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States Bring New Anti-Commandeering Tax Challenge Against U.S.

Posted on July 20, 2021

The federal government's late-2020 COVID relief package unconstitutionally forces states to fund a private horse racing regulatory body or lose related taxation powers, states argue in State of Oklahoma v. United States of America.

At issue is a section of the COVID-19 relief package signed by then-President Trump on December 27, 2020. That package — the Consolidated Appropriations Act, 2021 (P.L. 116-260) — incorporated in full the Horseracing Integrity and Safety Act (HISA) of 2020.

In a 78-page complaint filed in the U.S. District Court for the Eastern District of Kentucky, three states — Oklahoma, West Virginia, and Louisiana — and additional plaintiffs that include their racing commissions are asking the court to declare that the HISA violates the constitutional private non-delegation doctrine, the anti-commandeering principles under the 10th Amendment, due process, the appointments clause, and separation of powers.

The plaintiffs also are asking the court to enjoin the defendants from implementing the HISA, which the Louisiana Department of Justice on July 16 described as “a measure ramrodded into the COVID relief bill that cedes much regulatory and taxation power of the State to an unelected and unaccountable nongovernmental entity.”

In the complaint, the states argue that with the HISA, the federal government is creating a “vast new federal regulatory structure” and is authorizing an unelected private entity — the Horseracing Integrity and Safety Authority Inc. — to exercise regulatory, investigative, and enforcement powers over horse racing's anti-doping and racetrack safety programs scheduled to take effect July 1, 2022.

Much of the complaint addresses nontax regulatory issues. However, Congress not only did not provide funding for the private regulatory authority, it included language explicitly stating that nothing in the HISA should be construed as requiring federal appropriations to the entity or federal guarantee of its debts.

Instead, the authority is instructed to obtain loans for its initial funding — and then after that, states have two options for providing the financing. The HISA instructs the regulatory body by November 1 of each year to determine each state racing commission’s proportionate share for the program’s costs for the next calendar year.

A state racing commission can elect to remit fees according to a schedule developed by the private corporation and approved by the Federal Trade Commission. “There is no appeal or allowable challenges of what the Authority ultimately approves as its budget,” the complaint said.

If a state refuses to pay the fees, the private authority is instructed to calculate on at least a monthly basis a per-race fee for the state and directly collect the amount from all entities involved in the horse races at issue. But if a state goes this route, “a punishment follows,” the complaint said: The HISA prohibits that state from imposing or collecting any fees or taxes related to anti-doping or racetrack safety matters. This ban applies only to states that refuse to fund the private entity, not to states that give money to it, the complaint said.

By giving the private authority the power to collect fees and require members of the horse racing industry to remit the assessments, the HISA “effectively delegates to a private entity the uniquely governmental power of taxation,” the complaint said.

“Forcing a state legislature to either appropriate dollars for a private corporation or be banned from passing legislation imposing certain taxes or fees . . . puts Congress in control of state branches of government in violation of the Tenth Amendment,” the complaint said.

The states cited the U.S. Supreme Court's 2018 ruling in Murphy v. National Collegiate Athletic Association striking down a federal statute that prohibited states from authorizing sports gambling. “If Congress wants to regulate, ‘it must appropriate the funds needed to administer the program,’ and it must enforce it,” the complaint said. “Congress has no constitutional authority to command the law-enforcement agencies of the several states to help the Authority administer a federal regulatory program.”

The states added that while the private authority must submit its proposed rules to the FTC, including its formula for determining assessments, the FTC’s role is primarily ministerial and limited to the ability to approve or disapprove the rules promulgated by the entity.

“HISA requires the unelected Authority to exercise regulatory authority over horseracing in Louisiana, mandates our State to assist the Authority, and forces us to choose between remitting funds to the Authority or losing some of our powers of taxation,” Louisiana Attorney General Jeff Landry (R) said in the July 16 statement. “This violation of the Tenth Amendment would have devastating effects to our State and the thousands of Louisianans in the horse industry.”

The defendants in State of Oklahoma v. United States of America (No. 5:21-cv-00104-JMH) include the United States, the Federal Trade Commission and its commissioners, and the Horseracing Integrity and Safety Authority Inc. and members of its board of directors.

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