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Ky., Tenn. Sue Treasury Over Virus Law's State Tax Cut Limit

By Abraham Gross · April 7, 2021, 3:58 PM EDT

Kentucky and Tennessee sued the U.S. Treasury Department in Kentucky federal court over part of the recent coronavirus aid package that prohibits states from using federal funds for state tax cuts, arguing the provision was unconstitutionally vague and coercive.

In a complaint filed Tuesday, Kentucky Attorney General Daniel Cameron and Tennessee Attorney General Herbert H. Slatery III argued that it would be unconstitutional for Treasury and its secretary, Janet Yellen, from enforcing the restrictions on federal dollars stemming from the American Rescue Plan Act .

The attorneys general said the restrictions usurped state authority and taxing powers in violation of the U.S. Constitution by coercing states to effectively cede their taxing power to the federal government using federal relief for the coronavirus pandemic. The provision was impermissibly broad and ambiguous, they said, and was unrelated to the legislation's goal of providing pandemic relief.

"The federal legislation at issue here seeks to fundamentally remake the constitutional balance of power between the federal government and the states," the complaint said. "And it seeks to do so under the guide of COVID-19 crisis." 

The suit targets the act's so-called tax mandate that prohibits states from using the recent $350 billion cash infusion to "directly or indirectly offset … [states'] net tax revenue" via state laws or regulations, or through rate cuts, rebates, deductions, credits "or otherwise." States that don't comply with the provisions would be required to repay funds equal to the amount of tax cuts they gave.

The complaint is the latest of the barrage of challenges that Republicans have lodged against the law. U.S. Rep. Kevin Brady, R-Texas, the ranking member on the House Ways and Means Committee, and Rep. James Comer, R-Ky., announced last week a bill that would repeal the provision and require the department to refund states any money that would be reduced because of the statute.

On March 31, 13 other Republican state attorneys general, led by West Virginia, Alabama and Arkansas, also filed suit against the department. Missouri, Arizona and Ohio are pursuing separate federal challenges against the provision seeking to prevent its enforcement. The latest suit leaves only a handful of Republican state attorneys general that have not yet challenged the tax mandate.

Cameron was one of 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.

In the new suit, Kentucky and Tennessee said they were unsatisfied with a March 23 response from Yellen, who said in part that the law doesn't prevent states from enacting a broad variety of tax cuts, provided that they are not offset by the federal funds. The response, they said, did not clarify how the prohibition applied to "indirectly" offsetting tax cuts.

"In short, Secretary Yellen's response only increased the confusion about the scope of the tax mandate," the states said. "The states are thus in limbo between a rock and a hard place."

The attorneys general argue that the provision is so ambiguous and overbroad as to violate Congress' spending power under the U.S. Constitution, in addition to being unrelated to the goal of providing COVID-19 relief because the provision prevented states from enacting tax policy on issues unrelated to the pandemic.

The provision also breaches the 10th Amendment, they argue, by commandeering the state's taxing authority and concentrating that power with the federal government, noting that "the Constitution neither takes the power to set tax policy from the states nor empowers the federal government to commandeer state taxing authority."

The complaint asked the court for declaratory relief by finding that the provision is unconstitutional and enjoining its enforcement.

"Kentuckians expect state tax policies to be set by the men and women they elect to represent them in the General Assembly, and not as a result of an edict from the federal government," Cameron said in a joint press release with Slatery.

A spokesperson for Cameron declined to comment.

The offices of Slatery, Treasury and the Department of Justice did not immediately respond to requests for comment on Wednesday.

Kentucky is represented by Attorney General Daniel Cameron and Brett R. Nolan, Barry L. Dunn, Victor B. Maddox and Matthew F. Kuhn of the Kentucky Attorney General's Office.

Tennessee is represented by Attorney General Herbert H. Slatery III and Andrée S. Blumstein, Brandon J. Smith and Sarah K. Campbell of the Tennessee Attorney General's Office.

Counsel information for Treasury wasn't immediately available.

The case is Commonwealth of Kentucky et al. v. Janet Yellen et al., case number 3:21-cv-00017, in the U.S. District Court for the Eastern District of Kentucky, Central Division.

--Additional reporting by James Nani and Paul Williams. Editing by Neil Cohen.

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