An Alabama federal court has invalidated the “Tax Cut Ban” provision of the American Rescue Plan Act of 2021. As a result of the ruling in State of West Virginia, et al. v. United States Department of the Treasury, et al., the Treasury is enjoined from enforcing the provision against West Virginia, Alabama, Arkansas, Alaska, Florida, Iowa, Kansas, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota, and Utah.
The Tax Cut Ban, also referred to as the “Tax Mandate” in the court’s opinion, requires that states that accept federal funds through the ARP must not reduce their own taxes. It restricts states that receive aid from using the funds to “either directly or indirectly offset a reduction in the net tax revenue.” The stimulus package offered approximately $195 billion to states to assist with recovery from the economic damage inflicted by the COVID pandemic. For many states, the ARP funds represent 20% to 30% of their overall budget.
The statute and regulatory guidelines are impossibly ambiguous, according to Peggy Little, senior litigator at the New Civil Liberties Alliance, which filed amicus briefs in a number of jurisdictions challenging the provision.
“Money is fungible,” Little observed. “If a state does anything legitimate, it could raise or lower its net tax revenue [in violation of the provision].”
Under the ARP, Congress alone can provide tax relief for three or more years. State taxes are frozen, and state officials must serve as Congress’ auditors of state finances, with potential criminal penalties placed on those state officials, according to the NCLA. In his ruling, District Judge L. Scott Coogler concluded that the provision “raises concerns of federalism and the protection of our nation’s dual system of governing.”
“The federal government has no interest in proscribing state tax policy. Yet the Tax Mandate dictates more than what states do with federal funds; it dictates what states do with state funds as well. The Tax Mandate’s restriction on direct or indirect state tax cuts pressures states into adopting a particular — and federally preferred — tax policy,” Coogler reasoned. “The inherent ambiguity in the text of the mandate may disincentive the plaintiff states from considering any tax reductions for fear of forfeiting ARPA funds.”
The court summarized the current state of the litigation surrounding the provision in a footnote: The lawsuit is one of six around the country with nearly identical complaints, four of which have already been decided, with different results. In two of the four, district courts in Missouri and Arizona dismissed the complaints, finding that those states lacked standing. Both cases have been appealed.
“In Ohio, however, a district court found that Ohio had standing to sue, and granted its motion for a permanent injunction solely on the ground that the Tax Mandate is unconstitutionally ambiguous under the Spending Clause,” the court noted. An appeal has been filed in this case as well. “Similarly, a district court in Kentucky found that Tennessee and Kentucky possessed standing, and granted their motion for a permanent injunction on a different ground: that the Tax Mandate is unconstitutionally coercive under the Spending Clause. A lawsuit brought by Texas, Louisiana, and Mississippi that challenges the Tax Mandate remains pending.”
Significantly, in lawsuits that granted standing and considered the reasoning behind plaintiff allegations, the courts have favored dispensing with the ban.
“It is unsurprising that every court to analyze the Tax Cut Ban on the merits — first Ohio, then Kentucky, and now Alabama — had found it to be unconstitutional,” commented Sheng Li, litigation counsel for the NCLA. “Congress’ misguided attempt to use its own tax-and-spending powers to control states’ tax policy is a clear violation of the Constitution’s federalism structure.”
