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Judge Blocks Treasury From Enforcing Offset Provision Against Ohio 

Posted on July 6, 2021

A federal judge has blocked the Treasury Department from enforcing against Ohio a provision in the American Rescue Plan Act that bars states from using federal funds provided by the act to offset reductions in net tax revenue. 

In a July 1 opinion and order, Judge Douglas R. Cole granted Ohio’s motion for permanent injunction to prevent Treasury Secretary Janet Yellen from seeking to enforce the provision against the state.

The judge said Ohio met its burden of establishing that the provision, because of its ambiguity, exceeds Congress’s authority under the spending clause and that the interim final rule issued by Treasury in May doesn’t fix that issue.

“Moreover, Ohio is suffering irreparable harm due to that violation. And, unlike the case at the preliminary injunction stage, a permanent injunction will prevent that ongoing harm. Further, such an injunction is in the public interest,” Cole wrote.

Cole also denied the federal government’s motion to dismiss the suit and denied Ohio’s request for declaratory relief, saying it “would add nothing to the Court’s resolution of this matter.”

Ohio Attorney General Dave Yost (R) filed a complaint March 17 against TreasuryYellen, and acting Treasury Inspector General Richard K. Delmar in the U.S. District Court for the Southern District of OhioYost also filed a motion for preliminary injunction the same day in the same court, seeking to block the provision from being enforced, at least as applied to Ohio.

The motion was denied May 12 by Cole, who determined that the state has “established a substantial likelihood (although by no means a certainty) of success on at least an aspect of its Spending Clause claim, and that Ohio is currently suffering irreparable harm.” But Cole ruled that the preliminary relief was not warranted because it wouldn’t prevent the irreparable harm that Ohio claimed it would suffer.

Yost filed a motion May 19 in the U.S. District Court for the Southern District of Ohio for a final judgment permanently enjoining the provision’s enforcement against Ohio and declaring the provision unconstitutional. 

At issue is a provision in section 9901 of the American Rescue Plan Act of 2021 (P.L. 117-2) that restricts states and territories from using emergency funds provided by the act to directly or indirectly offset a reduction in net tax revenue. Under the act, states or territories that use the aid to offset reductions in net tax revenue are required to repay the funds to the federal government.

Yost argued that the provision oversteps Congress’s power under the spending clause and violates the 10th Amendment.

Ohio is one of more than 20 states that have sued the federal government over the provision.

Critics of the provision welcomed the judge’s order.

In a June 1 tweet, Jared Walczak of the Tax Foundation called the order “a victory for states' fiscal autonomy.”

“The federal government can certainly restrict the use of federal funds for state tax relief, but the vague, overbroad restrictions on ‘indirect’ use was a huge problem. Standard is clear and unambiguous for any federal funding preconditions,” Walczak said.

Joseph Bishop-Henchman of the National Taxpayers Union Foundation, which filed an amicus brief in support of Ohio, said in a statement that the judge had hinted at this in his denial of preliminary injunction, so the ruling was not unexpected.

“It now puts the matter at 1–1 with trial judges so far, with four others considering the matter. No doubt Treasury will appeal, but they will need to do a better job explaining what an indirect offset is and why voiding them is constitutional,” Bishop-Henchman said.

Treasury could not be reached for comment by press time.

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