In a reply brief, Ohio said that although it certified to Treasury that it would abide by the conditions of accepting funds under the American Rescue Plan Act — including a requirement to return aid used to offset net revenue reductions — it could still challenge the law.
Treasury asked a federal court Wednesday to dismiss Ohio's request for a permanent injunction against the federal law's clawback provision, saying that the state's claims were moot because Ohio certified on May 13 that it would accept the funds and follow the federal law. But Ohio responded that the law remains unconstitutionally ambiguous and coercive because its officials still have no clear guidance on how they can alter tax laws without triggering a clawback.
"While Ohio no longer has to decide whether to accept the offer, it does have to decide whether and how to spend the money, and its legislature and administrative officers do have to make budgeting decisions, set tax policy and interpret state tax laws," Ohio said. "But the mandate is just as ambiguous today as it was when Ohio sued."
U.S. District Judge Douglas R. Cole previously denied Ohio's bid for a preliminary injunction, but said the state "established a substantial likelihood of success" on the merits and that it was suffering irreparable harm. Ohio suggested this meant that a permanent injunction would provide more adequate relief, and refiled its claims that the law violates the 10th Amendment and the spending clause , which allows Congress to attach certain conditions for use of federal funds.
Treasury has issued an interim final rule on the provision, laying out how states should determine whether a net revenue reduction would prompt a clawback and the procedures for tracking and reporting their tax changes to the federal government through 2024, when funds must be spent.
The rule, Treasury said in its brief last week, provided clear instructions for how states could avoid running afoul of the clawback provision. Treasury also reiterated its stance that the law isn't unconstitutionally coercive or commandeering.
But Ohio, which is represented by Republican Attorney General Dave Yost's office, said that Treasury's proposed regulation further injures the state by compelling it to "allocate scarce resources to a task" that Ohio claims is unconstitutional.
"If anything, the injury is worse today than ever before," Ohio said.
The rule stated 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 revenue reductions were below that amount, no clawback would occur.
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.
Treasury argued that precedent has established that regulations "have a role to play" when carrying out funding conditions in spending clause legislation and that agency actions can be entitled to deference in such circumstances. Ohio, though, claimed that the rule shouldn't be afforded any deference because "it is so divorced from the mandate's text" and that the law's ambiguity can't be fixed through a regulation.
Buckeye State lawmakers are negotiating 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 address the state's concerns of not knowing what tax policy can pass muster under the clawback provision.
Ohio's case is one of several that mostly Republican attorneys general from around the country have filed against the clawback provision. 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 Yost's office and the U.S. Department of Justice, which is representing Treasury, did not immediately respond to requests for 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 M. Boynton, Brian D. Netter, Alexander K. Haas, Brigham J. Bowen, Stephen Ehrlich, Michael P. Clendenen 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 and James Nani. Editing by Neil Cohen.
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