Two of the nation’s largest business groups are looking to support Kentucky and Tennessee in their suit challenging a provision in the American Rescue Plan Act that prevents states from using federal aid to offset reductions in net tax revenue, arguing that the provision may harm states' economic recovery from the COVID-19 pandemic.
Separately, a judge has denied West Virginia and 12 other states’ request for a preliminary injunction to block the U.S. Treasury from enforcing the provision.
The U.S. Chamber of Commerce and the National Federation of Independent Business Small Business Legal Center on July 12 filed a motion for leave to file an amicus brief in support of Kentucky and Tennessee in their motion for summary judgment.
Kentucky Attorney General Daniel Cameron (R) and Tennessee Attorney General Herbert Slatery III (R) filed the motion for summary judgment June 23 in the U.S. District Court for the Eastern District of Kentucky.
At issue is a provision in section 9901 of ARPA (P.L. 117-2) that restricts aid from the act from being used by a state or territory 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.” Under ARPA, states that do so would have to repay the funds.
The attorneys general argue that the provision violates the limits on Congress’s power to spend under Article I and the Constitution’s prohibition against commandeering.
The states filed a complaint for declaratory and injunctive relief in April against Treasury Secretary Janet Yellen, acting Treasury Inspector General Richard K. Delmar, and the Treasury Department, claiming that the restriction is an unconstitutional power grab that usurps the states’ sovereign authority.
The states later filed an amended complaint June 21 after Treasury issued guidance in May on the provision via an interim final rule, in which they argue that Treasury “is now interpreting the tax mandate as a broad ban that will prevent the states from lowering their taxes at all.”
The parties filed a joint motion June 21 for a scheduling order for filing cross-motions for summary judgment or a motion to dismiss, saying they agree that the case can likely be resolved without discovery.
The U.S. chamber and the NFIB say their members are concerned that the provision will “prevent states from exercising their sovereign authority to tailor and implement their own tax policies, including those directly affecting businesses.”
“Many states have recently passed legislation that promote economic recovery by easing tax burdens on businesses of all kinds, including, especially, small businesses harmed by the COVID-19 pandemic. These policies and others may be stymied by the tax mandate’s prohibition on the use of federal funds to offset any decrease in a state’s tax revenue,” the groups said.
The groups note that states have enacted legislation to create new tax deductions and credits for restaurants and small businesses, reductions in corporate tax rates, and fee waivers for eating and drinking establishments. But they argue that these benefits may be subject to recoupment by Treasury, “if they correspond to a short-term revenue decrease.”
“Even the possibility of such adverse action will constrain state policymaking now and in future legislative sessions,” the chamber and the NFIB said.
Unless the provision is enjoined, the groups argue, it will “continue to imperil states’ efforts to implement revenue-related measures to foster a healthy business community and promote recovery from the economic devastation caused by COVID-19 — devastation that disproportionately harmed certain industries and carried particularly harsh effects for small businesses of all kinds.”
Preliminary Injunction
Meanwhile, in another lawsuit challenging the provision, U.S. District Judge L. Scott Coogler in a July 14 opinion and order denied West Virginia and 12 other states’ motion for a preliminary injunction.
Alabama, Alaska, Arkansas, Florida, Iowa, Kansas, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota, and Utah are also plaintiffs in the suit.
Attorneys general for the states filed suit March 31 in the U.S. District Court for the Northern District of Alabama to challenge the provision, which they argue is an unconstitutional exercise of federal power that violates the 10th Amendment and the anti-commandeering doctrine. The states are seeking to bar Treasury from enforcing the provision.
The states filed a motion for preliminary injunction April 13 to prevent Treasury from enforcing the provision while the lawsuit is pending.
Coogler said he denied the states’ request “because they have failed to show that this court can provide preliminary relief that would address the harm they will suffer in the absence of the injunction.”
The judge explained that it wouldn’t make sense to issue the preliminary injunction stopping Yellen from recouping federal funds because it is extremely unlikely that Treasury would be able to recoup funds from a state “between now and this court’s final decision.”
However, the judge ruled that the states have standing to pursue their claims and that those claims are ripe.
The U.S. Justice Department argued in a May 7 response brief that the plaintiff states lacked Article III standing to enjoin the provision’s enforcement because they have failed to show how they would use federal funds in a manner inconsistent with the provision. The federal government argued that the states “do not come close to demonstrating irreparable harm” as needed for a preliminary injunction.
The federal government also argued that the states’ challenge wasn’t ripe because “the only consequence of [the states] using Rescue Plan funds to pay for a reduction in net tax revenue would be potential recoupment of the amount of Rescue Plan funds used for an impermissible offset.”
West Virginia Attorney General Patrick Morrisey (R) said in a statement to Tax Notes, “This is the first step of many, and it’s similar to what happened in Ohio, where that state lost on the preliminary injunction and won the base case on the merits. We’re hopeful we will win on the district court level, and if not, then we’ll appeal the case.”
“We are correct on the merits: the federal government cannot coerce a state into forfeiting one of its core constitutional functions in exchange for a large amount of money,” Morrisey said.
Joseph Bishop-Henchman of the National Taxpayers Union Foundation, which requested to file an amicus brief in support of the states, said in an email that Coogler’s opinion is similar to the initial opinion issued in Ohio’s case over the provision, “in that the judge concluded that a preliminary injunction is not appropriate given that it will not change anything.”
“Again similarly, the judge said that the request for permanent injunction is more appropriate,” Bishop-Henchman said.
Bishop-Henchman said he expects the states will now file a motion for permanent injunction. “Given that the judge soundly rejected the Treasury Department's standing and ripeness arguments, odds are good that West Virginia would then prevail,” he said.