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Treasury Says Ohio Lacks Standing To Fight Tax-Cut Limit In Aid

By Paul Williams · April 19, 2021, 4:42 PM EDT

The U.S. Department of the Treasury told a federal court that Ohio lacks standing to challenge a federal law prohibiting states from using coronavirus aid to offset tax cuts, arguing the state's claims are speculative and based on hypothetical harm.

Treasury urged the court Friday to deny a preliminary injunction that Ohio Republican Attorney General Dave Yost is seeking against the department and its secretary, Janet Yellen, from enforcing the clawback provision in the American Rescue Plan Act . Ohio's complaint, Treasury said, is premature because the state hasn't enacted any tax cuts that it indicated it may intend to offset with federal aid.

Ohio cannot establish standing because "its asserted injury is hypothetical and speculative," Treasury said in a brief filed in the U.S. District Court for the Southern District of Ohio.

"Its complaint and preliminary-injunction motion are silent as to how it intends to use Rescue Plan funds, much less that it plans to use them in a manner inconsistent with the offset provision," the brief said.

Treasury noted that after Yost filed his complaint, Ohio's House Republicans proposed a 2% across-the-board income tax cut in H.B. 110, the state's pending budget bill. But Treasury said that "merely proposing a tax cut" is insufficient to establish standing. Additionally, the federal government noted that it still has to issue more guidance on the law, and that only then will a state receive funds and certify that it will use the funds in compliance with the clawback provision.

The case is one of several that Republican attorneys general have lodged against the provision, which bars states "directly or indirectly" from using the aid to offset a reduction in net revenue or risk having to return the amount used to offset a tax cut.

Yost claimed the clawback infringed on Ohio's sovereignty by barring it from cutting taxes and coerced the state to accept the restriction in violation of the U.S. Constitution's spending clause. This, Yost said, was an overreach of the federal government's power to set conditions on funds appropriated to states.

Treasury said Ohio "fundamentally misunderstands" the pandemic aid law. The law doesn't unilaterally block states from cutting taxes but rather restricts a state's ability to use federal funds to offset a net tax revenue reduction, Treasury said.

"No state has a 'sovereign interest' in using federal funds for that purpose," Treasury said.

The government also argued that the federal law isn't coercing states not to cut taxes if they receive aid, saying that states can lower taxes as long as the aid isn't used to pay for a drop in revenue.

"Ohio mistakenly assumes that the Rescue Plan requires a state receiving federal funds to freeze its existing tax laws in place and refrain from reducing any taxes," the brief said. Treasury added that states commonly offset reductions in tax revenue through other means, such as raising other taxes or cutting spending.

On May 9, 74 Republican members of Congress filed a brief in support of Ohio, echoing the state's claims that the federal law commandeers the state's authority under the 10th Amendment to set its own tax policy. But Treasury rejected those arguments, saying the government isn't forcing the states to carry out a federal program but instead attached restrictions to the funds that were within the federal government's purview.

"If Ohio dislikes the funding condition, or any other provision of the act, it is free to decline the generous federal aid in whole or in part — Ohio's voters know where to turn if they like, or dislike, the state's choice," Treasury said.

The government also argued that the balance of harm and public interest weighs in favor of denying Ohio's preliminary injunction. The U.S. Supreme Court has said a government suffers an irreparable injury any time a court enjoins it from effectuating statutes, the government said. And the U.S. could always repay Ohio if a court later determined that any potential funds that the state was required to return were found to be illegally recouped, Treasury said.

"Thus, an injunction would irreparably harm the United States and undermine the public interest," the brief said. "That is only more evident here, where the legislation at issue is a direct response to a national economic and health emergency of historic proportions."

Darien Shanske, a tax professor at University of California, Davis School of Law, told Law360 that he agreed with every argument that Treasury made in the brief and that he would expect the agency to advance similar arguments in the other pending legal challenges.

Shanske said that it won't be possible for Ohio to prove how the state may be harmed from the clawback provision until Treasury issues more guidance on the law. He noted that Treasury has already said that conforming to the federal tax law — which Ohio did in a March bill — won't trigger the clawback. And while lawmakers might be unsure at the moment whether certain tax cuts would pass muster, that doesn't warrant a court blocking the law from being enforced, he said.

"The fact that there might be uncertainty on the federal policy doesn't create a constitutional violation so severe that it requires a preliminary injunction," Shanske said.

Representatives of Yost and Treasury did not immediately respond to requests for comment Monday.

The state of 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 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 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 Abraham Gross and Maria Koklanaris. Editing by Neil Cohen.

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