The war over the Tax Mandate grinds on

Both the Supreme Court and the Eleventh Circuit weighed in on the American Rescue Plan Act's Tax Mandate, a.k.a. Tax Cut Ban, last week.

The Supreme Court, on Jan. 17, 2023, declined to consider Missouri's challenge to the Tax Mandate, which restricts states that receive federal aid from using the funds to "either directly or indirectly offset a reduction in the net tax revenue." Three days later, on Jan. 20, the Eleventh Circuit found the measure to be unconstitutional.

Since it was passed as part of the COVID aid package, the Tax Mandate has been challenged by a number of states that have argued it is unconstitutional. 

The denial of certiorari by the Supreme Court does not affect any of the other cases already decided, according to Sheng Li, litigation counsel at NCLA, the New Civil Liberties Alliance. 

"Missouri's case was dismissed for lack of standing. Notably, several other courts of appeal [the Sixth and Ninth Circuits] have found standing under circumstances that are different from Missouri's case," he said. "The Ninth Circuit sent the case back to the district court while the Sixth Circuit went on to hold that the challenged ARPA provision was unconstitutional."

So far, Tennessee, and by extension Ohio and Kentucky, have prevailed in the Sixth Circuit. The Treasury has asked for a review, and will likely ask the same of the Eleventh Circuit in the latest case.

"Texas, Louisiana and Mississippi prevailed in Texas district court, and that decision is being reviewed by a Fifth Circuit panel," said Li. "Again, whoever loses is likely to ask for en banc review." 

"Finally, Arizona prevailed in the Ninth Circuit in the sense that it was found to have standing," he added. "The case was sent back to the district court. It's not certain whether Arizona will continue to prosecute the case, given there is a new attorney general and governor there."

Ultimately, the Supreme Court's denial of certiorari in Missouri's case is unsurprising, given that the lower court decision was based solely on standing and thus did not reach the merits, and that similar challenges, including cases that do address the merits, are working their way through other circuits, according to Li: "The Supreme Court typically likes to wait until an issue percolates up the circuits before taking it up."

Visitors walk in front of the U.S. Supreme Court building in Washington, D.C.
The Supreme Court building
Andrew Harrer/Bloomberg

In a just-decided (Jan. 20, 2023) case, West Virginia v. U.S. Department of the Treasury, the Eleventh Circuit upheld the district court's decision to permanently enjoin the Treasury from enforcing a Tax Mandate against the 13 states that sued — West Virginia, Alabama, Alaska, Arkansas, Florida, Iowa, Kansas, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota, and Utah. 

In the unanimous panel ruling, Judge Andrew Brasher held that the states had standing to challenge ARPA's ban on direct or indirect reduction of state taxes. He then ruled that "the condition imposed by the offset provision is not sufficiently ascertainable" to pass constitutional muster. Noting that "money is fungible," the panel emphasized that the offset provision does not include a baseline standard or benchmark, so state policymakers are in the dark in determining whether their state reduced net tax revenue and what would trigger a federal clawback. 

In an amicus curiae brief, the NCLA argued that the ambiguous and indeterminate condition made the Tax Mandate fatally unconstitutional. It argued further that the Treasury lacked the power to rule by regulation when it later promulgated a rule seeking to clarify and thereby save the provision. An agency cannot exercise legislative power independently of Congress, which alone has the power to tax and spend — not the Executive Branch. The court agreed that the Treasury is not able to clarify the provision's ambiguous text through a regulation. Finally, the panel said that the novelty and grand scope of the Tax Mandate "make it even more important that Congress speak with a clear voice."

In addition to holding the indirect offset language unconstitutionally ambiguous, the court ruled that the Treasury lacks authority to clarify ambiguity via regulations. "Agencies routinely rely on statutory ambiguity to impose rules Congress never approved," said Li.

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