States continue to fight ban on American Rescue Plan Act tax cuts
Following the American Rescue Plan Act’s tax cut ban provision, also known as the “tax mandate”, a number of states sued the Treasury Department, arguing that the ban was unconstitutional. The tax cut ban requires states receiving federal bailout funds to give up their ability to cut state taxes. It prevents states that receive aid from using the funds to “directly or indirectly offset a reduction in net tax revenue“.
The New Civil Liberties Alliance, a nonpartisan, nonprofit civil rights group, filed an amicus curiae brief in the Fifth Circuit on October 31, 2022 in the State of Texas, et al. vs. Janet Yellen, et al. He argues that the ban, as it applies to Texas, Mississippi and Louisiana, “imposes a coercive condition on spending, requisitions state government officials in violation of the Tenth Amendment, and attacks a essential component of State sovereignty which is pre-constitutional”.
ARPA has authorized the distribution of approximately $195 billion directly to states to provide financial assistance to deal with the economic disruption caused by the pandemic. The funds involved represent 13% of Texas’ 2021 budget, 31% of Mississippi’s budget and 7% of Louisiana’s budget. These funds were supposed to be available if and only if a recipient state agreed not to pass laws or regulations that would reduce state taxes.
After Congress passed the ARPA legislation, it delegated authority to the Treasury Department, which in turn issued a final rule on January 27, 2022, to implement the ban. According to the procedure, a state must consult the Treasury rule to test every policy decision or risk the recovery of bailout funds. Because money is fungible, any ARPA funds states receive could be seen as indirectly offsetting any reduction in net tax revenue resulting from a change in state law or policy, the NCLA argued. “When Congress purports to tell states by statute or regulation what their tax policies must — or cannot — be, it violates state sovereignty. This structural violation of the Constitution impinges on the fundamental ability of states run their own tax affairs and make choices about how to tax their residents,” he said. “The inevitable concussion is that Congress has used the revenue generated by federally taxing residents and businesses of states to buy the sovereign fiscal power of the states.”
The Treasury’s final rule compounds the problem by forcing state officials to establish and staff an undesirable and convoluted accounting and reporting bureaucracy, according to the NCLA: “No power enumerated in the Constitution gives Congress the power to pass laws that direct, let alone micromanage, the fiscal and accounting personnel state.
“This law seeks to empower unelected Treasury Department bureaucrats to control each state’s tax and budget policies, eviscerating federalism and the vertical separation of powers structure that underpins the Constitution,” said Sheng Li, an attorney. in litigation at the NCLA. “The potential for arbitrary or abusive enforcement against politically disadvantaged states is immense.”
In its amicus brief, the NCLA noted that Congress’ practice of placing “conditions” on federal spending is concerning. “All too often, Congress attaches conditions to the receipt of federal funds, thereby insidiously breaking constitutional guarantees and buying into the submission of states and people to an unconstitutional seizure of power,” the brief reads. “This historically unprecedented case goes even further and usurps the basic power exclusively attributed to states – the power to modify or reduce the taxation of their citizens.”
This case is part of a series of cases brought by other states with similar problems. In two of the cases, the Missouri and Arizona district courts dismissed the claims for lack of standing. But in several cases that have examined the issue on the merits, the courts have ruled the ban on tax reductions unconstitutional.
“Congress’s attempt to use its own taxing and spending power to control state tax policy is a clear violation of the Constitution’s structure of federalism, which exists to protect individual liberty from unwanted government intrusion. “Li said.