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Three More States File Suit Over Federal Aid Restriction 

Posted on May 5, 2021

Texas, Mississippi, and Louisiana have joined a growing number of states suing the Biden administration over 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.

Attorneys general in the three states filed a lawsuit May 3 in the U.S. District Court for the Northern District of Texas against the U.S. Treasury Department, Treasury Secretary Janet Yellen, acting Treasury Inspector General Richard K. Delmar, and the United States.

Texas Attorney General Ken Paxton (R) said in a news release that although the act “generally assists Texans recovering from the COVID-19 pandemic, one provision — the tax mandate — specifically demands that Texas not use funds received through the Act to ‘directly or indirectly’ offset tax revenue reduction caused by changes in tax policy. This condition prohibits Texas and other states with similar low-tax models of governance from cutting taxes for years to come on pain of losing billions in COVID-19 relief.”

The lawsuit is among several that have been filed over a provision in section 9901 of the American Rescue Plan Act of 2021 (P.L. 117-2) that was added to the act by U.S. Senate Democrats. A bipartisan group of attorneys general in 13 states have filed suit, as have attorneys general in Arizona, Missouri, Ohio, and Kentucky and Tennessee. The provision 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.”

In the latest lawsuit, the states argue that the provision “not only prohibits the Plaintiff States from eliminating taxes, reducing tax rates, or increasing tax credits; it also prohibits the adoption of enforcement policies regarding taxes which would lead to reduced tax revenues.”

“For example, the states’ federal funding under the Act would be put at risk by a decision not to enforce a given unemployment or payroll tax against struggling small businesses if nonenforcement led to reduced tax revenue,” the suit says.

The states are seeking to have the provision declared unconstitutional and unenforceable, and to enjoin the federal government from recouping funds based on a violation of the provision and the defendants from enforcing the provision against the three states. They are also seeking to recoup attorney fees and costs associated with the lawsuit.

Joseph Bishop-Henchman of the National Taxpayers Union Foundation told Tax Notes that one interesting claim raised by the states “is that the mandate is unconstitutional for limiting states but not cities or tribes from cutting taxes.”

“Equal sovereignty is a somewhat unexplored area of 10th Amendment precedents,” Bishop-Henchman said. He said the foundation, which has filed amicus briefs in support of the motions filed by Arizona and Missouri to block the provision's enforcement, will file amicus briefs in all the cases to ensure the taxpayer perspective is heard.

Treasury did not respond to a request for comment by press time.

 

 

 

 

 

 

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