The “tax cut ban” introduced in the American Rescue Plan Act — which requires that states that accept federal funds through ARPA must not reduce their own taxes — has been challenged by a number of states in several jurisdictions.
“This provision violates very basic principles of the Constitution,” said Peggy Little, senior litigator at the New Civil Liberties Alliance, which has filed an amicus brief in State of Texas, State of Louisiana, and State of Mississippi v. Yellen et al in the U.S. District Court for the Northern District of Texas. “Further, the ban’s conditions are ambiguous and the regulations issued by the Treasury cannot cure the nondelegation problem created by an ambiguous statute. Simply put, Congress cannot purchase states’ sovereign power of taxation.”
“Congress cannot tell states what they can do with their own tax policy. It has absolutely no authority to tell states they can’t lower their taxes,” she said. “If the state accepts the funds, it’s subject to clawback and potential criminal liability. One misstep — ‘If you do something we don’t like we can take back the money and you are subject to potential criminal liability.’”
ARPA, enacted on March 11, 2021, led to the Treasury’s guidelines for the tax cut ban, which restrict states that receive aid from using the funds to “either directly or indirectly offset a reduction in the net tax revenue.” The stimulus package offers approximately $200 billion to states to assist with recovery from the economic damage inflicted by the COVID pandemic. For most states, the ARPA funds represent 20% to 30% of their overall budget. The unprecedented need for assistance arising from the pandemic, combined with the dramatic financial incentive the ARPA funds represent, makes it impractical for the plaintiff states to refuse funds raised from their own taxpayers to which they are entitled.
“Money is fungible,” observed Little. “If a state does anything legitimate, it could raise or lower its net tax revenue. It’s impossibly ambiguous.”
The NCLA also filed amicus briefs in two federal court cases that have permanently enjoined the Treasury from enforcing the tax cut ban in Ohio, Tennessee and Kentucky, she noted.
in the lawsuit, District Court Judge Douglas Cole noted Treasury conceded that the tax mandate may be ambiguous as written and found that “despite poring over this statutory language, the court cannot fathom what it would mean to indirectly offset a reduction in the ‘net tax revenue of a state,’ by a ‘change in law … that reduces any tax.’”
“Treasury cannot resolve the tax cut ban’s ambiguities through regulations,” said Little. “Congress would need to lay out clear statutory boundaries. U.S. District Court Judge Gregory Van Tatenhove concluded in a separate action filed by Kentucky and Tennessee that the tax cut ban was unconstitutionally coercive.”
Treasury has appealed these decisions, so the NCLA has filed additional briefs in the Sixth Circuit and the Eleventh Circuit that will be addressing these issues, remarked Little. “Altogether, 18 states have sued in various jurisdictions to thwart the ban.”
“Congress knows full well that it could never hope to defend legislation that explicitly shifted control of state budgets to the federal government,” the NCLA concluded in its amicus brief. “This attempted federal regulation of Americans’ state fiscal decisions through conditions on federal largesse, rather than through law, is ‘an irregular pathway of government control’ that displaces both the lawful exercise of state power over the states’ own fiscs and Americans’ right to vote for those who will lawfully make those decisions.”
