The chamber and the National Federation of Independent Business' Small Business Legal Center argued in a brief Friday that Arizona correctly claimed the so-called tax mandate portion of the American Rescue Plan Act threatens the state's sovereignty to enact its own tax policies.
The state's attorney general, Mark Brnovich, is seeking a preliminary injunction against that provision of the law. His case is one of several that Republican attorneys general have lodged against the provision, which bars states "directly or indirectly" from using the aid to offset a reduction in net revenue. States that do so risk having to return the amount used to offset a tax cut.
"Just as the federal government may not decide the location of a state capitol … the federal government may not decide whether a state should lower or raise taxes," the chamber said. "That Congress purports to do so here as a condition on the receipt of federal funds (or, more aptly, federal tax revenues collected from the states' citizens) makes no difference."
In his complaint, Brnovich had said that the federal law's language "attaches unconstitutional strings" to the funding sent to states in the plan by stipulating that those states receiving funds cannot lower their taxes. The law is also ambiguous because it "fails to give the state clear notice of what it means to 'indirectly offset a reduction in the net tax revenue' of the state," Brnovich has argued.
Brnovich asked the court to determine that the provision's language is unconstitutional because it's too ambiguous and infringes on state rights enumerated in the U.S. Constitution. He also asked the court to enjoin the federal government from enforcing the provision or recovering any funds sent to states that could be found in violation of the law.
In support of Arizona's claims, the chamber called the provision "plainly coercive" by forcing states to choose between refusing to accept federal aid if they want to cut taxes or opting to receive the federal funds in exchange for not cutting any taxes.
"Under normal circumstances, to refuse such a massive influx of tax dollars would be unthinkable; in these extraordinary times, to do so would border on unconscionable," the chamber said. "The tax mandate thus should be seen — and rejected — as exactly what it is: an unconstitutional effort to strip states of their core sovereign right to determine their own tax policy."
The chamber also cautioned that leaving the federal law in place could have "dire consequences" for states, listing several tax-reduction bills that are being considered in numerous state legislatures without any clear indication of whether they would pass muster under the federal law.
The U.S. Department of the Treasury has said that conforming to federal tax law won't trigger the clawback provision of the American Rescue Plan Act, and that law doesn't impose a blanket ban on cutting taxes. Rather, Treasury has said that the law only restricts a state's ability to use federal funds to offset a net tax revenue reduction.
But the chamber said that state lawmakers are in a bind because they are up against legislative session and budget deadlines regardless of how long it takes the federal government to flesh out the clawback provision.
"States cannot wait for Treasury to decide if and how it may try to interpret the mandate more narrowly (if doing so is even possible)," the chamber said. "States are confronted with pressing public policy issues now."
Catherine Mejia, a spokesperson for Brnovich's office, told Law360 on Monday that the state welcomes the perspective of groups "that understand how prohibitions on tax relief will harm local businesses and stifle growth as the nation recovers from the pandemic."
Treasury has argued that other states challenging the law, such as Ohio and Missouri, lack standing to bring claims similar to those that Brnovich lodged because the harm the states would suffer from the clawback provision is hypothetical and speculative.
Mejia told Law360 that the state hopes the case will sway the U.S. government to take a position on the clawback provision that mirrors the arguments Brnovich is advancing.
"We hope our lawsuit prompts the U.S. Treasury to adopt regulations for the rule that reject the federal government's attempts to commandeer states' tax policies and micromanage their budgets," Mejia said. "We will proceed with our legal challenge until such clarity is provided to protect taxpayers from this overreach."
Representatives for Treasury and the chamber did not immediately respond to requests for comment Monday.
Arizona is represented by Attorney General Mark Brnovich, 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 U.S. Chamber of Commerce and National Federation of Independent Business are represented by Daryl Joseffer and Paul Lettow of the U.S. Chamber Litigation Center, Karen Harned and Rob Smith of the NFIB Small Business Legal Center, and Paul D. Clement, Erin E. Murphy, Kasdin E. Mitchell, Laura E. Wolk and Elizabeth Hedges of Kirkland & Ellis LLP.
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. Editing by Neil Cohen.
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