affected states are injured.
“A concrete injury is required for a federal lawsuit,” Li observed. “The federal government contends that states are not injured at all because they have not enacted tax cuts that trigger federal enforcement of ARPA’s clawback provision. The states respond that actual federal clawback is not needed for an injury. Rather, an injury occurs because the threat of federal clawback deters states from tax cuts they might otherwise enact.”
In his ruling, Judge Matthew Kacsmaryk found, “Congress exceeded its Spending Clause authority and violated the anti-commandeering doctrine when it enacted [the Tax Cut Ban].” Judge Kacsmaryk held that Congress cannot order states to waive a sovereign power through “a conditional offer a state cannot refuse.”
“Although plaintiffs have not been notified of any recoupment of ARPA funds, the court judges the alleged coercion here at the time the states must choose whether to surrender their sovereignty or forgo billions of dollars in federal funds,” he wrote.
Grant Thornton SALT national tax office leader Jamie Yesnowitz, in his 2022 predictions, noted the various state victories at the district court level. He predicted that as several lawsuits get appealed to the circuit court level, “at least two circuit courts will come to different conclusions, resulting in a split.”
If such a split occurs, it could eventually be resolved by the Supreme Court.
But the NCLA’s Li hopes otherwise: “We believe the states are correct as a matter of common-sense logic. Good lawmakers should cut their citizens’ taxes if there are no worthwhile public projects on which to spend excess tax revenue. But if the federal government claws back the amount of any tax cut, which would be taken from parts of the state budget that are worthwhile, lawmakers understandably would prefer to keep taxes needlessly high and spend excess funds on inefficient projects.”
