U.S. DOJ Asks Sixth Circuit to Reinstate Blocked ARPA Offset Provision

COMMONWEALTH OF KENTUCKY and STATE OF TENNESSEE,
Plaintiffs-Appellees,
v.
JANET YELLEN, in her official capacity as Secretary of the Treasury; RICHARD K. DELMAR, in his official capacity as Acting Inspector General of the Department of the Treasury; and the U.S. DEPARTMENT OF THE TREASURY,
Defendants-Appellants.

IN THE UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT

On Appeal from the United States District Court
for the Eastern District of Kentucky

BRIEF FOR APPELLANTS

BRIAN M. BOYNTON
Acting Assistant Attorney General
MARK B. STERN
ALISA B. KLEIN
DANIEL WINIK
Attorneys, Appellate Staff
Civil Division, Room 7245
U.S. Department of Justice
950 Pennsylvania Avenue, NW
Washington, DC 20530
(202) 305-8849

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TABLE OF CONTENTS

TABLE OF AUTHORITIES

STATEMENT REGARDING ORAL ARGUMENT

STATEMENT OF JURISDICTION

STATEMENT OF ISSUES

STATEMENT OF THE CASE

SUMMARY OF ARGUMENT

STANDARD OF REVIEW

ARGUMENT

CONCLUSION

CERTIFICATE OF COMPLIANCE

DESIGNATION OF RELEVANT DISTRICT COURT DOCUMENTS

ADDENDUM

TABLE OF AUTHORITIES

Cases

Arizona v. Yellen, 2021 WL 3089103 (D. Ariz. July 22, 2021)

Babbitt v. United Farm Workers National Union, 442 U.S. 289 (1979)

Bennett v. Kentucky Department of Education, 470 U.S. 656 (1985)

Bennett v. New Jersey, 470 U.S. 632 (1985)

Clapper v. Amnesty International USA, 568 U.S. 398 (2013)

Crowell v. Benson, 285 U.S. 22 (1932)

EMW Women's Surgical Center., P.S.C. v. Friedlander, 978 F.3d 418 (6th Cir. 2020)

Gruver v. Louisiana Board of Supervisors, 959 F.3d 178 (5th Cir. 2020)

Jennings v. Rodriguez, 138 S. Ct. 830 (2018)

Kentucky v. Yellen, 2021 WL 4394249 (E.D. Ky. Sept. 24, 2021)

Mayhew v. Burwell, 772 F.3d 80 (1st Cir. 2014)

Mississippi Commission on Environmental Quality v. EPA, 790 F.3d 138 (D.C. Cir. 2015)

Missouri v. Yellen, 2021 WL 1889867 (E.D. Mo. May 11, 2021)

National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012)

Sabri v. United States, 541 U.S. 600 (2004)

South Carolina Department of Education v. Duncan, 714 F.3d 249 (4th Cir. 2013)

South Dakota v. Dole, 483 U.S. 203 (1987)

Susan B. Anthony List v. Driehaus, 573 U.S. 149 (2014)

Statutes

American Rescue Plan Act of 2021, Pub. L. No. 117-2, 135 Stat.

28 U.S.C. § 1291

28 U.S.C. § 1331

Regulations

Coronavirus State and Local Fiscal Recovery Funds, 86 Fed. Reg. 26,786 (May 17, 2021)

Coronavirus State and Local Fiscal Recovery Funds (Jan. 6, 2022), https://go.usa.gov/xtDWp

31 C.F.R. § 35.1 et seq.

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STATEMENT REGARDING ORAL ARGUMENT

The issues presented by this case are also presented in Ohio v. Yellen, No. 21-3787, in which oral argument is scheduled for January 26, 2021. To ensure consistent rulings, we respectfully suggest that this case be assigned to the same panel that will hear the Ohio appeal, which can determine whether oral argument in this case would be helpful.

STATEMENT OF JURISDICTION

Kentucky and Tennessee invoked the district court's jurisdiction under 28 U.S.C. § 1331. Amended Complaint ¶ 9, RE23, PageID #133-134. The district court entered final judgment in plaintiffs' favor on September 24, 2021. RE43, PageID #645-646. The federal government timely appealed from that judgment on November 22, 2021. RE45, PageID #648-649; see Fed. R. App. P. 4(a)(1)(B). This Court has appellate juris-diction under 28 U.S.C. § 1291.

STATEMENT OF ISSUES

The American Rescue Plan Act provided nearly $200 billion in federal grants to help States mitigate the fiscal effects of the COVID-19 pandemic. 42 U.S.C. § 802(a)(1). The Act gives States considerable flexibility in determining how to use these new federal funds but specifies that a State “shall not use the funds . . . to either directly or indirectly offset a reduction in the net tax revenue of such State” resulting from changes in state tax law during the covered period. Id. § 802(c)(2)(A) (the “Offset Provision”). The district court permanently enjoined the federal government from enforcing the Offset Provision against Kentucky and Tennessee on the theory that it is unconstitutionally coercive. The questions presented are:

STATEMENT OF THE CASE

A. Statutory Background

In the American Rescue Plan Act of 2021, Pub. L. No. 117-2, 135 Stat. 4, Congress created a Coronavirus State Fiscal Recovery Fund. 42 U.S.C. § 802. The Fund provides nearly $200 billion in new federal grants to help States and the District of Columbia mitigate the fiscal effects of the COVID-19 pandemic. Id. § 802(a)(1); see id. § 803(b)(3)(A). Section 802 allows States to use Fiscal Recovery Funds to cover broadly defined categories of costs incurred through 2024, including to provide assistance to households, businesses, and industries affected by the pandemic; to provide premium pay to workers performing essential work during the pandemic; to pay for state government services to the extent of revenue losses due to the pandemic; and to make necessary investments in water, sewer, or broadband infrastructure. Id. § 802(c)(1).

In addition to identifying the permissible uses of Fiscal Recovery Funds, Section 802 includes two “[f]urther restrictions” on the use of the funds.42 U.S.C. § 802(c)(2). One is that a State may not deposit the funds into a pension fund. Id. § 802(c)(2)(B). The other, at issue here, is that a State “shall not use the funds . . . to either directly or indirectly offset a reduction in the net tax revenue of such State” resulting from a change in state law during a covered time period. Id. § 802(c)(2)(A).¹

A State can receive its federal grant after providing “a certification” that it “requires the payment . . . to carry out the activities specified in” § 802(c) and that it “will use any payment . . . in compliance with” that provision. 42 U.S.C. § 802(d)(1). If a State uses its Fiscal Recovery Funds for impermissible purposes, it may be required to repay an amount equal to the funds misused. Id. § 802(e).

B. Implementing Regulations

Congress authorized the Treasury Department “to issue such regulations as may be necessary or appropriate to carry out” Section 802, which established the Fiscal Recovery Fund. 42 U.S.C. § 802(f). In May 2021, the Department issued an interim final rule detailing how it would implement the statutory conditions on the use of Fiscal Recovery Funds, including the Offset Provision. Coronavirus State and Local Fiscal Recovery Funds, 86 Fed. Reg. 26,786 (May 17, 2021) (codified at 31 C.F.R. § 35.1 et seq.); see id. at 26,815. In January 2022, the Department issued a final rule implementing the statu-tory conditions. Coronavirus State and Local Fiscal Recovery Funds (Jan. 6, 2022), https://go. usa.gov/xtDWp (publication in Federal Register forthcoming).

C. This Action

Kentucky and Tennessee brought this action in April 2021, shortly after the en-actment of the American Rescue Plan Act. The complaint (as amended in June 2021) alleges that the Offset Provision — which plaintiffs dub the “Tax Mandate” — “prohibits any State accepting federal financial assistance under the Act from lowering the tax burden on its citizens for the next four years.” Amended Complaint ¶ 5, RE23, PageID #132. Plaintiffs challenged the constitutionality of the so-called Tax Mandate on various grounds. Id. ¶¶ 52-83, RE23, PageID #148-154.

Plaintiffs moved for summary judgment, and the federal government moved to dismiss the complaint. The district court granted summary judgment in plaintiffs' favor. Kentucky v. Yellen, 2021 WL 4394249 (E.D. Ky. Sept. 24, 2021). The court based its conclusion that plaintiffs had established an Article III controversy on the theory that they faced “a credible threat” that the Offset Provision would be enforced against them. Id. at *2-3. On the merits, the court concluded that the Offset Provision was unconsti-tutionally coercive on the theory that the grants offered by Congress in the Fiscal Recovery Fund were so generous that States could not realistically turn them down. Id. at *3-6. The court did not address plaintiffs' other constitutional challenges. Id. at *7. It enjoined the enforcement of the Offset Provision against plaintiffs. Id. at *9.

SUMMARY OF ARGUMENT

In the American Rescue Plan Act, Congress offered Kentucky and Tennessee billions of dollars in new federal funds to help mitigate the effects of the pandemic. The statute gives States considerable flexibility to use these federal funds for a range of specific purposes, but the Offset Provision specifies that the funds may not be used to directly or indirectly offset a reduction in their net tax revenue resulting from a change in tax law adopted by the recipient. The district court permanently enjoined the federal government from enforcing the Offset Provision against Kentucky or Tennessee on the theory that it is unconstitutionally coercive.

The district court's injunction rests on two legal errors. As a threshold matter, Kentucky and Tennessee failed to establish a concrete controversy over the Offset Provision. As other courts addressing analogous challenges have emphasized, the Offset Provision does not prohibit state tax cuts; it merely prohibits a State from using the new federal funds to pay for a reduction in net tax revenue. Thus, if a State offsets tax cuts by other means — such as by revenue derived from macroeconomic growth, by tax increases, or by spending cuts in areas in which the State is not using the new federal funds — the Offset Provision is not implicated. To the extent plaintiffs have identified any actual or imminent tax cuts that could implicate the Offset Provision, they have not shown that they plan to pay for those tax cuts by means that would even arguably run afoul of the Offset Provision. They have accordingly failed to establish any live controversy supporting Article III jurisdiction.

Assuming the merits are presented, the Offset Provision is an unremarkable exercise of Congress's power to establish the permissible uses of federal grants. The Supreme Court's decision in National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012), forecloses any contention that a restriction on the use of new federal grants is coercive; that decision makes clear that a State is not coerced by conditions, such as the Offset Provision, that Congress places on the use of new federal funding.

STANDARD OF REVIEW

The district court's permanent injunction presents issues of law that are reviewed de novo by this Court. See EMW Women's Surgical Ctr., P.S.C. v. Friedlander, 978 F.3d 418, 428 (6th Cir. 2020).

ARGUMENT

I. PLAINTIFFS FAILED TO ESTABLISH AN ARTICLE III CONTROVERSY

The premise of this suit is that the Offset Provision — which Kentucky and Tennessee refer to as the “Tax Mandate” — “prohibits any State accepting federal financial assistance under the Act from lowering the tax burden on its citizens for the next four years.” Amended Complaint ¶ 5, RE23, PageID #132.

That premise is contrary to the Offset Provision's plain text, as other courts addressing analogous challenges have explained. The Offset Provision “'does not prohibit a State from cutting taxes; it merely restricts a State's ability to use federal funds distributed under the [Fiscal Recovery Fund] to offset a reduction in net tax revenue.'” Missouri v. Yellen, 2021 WL 1889867, at *4 (E.D. Mo. May 11, 2021), appeal pending, No. 21-2118 (8th Cir.). The court considering Arizona's challenge accordingly recognized that Arizona's recent enactment of “a $1.9 billion tax cut” did not contravene the Offset Provision, in the absence of a showing that the State “used [federal] funds to supplement a reduction in its net income.” Arizona v. Yellen, 2021 WL 3089103, at *5 (D. Ariz. July 22, 2021), appeal pending, No. 21-16227 (9th Cir.). Likewise, the court considering Missouri's challenge emphasized that “Missouri's sovereign power to set its own tax policy is not implicated by the” Offset Provision, which leaves the “Missouri legislature . . . free to propose and pass tax cuts as it sees fit.” 2021 WL 1889867, at *4.

Like Arizona and Missouri, the plaintiff States here did not show that they intend to take concrete actions that would contravene the Offset Provision. Kentucky submitted no evidence that it had cut taxes, or imminently intended to cut taxes, at all. Tennessee submitted a declaration stating that it “has a long history of cutting taxes,” identifying various tax cuts undertaken “[s]ince 2011,” and describing certain tax cuts “proposed but not yet pursued.” Decl. of N. Antonio Niknejad ¶¶ 6-9, RE25-2, PageID #222-223. But that declaration identifies only modest tax changes that fall within the period covered by the Offset Provision: a “onetime” “sales tax holiday for food and food ingredients and prepared food sold at eating and drinking establishments,” which the State expected to reduce tax revenue by $50 million, and minor changes to the sales tax on aviation fuel, the revenue effect of which the State does not identify. Id. ¶¶ 10-11, RE25-2, PageID #223-224. And Tennessee does not suggest that it will use Fiscal Recovery Funds to pay for reductions in its tax revenue caused by those changes or any others it imminently plans to implement. As the Treasury Department has emphasized, the Offset Provision is not implicated if state tax cuts are offset not by Fiscal Recovery Funds but by revenue derived from macroeconomic growth, increases in other taxes, or spending cuts in areas where the State is not spending Fiscal Recovery Funds. See 86 Fed. Reg. at 26,810. Plaintiffs thus have not established the prerequisites for standing to bring a pre-enforcement challenge — “'an inten-tion to engage in a course of conduct arguably affected with a constitutional interest, but proscribed by a statute,'” and “'a credible threat'” that the statute will be enforced against their conduct, Susan B. Anthony List v. Driehaus, 573 U.S. 149, 159 (2014).

The district court believed that Kentucky and Tennessee had established standing to bring a pre-enforcement challenge to the Offset Provision on the theory that “they wish to accept” Fiscal Recovery Funds but “interpret the [Offset Provision] as proscribing use of the funds for their 'preferred tax policies in the coming years.'” Kentucky v. Yellen, 2021 WL 4394249, at *3 (E.D. Ky. Sept. 24, 2021) (emphasis added). But plaintiffs do not assert a right to use Fiscal Recovery Funds to pay for tax cuts, in defiance of the restriction imposed by Congress on the use of the funds. Any such argument would flout Congress's well settled “authority to condition the receipt of funds on the States' complying with restrictions on the use of those funds,” in order to “ensure[ ] that the funds are spent according to its view of the 'general Welfare,'” National Fed'n of Indep. Bus. v. Sebelius (NFIB), 567 U.S. 519, 580 (2012) (plurality opinion). Rather, plaintiffs' argument is that the Offset Provision transgresses the bounds of Congress's Spending Clause authority by dictating how they spend their own funds in pursuit of their preferred tax policies. Yet plaintiffs have failed to identify any respect in which the Offset Provision even arguably prevents them from undertaking tax cuts.

Moreover, even if the Offset Provision could arguably be read as forbidding States to cut taxes, and even if such an interpretation would be constitutionally suspect, a court would be obligated to reject that interpretation so long as a constitutionally unproblematic interpretation were also available, which is plainly the case here. See Jennings v. Rodriguez, 138 S. Ct. 830, 842 (2018) (“When 'a serious doubt' is raised about the constitutionality of an act of Congress, 'it is a cardinal principle that this Court will first ascertain whether a construction of the statute is fairly possible by which the question may be avoided.'” (quoting Crowell v. Benson, 285 U.S. 22, 62 (1932))). A court could not properly adopt a merely “arguable” reading of an Act of Congress and then enjoin the enforcement of the statute on the theory that the interpretation raises serious constitutional issues.

Nor can plaintiffs establish the existence of an Article III controversy on the other ground they asserted before the district court: that the Offset Provision imposes reporting and compliance burdens. Even if there were no Offset Provision, plaintiffs would be obligated to keep track of their expenditures and ensure that they used Fiscal Recovery Funds for permissible purposes — purposes that do not include offsetting tax cuts. See 42 U.S.C. § 802(c)(1) (enumerating permitted purposes); id. § 802(d)(2) (requiring a State that accepts Fiscal Recovery Funds to submit to the Treasury Department “periodic reports providing a detailed accounting” of “the uses of funds by such State”). The Treasury Department has made clear, moreover, that States may rely on their existing budget projections in determining the anticipated revenue effects of changes to their tax laws. 86 Fed. Reg. at 26,807 (“In order to reduce burden, the interim final rule's approach also incorporates the types of information and modeling already used by States and territories in their own fiscal and budgeting processes. By incorporating existing budgeting processes and capabilities, States and territories will be able to assess and evaluate the relationship of tax and budget decisions to uses of the Fiscal Recovery Funds based on information they likely have or can obtain.”).

In short, nothing in the record establishes a concrete conflict between the Offset Provision and Tennessee's or Kentucky's plans for using their allocated Fiscal Recovery Funds. Plaintiffs have accordingly shown no “'realistic danger of sustaining a direct injury as a result of '” the Offset Provision's “'enforcement.'” Arizona, 2021 WL 3089103, at *5 (quoting Babbitt v. United Farm Workers Nat'l Union, 442 U.S. 289, 298 (1979)). And the district court erred in not dismissing their attempt to seek what amounts to an advisory opinion on the Offset Provision. “'[N]o principle is more fundamental to the judiciary's proper role in our system of government than the constitu-tional limitation of federal-court jurisdiction to actual cases or controversies.'” Clapper v. Amnesty Int'l USA, 568 U.S. 398, 408 (2013). “The law of Article III standing, which is built on separation-of-powers principles, serves to prevent the judicial process from being used to usurp the powers of the political branches,” and the standing inquiry is “'especially rigorous when reaching the merits of the dispute would force'” a court “'to decide whether an action taken by one of the other two branches of the Federal Government was unconstitutional.'” Id. To “determine the scope of the” Offset Provision in a “hypothetical context” is not a “'proper exercise of the judicial function.'” Missouri, 2021 WL 1889867, at *5.

Dismissing this suit for lack of jurisdiction will not deprive Tennessee or Kentucky of an opportunity to seek relief if either State is ever actually harmed by the Offset Provision. If a concrete dispute over allegedly misused Fiscal Recovery Funds were to arise, the affected State could assert its challenge at that time. See, e.g., Bennett v. Kentucky Dep't of Educ., 470 U.S. 656, 658 (1985) (explaining that “the dispute is whether the Secretary correctly demanded repayment based on a determination that Kentucky violated requirements that Title I funds be used to supplement, and not to supplant, state and local expenditures for education”); Bennett v. New Jersey, 470 U.S. 632, 637 (1985) (dispute arose from the Secretary's final decision ordering repayment of speci-fied federal education funds).

II. PLAINTIFFS' CHALLENGE TO THE OFFSET PROVISION IS MERITLESS

Assuming the district court had jurisdiction, its permanent injunction should be reversed on the merits. The Supreme Court has repeatedly “upheld Congress's authority to condition the receipt of funds on the States' complying with restrictions on the use of those funds, because that is the means by which Congress ensures that the funds are spent according to its view of the 'general Welfare.'” NFIB, 567 U.S. at 580 (plurality opinion). And the Offset Provision is a familiar exercise of Congress's authority to specify the permissible and impermissible uses of Fiscal Recovery Funds.

In Section 802, Congress appropriated hundreds of billions of dollars to help States mitigate the fiscal impacts of the pandemic. Congress identified broad categories of permissible uses of these federal funds, such as providing assistance to households and businesses affected by the pandemic and providing premium pay to workers performing essential work during the pandemic. And Congress placed certain limited restrictions on the uses of these federal funds, including that they may not be used to fill a revenue hole created by state tax cuts. That is all well within the authority recognized in NFIB, as is Congress's further specification that a State cannot use fiscal machinations to circumvent the prohibition against using Fiscal Recovery Funds to pay for tax cuts. If a State were simply to deposit its federal grant into its general treasury in order to fill a revenue hole created by (say) a $2 billion tax cut, the State would be using the federal funds to directly offset a reduction in state tax revenue. Congress permissibly forbade the State from achieving the same result “indirectly,” 42 U.S.C. § 802(c)(2)(A), by reducing the State's own expenditures by $2 billion to offset the tax cut and using $2 billion in Fiscal Recovery Funds to pay for those expenditures instead.

By preventing States from “'us[ing] federal funds distributed under the [Fiscal Recovery Fund] to offset a reduction in net tax revenue,'” Missouri, 2021 WL 1889867, at *4 (emphasis omitted), the Offset Provision serves to reinforce Section 802(c)'s identification of purposes for which the funds may be used. In effect, it simply prevents States from choosing to eliminate a source of non-federal revenue ordinarily used to pay for a state expenditure, replacing that source with Fiscal Recovery Funds, and using the saved state funds to pay for a tax cut. It thus resembles the maintenance-of-effort requirements that are a longstanding feature of Spending Clause legislation. See, e.g.,

Bennett v. Kentucky Dep't of Educ., 470 U.S. at 659 (explaining that Title I of the Elementary and Secondary Education Act “from the outset prohibited the use of federal grants merely to replace state and local expenditures”); Mayhew v. Burwell, 772 F.3d 80 (1st Cir. 2014) (upholding a Medicaid maintenance-of-effort requirement); South Carolina Dep't of Educ. v. Duncan, 714 F.3d 249, 252 (4th Cir. 2013) (describing the maintenance-of-effort requirement in the Individuals with Disabilities Education Act, which generally requires the Secretary to reduce a State's grant by the same amount by which the State has failed to maintain its expenditures for special education for children with disabilities).

The district court concluded that the Offset Provision is unconstitutionally coercive because it is so generous that no State could resist the temptation to accept it. But the Supreme Court's decision in NFIB squarely forecloses that reasoning. In NFIB, as noted above, the Court reaffirmed “Congress's authority to condition the receipt of funds on the States' complying with restrictions on the use of those funds,” and it observed that South Dakota v. Dole, 483 U.S. 203 (1987), had applied a coercion analysis to a condition on federal highway funds only because “the condition was not a restriction on how the highway funds . . . were to be used.” 567 U.S. at 580 (plurality opinion). Consistent with that distinction, a majority of the Justices held in NFIB that Congress could not make a State's preexisting Medicaid funding contingent on the State's agreement to extend coverage to all low-income adults — an expansion that the majority regarded as an entirely new program. See id. at 580-585 (plurality opinion); id. at 681-689 (joint dissent). But a different majority of Justices upheld the same requirement as a condition on the new federal funds offered by the Affordable Care Act, which totaled $100 billion per year. See id. at 576, 585-586 (Roberts, C.J., joined by Breyer, J., and Kagan, J.) (emphasizing that “[n]othing in our opinion precludes Congress from offering funds under the Affordable Care Act to expand the availability of health care, and requiring that States accepting such funds comply with the conditions on their use”); id. at 646 (Ginsburg, J., jointed by Sotomayor, J., agreeing with this aspect of the plurality opinion). Even the dissenting Justices agreed that “Congress could have made just the new funding provided under the ACA contingent on acceptance of the terms of the Medicaid Expansion,” although they disagreed with the majority about whether that funding condition was severable. Id. at 687-688 (joint dissent). And other courts have recognized the same distinction between conditions on the use of federal funds (which are permissible) and conditions that seek to leverage a grant of federal funds to require a State to undertake, or prevent it from taking, actions in another sphere. See, e.g., Gruver v. Louisiana Bd. of Supervisors, 959 F.3d 178, 183-184 (5th Cir. 2020); Mississippi Comm'n on Envtl. Quality v. EPA, 790 F.3d 138, 179 (D.C. Cir. 2015) (per curiam). The offset provision plainly falls into the first category: It is simply a “restriction on the use of [federal] funds.” 42 U.S.C. § 802(c)(2) (heading).

Even if NFIB had not foreclosed the argument, moreover, common sense refutes the notion that Congress loses its power to determine how grants will be used if the grants exceeds a certain (unspecified) size. For example, if Congress offered Kentucky or Tennessee a multi-billion dollar grant to build bridges and roads, the States could not seek to invalidate that condition and use the grant for other purposes simply because, given their present degree of economic hardship, they could not reasonably turn down the funds. There is no generosity exception to the rule that “[t]he power to keep a watchful eye on expenditures . . . is bound up with congressional authority to spend in the first place,” Sabri v. United States, 541 U.S. 600, 608 (2004).

CONCLUSION

The district court's judgment should be reversed.

Respectfully submitted,

BRIAN M. BOYNTON
Acting Assistant Attorney General
MARK B. STERN
ALISA B. KLEIN

DANIEL WINIK
Attorneys, Appellate Staff
Civil Division, Room 7245
U.S. Department of Justice
950 Pennsylvania Avenue NW
Washington, DC 20530
(202) 305-8849
daniel.l.winik@usdoj.gov