Arizona Attorney General Mark Brnovich (R) has filed suit against the Treasury Department, arguing that a provision in the recently adopted federal COVID-19 law that could prevent states from using federal aid to lower state taxes is unconstitutional.
In a March 25 complaint in the U.S. District Court for the District of Arizona, Brnovich claimed that the provision is too ambiguous to pass constitutional muster and “represents an unprecedented and unconstitutional intrusion” on state sovereignty. Arizona is asking the court in Arizona v. Yellen to declare the provision unconstitutional and prohibit the federal government from recouping funds based on violations of the provision.
Brnovich said in a March 25 press release that it was “unacceptable for the federal government to commandeer states’ tax policies and micromanage their budgets.”
The suit comes 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.”
Yellen continued that the provision “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” and that it was well established that Congress may place reasonable conditions on how states use federal funding.
The American Rescue Plan Act of 2021 (P.L. 117-2), signed March 11, includes $350 billion in aid for state and local governments. But provisions in section 9901 of the act restrict 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 argues in its complaint that there is disagreement between the Congress members who passed the act and Treasury, adding that “the language of the tax mandate is patently ambiguous, and even borderline incoherent.”
If the act is determined to prohibit states from engaging in tax relief, Arizona says, the conditions for the federal funding are insufficiently related to the federal interest advanced by the act of assisting states in responding to the COVID-19 pandemic.
Arizona argues that the provision unconstitutionally coerces states into adopting a preferred policy by offering “an enormous amount of money to the states — for Arizona, a total amount that is about 40 percent of its general fund budget — at a time when that budget is strained by the ravages of a once-in-a-century pandemic.”
Arizona also claims that the provision could empower governors to violate separation of powers and undermine the authority of their legislatures because the act appears to allow current governors to accept funds under the act and "thereby bind their successors" to the prohibition against tax relief through 2024.
Ohio Attorney General Dave Yost (R) is seeking to block the provision’s enforcement, at least as applied to Ohio, filing a motion for preliminary injunction in the U.S. District Court for the Southern District of Ohio on March 17. Yost claims that Congress exceeded its authority by requiring states to choose between accepting stimulus funds or keeping their sovereign authority to reduce taxes.