This article has been saved to your Favorites!

States Seek Injunction Over State Tax Cut Limit In Virus Law

By Asha Glover · May 17, 2021, 7:02 PM EDT

A provision of the recent coronavirus aid package that prohibits states from using federal funds for state tax cuts is unconstitutional, said several state attorneys general who are seeking a preliminary injunction in their dispute with the U.S. Treasury.

The Republican attorneys general argued in a reply brief filed Friday in an Alabama federal court that 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 brief asked the court for declaratory relief by finding that the provision is unconstitutional and enjoining its enforcement.

The attorneys general told the court that the so-called tax mandate is coercive, goes beyond requiring states to spend federal dollars as directed and violates the U.S. Constitution's spending clause.

"Like nearly all spending clause legislation, ARPA tells states how they must spend that money," the attorneys general said. "But unlike any law before it, ARPA also tells states how they must exercise their authority over any decision that might lower state revenue."

The suit deals with a federal provision 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 with the provision would be required to repay funds equal to the amount of tax cuts they gave.

The brief was filed by attorneys general representing Alabama, West Virginia, Arkansas, Alaska, Florida, Iowa, Montana, New Hampshire, Kansas, Oklahoma, South Carolina, South Dakota and Utah, following a complaint filed in April.

According to the brief, the mandate also requires states to sacrifice core elements of their sovereignty or billions in relief funds that states can't realistically turn down during the coronavirus pandemic.

They also argued that the tax mandate is not germane to ARPA's purpose because the provision does not mandate a particular spending level on pandemic relief. The attorneys general said the tax mandate instead penalizes states for pandemic relief through tax cuts and credits, preventing them from spending surplus state funds on anything but tax relief.

"Thus, the tax mandate's aim is not an increase in COVID relief, but rather an increase in the size of government for big government's sake," the brief argued, referring to COVID-19, the respiratory disease caused by the virus. 

Additionally, the attorneys general said the court should invalidate the tax mandate because it's ambiguous.

"Given that states have no realistic choice but to accept ARPA funds, the states must attempt to comply with the tax mandate," the brief said. "And if states guess incorrectly, they forfeit much-needed federal funds."

The group said that requiring that kind of guesswork prevents states from being able to exercise sovereign power over constituents.

In addition, the mandate has impeded state lawmakers' ability to enact tax relief legislation, the attorneys general contend. According to the brief, the Alabama Legislature tabled a relief package partly because lawmakers were unclear on the terms of the tax mandate "contract" required for it to receive federal funds, according to the brief.

The suit includes several of the 21 Republican state attorneys general who sent a letter in March to Treasury and its secretary, Janet Yellen, demanding that they weigh in on the provision and interpret it narrowly, while also 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 that the $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 they are not offset by federal funds, Yellen said, adding that states that do offset those cuts with federal funds risk only the amount of funds used in the offset.

But in the complaint filed in April by the attorneys general, they said Yellen's response failed to set limits on how Treasury would determine when federal funds were "indirectly" used to offset tax cuts.

Yellen's response also didn't provide a timetable for when Treasury would 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.

According to the complaint, Kansas' share of the federal funds will equal around 20% of its annual revenue budget, with the other states expecting to receive amounts representing similar percentages of their budgets.

The offices of the Treasury, the U.S. Department of Justice and the other state attorneys general did not immediately respond to requests for comment.

The states are represented by Alabama Attorney General Steve Marshall, by Edmund G. LaCour Jr., James W. Davis and A. Reid Harris of the Alabama Attorney General's Office and by Bryan M. Taylor of Bachus Brom & Taylor LLC.

States' representatives also include West Virginia Attorney General Patrick Morrisey; Lindsay S. See, David C. Tryon and Jessica A. Lee of the West Virginia Attorney General's Office; Arkansas Attorney General Leslie Rutledge; 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.

States' representatives also include Florida Attorney General Ashley Moody; 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.

States' representatives also include Kansas Attorney General Derek Schmidt; Dwight R. Carswell of the Kansas Attorney General's Office; Montana Attorney General Austin Knudsen; David M.S. Dewhirst of the Montana Attorney General's Office; and Daniel E. Will of the New Hampshire Attorney General's Office.

States' representatives also include Oklahoma Attorney General Mike Hunter; Mithun Mansinghani of the Oklahoma Attorney General's Office; South Carolina Attorney General Alan Wilson; J. Emory Smith Jr. of the South Carolina Attorney General's Office; South Dakota Attorney General Jason Ravnsborg; Jeffery J. Tronvold of the South Dakota Attorney General's Office; Utah Attorney General Sean Reyes; and Melissa A. Holyoak of the Utah Attorney General's Office.

Treasury is represented by Michael P. Clendenen, Stephen Ehrlich and Charles E.T. Roberts of the U.S. Department of Justice. 

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 Abraham Gross and James Nani. Editing by Robert Rudinger.

For a reprint of this article, please contact reprints@law360.com.