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NTUF Files Briefs in Support of Lawsuits Over Federal Aid Restrictions 

Posted on Apr. 27, 2021

A provision in the recently adopted federal COVID-19 relief law that restricts states from using federal aid to offset reductions in net tax revenue should be struck down as unconstitutional, according to amicus briefs filed by the National Taxpayers Union Foundation (NTUF). 

The briefs were filed April 23 by Joseph Bishop-Henchman of NTUF in support of motions filed by attorneys general in Arizona and Missouri seeking to block the provision from being enforced. 

The provision, in section 9901 of the American Rescue Plan Act of 2021 (ARPA, P.L. 117-2), was added to the act by Senate Democrats. It restricts federal aid from being used to “either directly or indirectly offset a reduction in the net tax revenue of such state or territory resulting from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.”

Arizona Attorney General Mark Brnovich (R) filed suit over the provision March 25, shortly after Treasury Secretary Janet Yellen responded in a March 23 letter to Brnovich and a coalition of Republican attorneys general about their concerns regarding the provision. Yellen said in the letter that “nothing in the act prevents states from enacting a broad variety of tax cuts," but that it “simply provides that funding received under the act may not be used to offset a reduction in net tax revenue resulting from certain changes in state law.” Brnovich later filed a motion to block Treasury from enforcing the restriction. 

Missouri Attorney General Eric S. Schmitt (R) filed a complaint March 29 with the U.S. District Court for the Eastern District of Missouri, seeking to block the provision’s enforcement and have it declared unconstitutional and severable from the act.

NTUF argues that “the provision is capable of multiple meanings, such that an honest person (or state government) attempting to abide by its terms is necessarily guessing at its meaning” and the result is "paralyzing state legislative action for fear of violating the provision, undermining ARPA’s purpose of action to provide pandemic relief.”

The briefs argue that the clawback provision is either void for vagueness or unconstitutionally coercive. It also argues that “the provision is so ambiguous that its enforcement will be arbitrary.”

According to the briefs, the provision can be interpreted three ways: as completely banning tax cuts through 2024; as allowing states to reduce taxes but forgo federal aid dollar for dollar; or as preventing the federal aid from being used to offset a reduction in net tax revenue resulting from tax policy changes.

Bishop-Henchman told Tax Notes, “Our main argument is that the ARPA provision is so ambiguous that its enforcement will be arbitrary and that the use of the word 'indirectly' in the statute makes it unconstitutionally intrusive on state government policy.”

The federal government responded to Missouri’s lawsuit April 23, arguing that the state’s motion for preliminary injunction should be denied and that the state “lacks Article III standing because it has not enacted any tax cut, let alone alleged that any hypothetical tax cut under consideration will decrease net tax revenue or that the State plans or intends to use Rescue Plan funds to offset that theoretical reduction” (emphasis in original).

The U.S. Chamber of Commerce and the National Federation of Independent Business filed a brief April 15 in support of Missouri’s motion.

The Buckeye Institute, a free-market think tank, filed a brief April 23 in support of Arizona’s motion.

The lawsuits filed on behalf of Arizona and Missouri are among others filed by state attorneys general over the provision.

Ohio Attorney General Dave Yost (R) filed a motion for preliminary injunction March 17 in the U.S. District Court for the Southern District of Ohio seeking to block the provision’s enforcement, at least as applied to Ohio. The federal government responded April 16, arguing that Ohio lacks standing to challenge the provision. 

A bipartisan group of attorneys general in 13 states filed suit March 31 in the U.S. District Court for the Northern District of Alabama, seeking to prevent the Treasury Department and other agencies or employees from enforcing the provision. Those states argue that the provision is an unconstitutional exercise of federal power that violates the Constitution's 10th Amendment and the anti-commandeering doctrine.

Kentucky Attorney General Daniel Cameron (R) and Tennessee Attorney General Herbert H. Slatery III (R) filed a complaint April 6 in the U.S. District Court for the Eastern District of Kentucky seeking to enjoin Treasury from enforcing the provision.

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