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13 States Sue Treasury Over State Tax Cut Limit In Virus Law

By Abraham Gross · April 1, 2021, 7:53 PM EDT

A group of 13 states including Florida, West Virginia and Alaska have sued the U.S. Treasury Department over part of the recent coronavirus aid package that prohibits states from using federal funds for state tax cuts.

The Republican attorneys general sued in Alabama federal court, arguing it would be unconstitutional for the federal government to broadly interpret restrictions on federal dollars stemming from the recently enacted American Rescue Plan  Act.

The attorneys general said the restrictions impermissibly seize state taxing authority by leveraging federal aid to coerce states not to cut taxes. They asked the court "to protect them from one of the most egregious power grabs by the federal government in the history of the United States."

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.

The suit includes several of the 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. Other attorneys general who did not sign the letter joined the suit, suggesting growing Republican opposition.

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 complaint filed by Florida, West Virginia, Alaska, Alabama, Arkansas, Iowa, Kansas, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota and Utah, the attorneys general said Yellen's response failed to set limits on how Treasury would determine when federal funds were "indirectly" used to offset tax cuts.

"Treasury's response in fact appears to confirm that the intent of the federal tax mandate, and Treasury in implementing it, is to enforce a revenue-neutral tax policy across the board on every state in the country," the attorneys general said.

Yellen's response also didn't provide a timetable for when Treasury will provide formal guidance on the provision, the state attorneys general said, while state legislatures must operate their current legislative sessions with little understanding of how their work will implicate the provision.

Under the federal law, each state's share of federal funds will equal around 20% of its annual revenue budgets, according to the complaint.

The attorneys general argue that the provision is so ambiguous and overbroad as to violate Congress' spending power under the U.S. Constitution. The provision also breaches the 10th Amendment, they argue, by commandeering the state's taxing authority and concentrating that power with the federal government while blurring political accountability.

The complaint asked the court for declaratory relief by finding that the provision is unconstitutional and enjoining its enforcement.

The suit is the latest GOP volley against the so-called tax mandate provision of the American Rescue Plan. 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 Treasury to refund states any money that would be reduced because of the statute.

The attorneys general for Missouri, Arizona and Ohio have filed separate federal complaints against the provision seeking to prevent enforcement of the provision.

The latest suit is led by West Virginia, Alabama and Arkansas, according to press releases provided to Law360 by those states' attorneys general. Their offices either did not respond or declined to respond to questions on the suit.

"Our lawsuit is designed to protect West Virginia from federal overreach," West Virginia Attorney General Patrick Morrisey said in a release. "This ensures our citizens aren't stuck with an unforeseen bill from the feds years from now."

Charlotte Rand, a spokesperson for Alaska Attorney General Treg Taylor, said in an email to Law360 on Friday that Alaska joined the suit to show support for the other states.

"The ARPA is being challenged for impermissibly seizing taxing authority from the states, and this usurps the ability of the states to make their own decisions based on their own unique circumstances and the needs of their citizens," Rand said.

Lynn Hicks, chief of staff for the Iowa attorney general's office, said in an email to Law360 that the state joined at the request of Republican Gov. Kim Reynolds, and referred specific questions to Reynolds' office and the West Virginia attorney general's office. 

Reynolds' spokesperson did not immediately respond to requests for comment. 

A spokesperson for the U.S. Department of Justice declined to comment. 

The offices of the Treasury and the other state attorneys general did not immediately respond to requests for comment.

The states are represented by Alabama Attorney General Steve Marshall and Edmund G. LaCour Jr., James W. Davis and A. Reid Harris of the Alabama Attorney General's Office, and Bryan M. Taylor of Bachus Brom & Taylor LLC; West Virginia Attorney General Patrick Morrisey and Lindsay S. See, David C. Tryon and Jessica A. Lee of the West Virginia Attorney General's Office; Arkansas Attorney General Leslie Rutledge and Nicholas J. Bronni, Vincent M. Wagner and Dylan L. Jacobs of the Arkansas Attorney General's Office; Alaska Attorney General Treg R. Taylor and John M. Ptacin of the Alaska Attorney General's Office; Florida Attorney General Ashley Moody and John Guard, James H. Percival and Jason H. Hilborn of the Florida Attorney General's Office; Iowa Attorney General Thomas J. Miller and Jeffrey S. Thompson of the Iowa Attorney General's Office; Kansas Attorney General Derek Schmidt and Dwight R. Carswell of the Kansas Attorney General's Office; Montana Attorney General Austin Knudsen and David M.S. Dewhirst of the Montana Attorney General's Office; Daniel E. Will of the New Hampshire Attorney General's Office; Oklahoma Attorney General Mike Hunter and Mithun Mansinghani of the Oklahoma Attorney General's Office; South Carolina Attorney General Alan Wilson and J. Emory Smith Jr. of the South Carolina Attorney General's Office; South Dakota Attorney General Jason Ravnsborg and Jeffery J. Tronvold of the South Dakota Attorney General's Office; and Utah Attorney General Sean Reyes and Melissa A. Holyoak of the Utah Attorney General's Office.

Counsel information for Treasury wasn't immediately available.

The case is West Virginia et al. v. U.S. Department of the Treasury et al., case number 7:21-cv-00465, in the United States District Court for the Northern District of Alabama, Western Division.

--Additional reporting by James Nani. Editing by Neil Cohen.

Update: This story has been updated with comment from Charlotte Rand in Alaska. 

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