A group of 13 state attorneys general on Wednesday filed a federal lawsuit against the Biden administration, claiming that a provision in the $1.9 trillion COVID-19 stimulus bill recently signed into law illegally impinges upon the states’ authority to control their own tax policies in violation of the Tenth Amendment.
Led by Alabama Attorney General Steve Marshall (R), the complaint alleged that language in Federal Tax Mandate provision of the American Rescue Plan Act of 2021 (ARPA) prohibits states from using the stimulus funds to “offset a reduction in the net tax revenue” effectively bars states from implementing tax cuts for up to three years. Any funds deemed by the Treasury Department to have been misspent on tax cuts is subject to recapture.
“The Federal Tax Mandate thus usurps the ability of the Plaintiff States’ citizens to reduce their tax burdens and creates an impermissible chilling effect on their elected officials’ willingness to do the same—based on a threat that the federal government may claw back some or all of the States’ share of critical ARPA funding,” the complaint stated. “Never before has the federal government attempted such a complete take-over of state finances. The Federal Tax Mandate steps well beyond the constitutional bounds set forth in Article I of the Constitution and the Tenth Amendment to the Constitution, and offends the dignity of co-sovereign States in our federal system.”
Filed in the U.S. District Court for the Northern District of Alabama, Marshall was joined in the lawsuit by the attorneys general of Alaska, Florida, Iowa, Kansas, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota, West Virginia, and Utah. Treasury Secretary Janet Yellen and Department Inspector General Richard K. Delmar were also named as defendants in their official capacity.
According to the suit, the provision in question forces states to make “an untenable choice” between relinquishing control over their “inherent sovereign powers” or forfeiting “massive and much-needed aid that represents approximately 25%” of the states’ annual budgets.
The AGs are seeking to have the court declare ARPA’s Federal Tax Mandate unconstitutional and enjoin Treasury from enforcing the provision.
Earlier this month, all of the plaintiff state AGs signed a letter to Yellen expressing concern about the tax provision and requesting clarification regarding how Treasury would interpret the policy. In response, Yellen responded, saying the law did not forbid states that accept funds from cutting taxes, the law only prevented states from using stimulus funds to offset the cost of such tax cuts.
“It is well established that Congress may place such reasonable conditions on how States may use federal funding. Congress includes those sorts of reasonable funding conditions in legislation routinely, including with respect to funding for Medicaid, education, and highways,” she wrote. “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. If States lower taxes but do not use funds under the Act to offset those cuts — for example, by replacing the lost revenue through other means — the limitation in the Act is not implicated.”
Read the full lawsuit below:
[image via YouTube screengrab]
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