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Mo. Urges Court To Block Virus Tax Cut Prohibition

By James Nani · Apr 28, 2021, 5:47 PM EDT

A Missouri federal court should issue a preliminary injunction barring the U.S. government from enforcing a prohibition against using federal coronavirus aid to offset tax cuts, the state said in a filing.

The Missouri attorney general's office told the court Tuesday that the U.S. Department of Justice in its latest brief agreed with its stance that the U.S. Department of the Treasury should narrowly interpret a provision of the American Rescue Plan Act  prohibiting states from using federal coronavirus aid to offset state tax cuts. But Treasury Secretary Janet Yellen has refused to endorse that view despite the DOJ's concession, the brief said.

"Treasury, not DOJ, has the authority to interpret and to enforce the mandate, and until Treasury endorses that narrow interpretation, Missouri operates under a 'sword of Damocles,'" the filing said.

Missouri Attorney General Eric Schmitt is seeking a preliminary injunction against a broad reading of the clawback provision, which bars states from "directly or indirectly" using the aid to offset a reduction in net revenue or risk having to return the amount used to offset a tax cut.

Schmitt has argued the 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, he has argued.

Schmitt's office asked the court for a preliminary injunction that would require Treasury to follow Missouri's narrow interpretation of the act's so-called tax mandate.

Several Republican attorneys general have lodged challenges against the clawback provision.

Schmitt filed his complaint in late March, taking aim at the tax mandate that prohibits states from using the recent $350 billion cash infusion to "directly or indirectly offset … net tax revenue" via state laws or regulations, or through rate cuts, rebates, deductions, credits "or otherwise." States that don't comply would be required to repay funds equal to the amount of tax cuts they gave.

Schmitt was among 21 Republican state attorneys general who sent a letter in March to Treasury and Yellen, demanding that they weigh in on the provision and interpret it narrowly, while also threatening legal action.

The DOJ, representing Treasury, asked the court on Friday to deny the preliminary injunction. Missouri lacks standing to challenge the law because it hasn't shown any concrete injury that may result, the DOJ said. Missouri's request came from an "incorrect premise" that Treasury is "poised to implement an overbroad, unconstitutional interpretation" of the law that would prohibit states from cutting tax revenue, the DOJ said.

The DOJ said Missouri admitted that Treasury hadn't adopted any interpretation yet that's inconsistent with the law and the court can't enjoin a "specter," even if Missouri does have a claim. Missouri's "guess" that Treasury may interpret the provision so broadly so as to bar all tax cuts isn't consistent with the act, the DOJ said.

But Missouri told the court Tuesday that it's likely to prevail on the merits involving statutory interpretation. The state has proper standing, the case is ripe for consideration and Yellen's "threatened interpretation" inflicts immediate harm on Missouri, the state said. Yellen's "broad interpretation" of the statute is currently undercutting legislative deliberations over state tax policy, giving Missouri standing, the state said.

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's noted that lawmakers are considering several tax cut bills that were filed before the federal act was signed into law March 11. 

Citing comments made by Yellen during congressional testimony and a letter she sent to GOP attorneys general, Missouri said Tuesday it's "natural to conclude" the agency will interpret a broader interpretation into whatever guidance it releases.

"Given the ongoing uncertainty created by Secretary Yellen's failure to adopt the narrow interpretation of the act, and with the end of its legislative session impending, Missouri's need for judicial relief remains live and urgent," the state said.

Chris Nuelle, a spokesman for Schmitt, declined to comment Wednesday.

The offices of Treasury and the DOJ didn't immediately respond to requests for comment Wednesday.

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 et al., 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, Paul Williams and Maria Koklanaris. Editing by Neil Cohen.

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