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Mo. AG Asks Court To Block Broad Tax Cut Limits In Virus Law

By Paul Williams · Apr 2, 2021, 6:45 PM EDT

Missouri's attorney general asked a federal court Friday to issue a preliminary injunction barring the U.S. Department of the Treasury from broadly interpreting a new law that prohibits states from using federal coronavirus aid to offset state tax cuts.

Republican Missouri Attorney General Eric Schmitt argued that a broad reading of the provision in the American Rescue Plan Act would irreparably harm the state by having the federal government trample over Missouri's sovereignty to set its own tax policy. The brief, filed in the U.S. District Court for the Eastern District of Missouri, claimed that anything but a narrow interpretation of the law would violate the U.S. Constitution's 10th Amendment and spending clause .

"Congress cannot use its spending power to circumvent the 10th Amendment and coerce states to adopt federal rules and policies," the brief said.

Schmitt lodged his complaint on Monday, taking aim at the act's so-called tax mandate that prohibits states from using the recent $350 billion cash infusion to "directly or indirectly offset … [states'] net tax revenue" via state laws or 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 in March to the Treasury Department and its secretary, Janet Yellen, demanding that they weigh in on the provision and interpret it narrowly while also threatening legal action.

In the brief, Schmitt said he was unsatisfied with a March 23 response from Yellen, who said in part that the law doesn't prevent states from enacting a broad variety of tax cuts, provided that they are not offset by the federal funds. Schmitt said Yellen "carefully left open the possibility" that she could interpret the law broadly, which he argued would run afoul of the Constitution.

"Under the spending clause, Congress cannot impose ambiguous conditions on the states through spending legislation — those conditions must be clear," the brief said. "Accordingly, if broadly interpreted, the tax mandate is unconstitutional."

Schmitt asked the court to enjoin Yellen and the department from enforcing anything broader than 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.

The suit is the latest of the barrage of challenges that Republicans have lodged against the law. U.S. Rep. Kevin Brady, R-Texas, the ranking member on the House Ways and Means Committee, and Rep. James Comer, R-Ky., announced Monday a bill that would repeal the provision and require the department to refund states any money that would be reduced because of the statute.

On Wednesday, 13 other Republican state attorneys general, led by West Virginia, Alabama and Arkansas, also filed suit against the department. Separately, Arizona Attorney General Mark Brnovich, also a Republican, submitted his own legal complaint against the federal law on March 25.

On Friday, Schmitt noted that Missouri's General Assembly is considering several tax cut bills that were filed before the federal act was signed into law on March 11. Among the measures cited was S.B. 153, a bill that would have Missouri join the 43 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.

Schmitt said absent any specific guidance on the federal law, there will be "ongoing confusion and uncertainty" over the interplay between the tax mandate and the state's tax legislation. He asked the court to issue a ruling on the preliminary injunction by May 3 because the state's legislative session ends May 28.

In arguing for the injunction, Schmitt claimed that halting a broad enforcement of the law wouldn't harm the public interest, saying that even if the state loses the case on the merits, the federal government could still recoup any funds that the act would require Missouri to return.

Chris Nuelle, a spokesperson for Schmitt, was unable to immediately comment on the filing.

The department did not immediately respond to questions.

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.

Counsel information for the Treasury Department wasn't immediately available.

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 James Nani and Abraham Gross. Editing by Vincent Sherry. 

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