This article has been saved to your Favorites!

Wis. Legislature Asks To Intervene In State Tax Cut Limit Case

By Asha Glover · June 7, 2021, 8:19 PM EDT

The Wisconsin Legislature moved to intervene in a case several state attorneys general have filed to invalidate a provision in the recent federal coronavirus aid package that prohibits states from using federal funds for state tax cuts.

The Wisconsin Legislature on Friday told an Alabama federal court that it should be allowed to intervene in the case brought by several Republican attorneys general over the provision in the recently enacted American Rescue Plan Act because it has the same goal. The attorneys general have asked an Alabama federal court for declaratory relief, arguing that it would be unconstitutional for the federal government to broadly interpret restrictions on federal dollars stemming from the law.

"A spending clause-based penalty that is so coercive as to make the state's passage of a contrary law prohibitive is indistinguishable from a direct invalidation of state law, which is why such a mandate is unconstitutional in the first place," the Wisconsin Legislature said.

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 Legislature said that it has standing to intervene because the so-called tax mandate harms the state in two ways, partly by harming Wisconsin's interest in the validity of its laws by punishing the state for enacting tax laws under a vague standard for when punishment will occur. The tax mandate also harms the state by undermining the Legislature's specific, institutional role under the state's constitution to cut taxes, according to the motion.

"The mandate coercively limits the states' sovereign lawmaking power to reduce taxes and introduces grave uncertainty into the lawmaking process with its hopelessly vague terms," the Wisconsin Legislature said.

The suit includes several of the 21 Republican state attorneys general who sent a letter in March to the U.S. Department of the Treasury and Treasury 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.

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

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.

Representatives for the Wisconsin Legislature did not immediately respond to a request for comment Monday.

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

The Wisconsin Legislature is represented by J. Houston Shaner, Misha Tseytlin and Sean T.H. Dutton of Troutman Pepper Hamilton Sanders LLP.

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 Neil Cohen.

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