In the wake of the American Rescue Plan Act's provision of a tax cut ban, also known as a "Tax Mandate," a number of states sued the Treasury Department, arguing that the ban was unconstitutional. The tax cut ban requires states receiving federal rescue funds to give up their ability to decrease state 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 New Civil Liberties Alliance, a nonpartisan, nonprofit civil rights group, filed an amicus curiae brief in the Fifth Circuit on Oct. 31, 2022 in State of Texas, et al. v. Janet Yellen, et al. It argues that the ban, as it applies to Texas, Mississippi and Louisiana, "places a coercive condition on spending, commandeers state government officials in violation of the Tenth Amendment, and assaults a core component of state sovereignty that is pre-constitutional."
ARPA authorized the distribution of roughly $195 billion directly to states to provide financial assistance to address the economic disruptions caused by the pandemic. The funds at issue represent 13% of Texas' 2021 budget, 31% of Mississippi's budget, and 7% of Louisiana's budget. Those funds were meant to be available if and only if a recipient state agreed not to pass any laws or regulations that would decrease state taxes.
After Congress passed the ARPA legislation, it delegated authority to the Treasury Department, which in turn published a final rule on Jan. 27, 2022, to implement the ban. Under the procedure, a state must consult Treasury's rule to test every policy decision or else risk the clawback of rescue funds. Because money is fungible, any ARPA funds the states receive could be viewed as indirectly offsetting any reduction in net tax revenue from a change in state law or policy, the NCLA argued. "When Congress purports to tell states by law or regulation what their tax policies must — or cannot — be, it violates state sovereignty. This structural violation of the Constitution intrudes upon the states' core capability to direct their own fiscal affairs and make choices about how to tax their residents," it said. "The inescapable concussion is that Congress has used revenue raised through federal taxation of states' residents and businesses to purchase states' sovereign taxation power."
Treasury's final rule compounds the issue by forcing state officials to establish and staff an unwanted and convoluted accounting and reporting bureaucracy, according to the NCLA: "No enumerated power in the Constitution confers authority upon Congress to pass statutes that direct, let alone micromanage, state tax and accounting personnel."
"This law purports to empower unelected bureaucrats at the Department of Treasury to police tax and budgetary policies of every state, eviscerating federalism and the vertical separation-of-powers structure that undergirds the Constitution," said Sheng Li, litigation counsel at the NCLA. "The potential for arbitrary or abusive enforcement against politically disfavored states is immense."
In its amicus brief, the NCLA noted that Congress' practice of imposing "conditions" on federal spending is disturbing. "Far too often, Congress attaches conditions on the receipt of federal funds, thereby insidiously defeating constitutional guarantees and purchasing submission by states and the people to an unconstitutional power grab," the brief stated. "This historically unprecedented case goes even further and usurps core power exclusively assigned to the states — the power to change or reduce the taxation of their citizens."
This case is one of a series of cases brought by other states with similar issues. In two of the cases, district courts in Missouri and Arizona dismissed the complaints due to lack of standing. But in several cases that considered the issue on the merits, the courts held the tax cut ban to be unconstitutional.
"Congress' attempt to use its own tax-and-spending power to control states' tax policy is a clear violation of the Constitution's federalism structure, which exists to safeguard personal liberty from unwanted government intrusion," said Li.
