By James Nani

Law360 (May 13, 2021, 7:28 PM EDT) -- Arizona urged a federal court to consider its challenge to a state-aid provision that could allow the federal government to claw back funding from states that cut taxes, comparing the provision to a mugger threatening someone with a gun.

Arguments by the U.S. Treasury Department that the Arizona federal court doesn't have standing in the case lack merit, Arizona told the court Monday. The state reiterated its arguments that the so-called tax mandate provision of the American Rescue Plan Act , or ARPA, is unconstitutional.

The tax mandate "seeks to collapse our system of separate sovereigns with independent taxing power" while also illegally attempting to coerce states, Arizona said.

"ARPA puts a financial gun to the states' fiscal heads. And the states may reasonably ask courts whether that gun is loaded before waiting for the federal government to pull the trigger (and discover the hard way)," Arizona said.

Arizona Attorney General Mark Brnovich sued Treasury in March, asking the Arizona federal court for a preliminary injunction against the tax mandate provision. The provision bars states from "directly or indirectly" using the coronavirus aid to offset a reduction in net revenue; otherwise, they risk having to return the amount that is used to offset a tax cut.

Arizona has argued the mandate threatens state sovereignty by potentially encroaching on its ability to craft its own state tax policies, a "federal usurpation" that's "unprecedented" and violates states' rights under the 10th Amendment. The law is also ambiguous because it doesn't give clear notice of the meaning of "indirectly offset a reduction in the net tax revenue," the state has said.

State attorneys general have filed similar cases across the country. This week, Missouri's challenge against Treasury was tossed by a federal court for lack of standing. But a different court rejected Treasury's motion to dismiss Ohio's challenge, finding the state established a substantial likelihood of success on the merits, though it declined to issue a preliminary injunction.

Treasury has told the Arizona court that Congress was well within its powers to pass the tax mandate portion of the ARPA. Congress gave states flexibility in spending roughly $350 billion in pandemic relief funds and is allowed to make sure that money can't offset reductions in net tax revenue from changes to state law, the federal government said.

Treasury has said Arizona hasn't shown an actual concrete and particularized injury that's imminent, as required under Article III of the Constitution, arguing its alleged injuries are "hypothetical and speculative." Arizona isn't likely to succeed on the merits of its case because it hasn't met the "heavy burden" of showing the offset provision is unconstitutional in all applications , the federal government has said. Any tax cut proposals by the Arizona Legislature don't meet requirements for pre-enforcement standing, Treasury has said.

But Arizona said Monday it does have standing under Article III. The tax mandate provision doesn't give clear notice to states of what they're agreeing to, Arizona said. Tossing the case would "make a mockery" of the U.S. Supreme Court spending clause precedents, the state said.

The state is also suffering harm from the mandate because the Arizona Legislature must finalize a budget before the new fiscal year begins July 1, it said.

"Absent adjudication by this court now, the Arizona Legislature will be forced to engage in Russian-roulette-style budgeting, with a meaningful chance that the tax mandate will deliver a fatal shot to its budget at some future date," Arizona said.

The tax mandate provision can also have multiple interpretations, Arizona said, making it ambiguous and therefore creating the likelihood the state will succeed on the merits of the case. Arizona noted that an interpretation by the provision's sponsor, U.S. Sen. Joe Manchin, D-W.Va., would apply the provision broadly, while Treasury Secretary Janet Yellen's interpretations of the provision could be interpreted in different ways.

Representatives of Treasury and the Department of Justice didn't immediately respond to requests for comment Thursday.

Brnovich's office didn't immediately respond to requests for comment.

Arizona is represented by Attorney General Mark Brnovich and by Joseph A. Kanefield, Brunn W. Roysden III, Robert John Makar and Drew C. Ensign of the Arizona Attorney General's Office.

Treasury is represented by Stephen Ehrlich and Charles E.T. Roberts of the U.S. Department of Justice.

The case is Arizona v. Janet Yellen et al., case number 2:21-cv-00514, in the U.S. District Court for the District of Arizona.

--Additional reporting by Dylan Moroses, Paul Williams, Abraham Gross, Maria Koklanaris and Andrew Kragie. Editing by Tim Ruel.

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