The states asked a Texas federal court Monday to enjoin the U.S. Department of the Treasury and Treasury Secretary Janet Yellen from enforcing the American Rescue Plan Act 's so-called tax mandate that bars states from using aid to offset a reduction in net tax revenue. The law would require states that violate the provision to return the aid used to offset a tax cut, which the states claim violates the U.S. Constitution's 10th Amendment and spending clause .
"The tax mandate, with its broad invasion of the states' sovereign prerogatives, seeks to unconstitutionally commandeer the governments of the plaintiff states into setting their tax policy as the federal government would prefer," said the complaint, authored by the attorneys general offices for the states. "By design, Congress lacks the power to assert control over the states as such, let alone issue direct orders to the governments of the states to adopt policies as Congress desires."
In similar legal challenges from Ohio, Missouri and Arizona, Treasury has responded that those states lack standing to challenge the law, arguing that the harm they would suffer is speculative. Treasury has said that those states haven't enacted any tax cuts that they intend to offset with the federal aid and that the U.S. government has not yet issued any final guidance on the clawback provision.
Treasury issued initial guidance in April stating that conforming to federal tax law won't trigger the clawback. According to a response that Treasury filed Friday in its case against Arizona, the agency said it will "provide further guidance imminently through an interim final rule."
But the states said in their Monday complaint that the federal law unconstitutionally coerces them into shying away from cutting taxes to be able to avail themselves of billions in federal aid. The states also said the federal law violated the equal sovereignty principle because it was written in a manner to punish states that would be more likely to cut taxes.
"The tax mandate violates the principle of equal sovereignty by targeting and invading the sovereignty only of those states that, as a matter of history and present fact, are likely to decrease taxes and other government revenues," the states said.
The attorneys general also said the federal law doesn't impose a similar restriction on cities, local governments or tribal governments.
Texas Attorney General Ken Paxton said in a statement Tuesday that the clawback provision "blatantly violates the Constitution" and would hamper the Lone Star State's ability to set its own tax rules.
"For Texas, which successfully operates on a low-tax model and continually finds ways to reduce tax burdens on citizens, the tax mandate is particularly intrusive," Paxton said.
The law's prohibition against using the aid to offset net revenue reductions will be in effect through 2024. Mississippi's legislative session has already concluded for the year while Texas and Louisiana sessions are still ongoing. However, the states argued that the federal law could threaten any policy, even administrative ones, that result in a net reduction of revenue.
"For example, the states' federal funding under the act would be put at risk by a decision not to enforce a given unemployment or payroll tax against struggling small businesses if nonenforcement led to reduced tax revenue," the complaint said. "Similarly, a law reducing property values, and thus indirectly the collection of property taxes, would also put the states' federal funding at risk."
In a statement to Law360 on Tuesday, Louisiana Attorney General Jeff Landry said the federal government shouldn't be permitted to intrude on the state's ability to manage its own interests.
"We cannot allow the federal government to usurp Louisiana's constitutional authority to govern itself," Landry said. "If we do, it will be the end of state sovereignty."
However, Treasury has said in the other similar cases that states don't have a sovereign interest in using the federal funds to pay for a reduction in net tax revenue. The U.S. government has also claimed that the federal law isn't coercive because states have the option to decline the funds.
Representatives of the Mississippi Attorney General's Office and for Treasury did not immediately respond to requests for comment Tuesday.
Texas is represented by Attorney General Ken Paxton and Brent Wester, Judd E. Stone II, Patrick K. Sweeten, William T. Thompson and Jeffrey M. White of the Texas Office of Attorney General.
Mississippi is represented by Attorney General Lynn Fitch and Justin L. Matheny of the Mississippi Attorney General's Office.
Louisiana is represented by Attorney General Jeff Landry and Elizabeth B. Murrill of the Louisiana Department of Justice.
Counsel information for Treasury was not immediately available.
The case is Texas et al. v. Janet Yellen et al., case number 2:21-cv-00079, in the U.S. District Court for the Northern District of Texas.
--Additional reporting by James Nani. Editing by Neil Cohen.
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