By Paul Williams

Law360 (April 26, 2021, 3:00 PM EDT) -- Missouri lacks standing to challenge a federal law's prohibition against using federal coronavirus aid to offset tax cuts, the U.S. Department of the Treasury said, arguing that the state hasn't shown any concrete injury that may result from the law.

Treasury asked a federal court Friday to deny a preliminary injunction that Missouri is seeking against the department and its secretary, Janet Yellen, from enforcing a clawback provision in the American Rescue Plan Act. Treasury said Missouri's challenge to the act isn't ripe because the state hasn't passed any tax cuts that may be offset by federal aid.

Missouri's "complaint and preliminary-injunction motion are silent as to how it intends to use Rescue Plan funds, nowhere even suggesting that it plans to use them in a manner inconsistent with the offset provision," Treasury said in a brief, filed in the U.S. District Court for the Eastern District of Missouri.

The U.S. government's arguments were akin to those that it made in an April 16 brief that rebutted a separate but similar challenge to the federal law from Ohio.

Missouri's challenge is one of several that Republican attorneys general have lodged against the clawback provision, which bars states "directly or indirectly" from using the aid to offset a reduction in net revenue or risk having to return the amount used to offset a tax cut.

In seeking a preliminary injunction, Missouri Attorney General Eric Schmitt argued April 2 that a broad reading of the clawback provision would irreparably harm the state by having the federal government trample over Missouri's sovereignty to set its own tax policy. Anything but a narrow interpretation of the law would violate the U.S. Constitution's 10th Amendment and spending clause, Schmitt argued.

Schmitt asked the court to enjoin Yellen and Treasury from enforcing anything beyond what he argued was the tax mandate's "narrow, ordinary and natural meaning of prohibiting the deliberate and express use of the act's relief funds to offset revenue losses from a specific tax cut."

Alternatively, if the court determines that the tax mandate could be interpreted broadly, Schmitt asked for a preliminary injunction against its enforcement while leaving the rest of the federal law in effect.

But Treasury argued that Missouri fundamentally misunderstands the pandemic aid law, saying the clawback provisions doesn't impose a blanket ban on cutting taxes but rather restricts a state's ability to use federal funds to offset a net tax revenue reduction.

"No state has a sovereign interest in using federal funds for that purpose. And Missouri, of course, remains free to decline the funds," Treasury said, responding to Missouri's argument that the clawback provision was unconstitutionally coercive.

Schmitt has asked the court to rule on his preliminary injunction motion by May 3 because the state's General Assembly must adjourn its regular session by May 28. He argued that the absence of robust federal guidance on the law would create "ongoing confusion and uncertainty" over the interplay between the clawback provision and the state's tax legislation.

Schmitt had noted that lawmakers are considering several tax cut bills that were filed before the federal act was signed into law March 11. Among the measures cited was S.B. 153, a bill that would have Missouri join the 45 other states that require out-of-state sellers to collect and remit sales and use taxes, while offsetting the higher sales tax collections with income tax cuts.

But Treasury claimed that the numerous tax cut bills that are being circulated in Jefferson City don't establish standing for the state to bring legal action against the federal government, saying that "proposing a tax cut is plainly not prohibited by the Rescue Plan Act."

Additionally, Treasury said that the balance of harms and public interest weighs in favor of denying Missouri's preliminary injunction. The U.S. Supreme Court has held a government suffers an irreparable injury any time a court enjoins it from effectuating statutes, Treasury said, adding that Missouri could seek to recoup any future funds that it believed may have been illegally required to be turned over to the federal government.

"Thus, an injunction would irreparably harm the United States and undermine the public interest," Treasury said. "That is only more evident here, where the legislation at issue is a direct response to a national economic and health emergency of historic proportions."

Chris Nuelle, a spokesperson for Schmitt, declined to comment Monday.

Treasury did not immediately respond to a request for comment Monday.

Missouri is represented by Attorney General Eric Schmitt, D. John Sauer, Justin D. Smith and Michael E. Talent of the Missouri Attorney General's office.

Treasury is represented by Brian M. Boynton, Alexander K. Haas, Brigham J. Bowen, Stephen Ehrlich and Charles E.T. Roberts of the U.S. Department of Justice.

The case is Missouri v. U.S. Department of the Treasury, case number 4:21-cv-00376, in the U.S. District Court for the Eastern District of Missouri, Eastern Division.

--Additional reporting by Abraham Gross and Maria Koklanaris. Editing by Neil Cohen.

Update: This story has been updated with a response from Schmitt's office.

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