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Federal Government Argues 13 States Lack Standing for Preliminary Relief

Posted on May 12, 2021

Thirteen states seeking to block the enforcement of a provision in the recently adopted federal COVID-19 relief law that restricts funding from being used to offset reductions in net tax revenue lack standing in their request for preliminary relief, the federal government argues.

Attorneys for the Department of Justice filed a response May 7 on behalf of the Treasury Department, Treasury Secretary Janet Yellen, and acting Treasury Inspector General Richard K. Delmar in opposition to the states’ April 13 motion for preliminary injunction seeking to enjoin the federal government from enforcing the provision. 

A bipartisan group of attorneys general for West Virginia, Alabama, Arkansas, Alaska, Florida, Iowa, Kansas, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota, and Utah filed a lawsuit March 31 in the U.S. District Court for the Northern District of Alabama, charging that a provision in the American Rescue Plan Act of 2021 (P.L. 117-2) is unconstitutional.

The suit is one of several that have been filed over the provision, found in section 9901 of the act, which 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.”

The suit asserts that the provision “sets up an untenable choice for the plaintiff states” because “they must either relinquish control over a core function of their inherent sovereign powers, or else, in the midst of a deadly and destructive pandemic, forfeit massive and much needed aid that represents approximately 25 percent” of their annual budgets.

The states argue that the provision is an unconstitutional exercise of federal power that violates the 10th Amendment and the anti-commandeering doctrine.

Before the lawsuit was filed, 21 Republican state attorneys general sent a letter March 16 to Yellen requesting prompt guidance from Treasury that the law doesn’t prohibit states from using the aid to generally provide tax relief. 

Yellen responded in a March 23 letter saying, “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.”

According to the motion for preliminary injunction, Yellen’s “response did not resolve the plaintiff states’ questions about the federal tax mandate’s meaning and limits, nor resolve their concerns about its significant infringement into their sovereign taxing powers,” and the lawsuit followed.

Seventy-eight members of Congress and the American Center for Law and Justice have filed an amicus brief in support of the states’ motion.

The Justice Department argues in its May 7 response that the plaintiff states lack 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 also argues that the states “do not come close to demonstrating irreparable harm” as needed for a preliminary injunction.

“The [act] does not prohibit a state from cutting taxes; it merely restricts a state’s ability to use federal funds distributed under the Rescue Plan to offset a reduction in net tax revenue. No state has a sovereign interest in using federal funds for that purpose. And each state, of course, remains free to decline the funds,” the government said.

The federal government also argues that the states’ challenge isn'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.”

Treasury released an interim final rule May 10 on how the federal funds can be used.

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