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Mo. Sues Treasury Over State Tax Cut Limits In Relief Law

By James Nani · Mar 29, 2021, 6:25 PM EDT

Missouri's attorney general on Monday sued the U.S. Treasury Department over part of the recent coronavirus aid package that prohibits states from using federal loans for state tax cuts, part of growing GOP opposition toward the provision.

The office of Republican Missouri Attorney General Eric Schmitt filed the complaint in the U.S. District Court for the Eastern District of Missouri, arguing that it would be unconstitutional for the federal government to broadly interpret restrictions on federal dollars stemming from the recently enacted American Rescue Plan .

Schmitt said in a release that as a state senator he helped pass "one of the largest tax cuts in Missouri history" and that as attorney general he wanted to fight to allow the state to make sure no one infringes on that power.

"Missouri should not have to choose between implementing tax policy or receiving federal COVID-19 relief funds, especially as this pandemic has crushed small businesses and individuals," Schmitt said.

The suit deals with a federal provision that prohibits states from using the recent $350 billion cash infusion to states "directly or indirectly offset … [states'] net tax revenue" via state laws, regulations or through rate cuts, rebates, deductions, credits "or otherwise." States that don't comply with the provisions would be required to repay funds equal to the amount of tax cuts they gave.

Schmitt was one of 21 Republican state attorneys general who sent a letter earlier this month to Treasury and its secretary, Janet Yellen, demanding that they weigh in on the provision and interpret it narrowly while threatening legal action.

Yellen responded in a letter to the attorneys general last week, saying that part of the recently passed $1.9 trillion coronavirus relief law doesn't prevent states from enacting a broad variety of tax cuts. States could still enact tax cuts provided that they are not offset by federal funds, Yellen said, adding that states that do offset those cuts with federal funds only risk the amount of funds used in the offset.

But in the Missouri complaint, the office said the proper interpretation of the provision "merely prohibits the states from taking COVID-19 relief funds and deliberately applying them to offset a specific tax reduction of a similar amount." But they say Yellen has advanced a broader interpretation of the provision which is "manifestly unconstitutional."

"Secretary Yellen's letter left open the possibility that the Department of the Treasury might require states receiving federal aid to 'replace lost revenue by other means' if they choose to enact tax cuts," the complaint said.

Yellen's interpretation is confusing, creates uncertainty and doubt for state legislatures thinking about cutting taxes, the complaint said. Under the federal law, Missouri is estimated to receive about $2.7 billion in aid, according to the complaint.

"If adopted, the broad interpretation of the tax mandate would impose a draconian and unprecedented federal restriction on a core aspect of state sovereignty — each state's authority to set its own tax policy," the complaint said.

Yellen's letter said if states lower certain taxes but don't use the federal funds to offset those cuts, the restriction in the act doesn't apply.

The complaint argues that the provision violates conditions on limits of Congress' spending power, is ambiguous and therefore violates the spending clause of the U.S Constitution, the complaint said.

Missouri asked the court for declaratory and injunctive relief as to the interpretation of the provision. If the court does adopt a broad interpretation, Missouri asked instead for relief in the form of finding the provision is unconstitutional and therefore must be severed from the rest of the American Rescue Plan.

Furthermore, the provision is unrelated to a federal interest, unconstitutionally tries to coerce states and violates the 10th Amendment's anti-commandeering principle, which says powers not delegated to the federal government via the U.S. Constitution are reserved to the states and the people, the complaint said.

The complaint Monday is the latest GOP volley against the so-called tax mandate provision of the American Rescue Plan. Rep. U.S. Rep. Kevin Brady, R-Texas, the ranking member on the Ways and Means Committee, and Rep. James Comer, R-Ky., announced Monday a bill that would repeal the provision and require the Treasury to refund states any money that would be reduced because of the statute.

Several states have filed federal complaints against the provision. Arizona Attorney General Mark Brnovich last week filed suit against Treasury to prevent enforcement of language. Republican Ohio Attorney General Dave Yost, has also filed for a preliminary injunction against the provision in Ohio federal court, arguing it exceeds Congress' authority.

The offices of the U.S. Department of Justice and Treasury didn't immediately respond to requests for comment.

The Missouri attorney general's office didn't immediately respond to requests for comment.

The Missouri Attorney General's Office is represented by Justin D. Smith, Jeff P. Johnson and Michael E. Talent. 

Counsel information for the Treasury wasn't immediately available.

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

--Editing by Neil Cohen.

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