In a response submitted Wednesday, Treasury told the court that Ohio's challenge to the American Rescue Plan Act 's provision that bars states from using federal aid to offset net revenue reductions, or risk having to return the funds, was moot after the state accepted the provision and funds.
Since Ohio certified to Treasury on May 13 that it would abide by the conditions of accepting the federal funds — including the offset provision and any related regulations or guidance — Treasury told the court that it should dismiss the state's case and its request for a permanent injunction.
"Whether or not Ohio pleaded and suffered a cognizable injury from uncertainty over the proposed deal when it brought this action, accepting the deal moots that injury," Treasury said. "Ohio now lacks standing to pursue relief based on that moot theory."
Ohio is seeking a permanent injunction against the provision for being unclear and coercive, claiming that it violates the 10th Amendment of the U.S. Constitution and the Constitution's spending clause, which allows Congress to attach certain conditions for use of federal funds.
U.S. District Judge Douglas R. Cole denied Ohio's bid for a preliminary injunction on May 12, but said the state "established a substantial likelihood of success" on the merits because it is suffering irreparable harm. Ohio suggested this meant that a permanent injunction would provide more adequate relief.
That week, Treasury issued an interim final rule stating that if net tax revenue hasn't been cut, states fall under a safe harbor rule and the clawback provision doesn't apply. The rule also set up a de minimis standard when the total value of revenue reductions by a government is below 1% of the reporting year's baseline. If below that amount, the clawback would not be triggered, according to the rule.
Additionally, the rule sets the baseline to measure reductions in net tax revenue to 2019 fiscal year tax revenue, indexed for inflation in each year of the covered period. It also outlines how states should track and report their tax changes to Treasury through 2024, when funds must be spent.
In a brief filed in May, Ohio claimed the clawback provision remains in violation of the spending clause because U.S. Supreme Court precedent has held that only Congress, rather than agencies, can clarify ambiguities relating to spending clause legislation. The rule also failed to define key terms, such as what it means to "indirectly offset" reductions using federal aid, the state said.
Treasury responded by restating its arguments that the provision was not unconstitutionally coercive or commandeering and that both the law's language and the agency's rule provided clear instruction for how states could avoid running afoul of the clawback provision.
"The rule implementing the offset provision also moots this supposed ambiguity-as-injury claim," Treasury said. "Not only has Ohio received further details about this implementation, it has accepted the proposed deal as detailed."
Buckeye State lawmakers are crafting a budget with a mix of tax cuts and expanded deductions. Considering that the rule won't be finalized before the state's June 30 budget deadline, Ohio has argued that the interim regulation doesn't offer the state a clear picture of how it can set its own tax policy without triggering a clawback.
Ohio's case is one of several that attorneys general from around the country have filed against the clawback provision. Most of the challenges have been lodged by Republicans, although Iowa's Democratic attorney general, Tom Miller, signed onto a lawsuit with 12 other states at the behest of Republican Gov. Kim Reynolds.
The litigation is at various stages. A federal judge dismissed a complaint from Missouri, although the state appealed that ruling, and district court rulings in the other cases are pending.
Representatives of Ohio Attorney General Dave Yost's office did not immediately respond to requests for comment Wednesday.
A spokesperson for the U.S. Department of Justice declined to comment.
Ohio is represented by Attorney General Dave Yost and by Benjamin M. Flowers, Zachery P. Keller and Sylvia May Davis of the Ohio Attorney General's Office.
Treasury is represented by Brian David Netter, Stephen Ehrlich and Charles E.T. Roberts of the U.S. Department of Justice.
The case is Ohio v. Janet Yellen et al., case number 1:21-cv-00181, in the U.S. District Court for the Southern District of Ohio.
--Additional reporting by Paul Williams, James Nani and Maria Koklanaris. Editing by Neil Cohen.
Update: This story has been updated with a response from the U.S. Department of Justice.
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