The Volokh Conspiracy

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Is Section 602(c)(2)(A) of the American Rescue Plan Act Constitutional?

This provision seems to prohibit states that accept billions of dollars in federal funds from reducing taxes prior to 2024.


Earlier this week, President Biden signed into law the American Rescue Plan Act. This law provides the states with more than $200 billion in aid. Of course, this money comes with strings. Section 602(c) imposes a series of requirements on how the funds can be used. Section 602(c)(1) provides permissible uses. For example, states can use the funds to cover costs in response to "to the public health emergency." By contrast, Section 602(c)(2) lists two categories of expenditures the funds cannot be used for. Section 602(c)(2)(B) addresses a common Republican criticism: the funds cannot be used to bail out pension funds. But Section 602(c)(2)(A) seems to limit a state's power to reduce taxes. It provides:

A State or territory shall not use the funds provided under this section or transferred pursuant to section 603(c)(4) 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 [from now till December 31, 2014] 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 New York Times reports that Section 602(c)(2)(A) was added late in the process. The intent was clear: to prevent Republican states from using the funds to offset tax cuts:

Democrats slipped the new language into the legislation last week after several senators from the party's moderate wing expressed concern that some states would seize on the opportunity to use emergency relief money to subsidize tax cuts. They worked with Senator Chuck Schumer, the majority leader, on language for the amendment, according to a Democratic Senate aide.

Senator Joe Manchin III, Democrat of West Virginia, explained why he pushed for the language in a briefing this week, arguing that states should not be cutting taxes at a time when they need more money to combat the virus. He urged states to postpone their plans to cut taxes.

"How in the world would you cut your revenue during a pandemic and still need dollars?" Mr. Manchin said.

Already, Republicans are objecting to this policy:

But some Republican-led states are pointing to the apparent prohibition as a violation of their sovereignty and calling for that part of the law to be repealed. They see the requirement that states refrain from cutting taxes as an unusual intervention by the federal government in state tax policy.

"It is an intrusion into what would traditionally be a state prerogative of how we balance our budget," said Ben Watkins, the director of the Florida Division of Bond Finance. "If they want to give us this money to deal with Covid, then they should just give it to us with no strings attached."

On Tuesday, the WSJ editorialized against the provision:

Wow. Democrats in Washington are trying to dictate to governors and state legislatures that they can't change their tax laws if they accept their share of the $1.9 trillion. The sweeping prohibition would last through 2024, and the bill grants Treasury Secretary Janet Yellen authority to write regulations "as may be necessary or appropriate to carry" it out.

The language is so expansive that states could be limited from making any changes to their tax codes that reduce revenue even if they don't use federal funds as direct offsets. Much will depend on how Ms. Yellen defines "indirectly." States that don't comply with her interpretation will have to repay federal funds.

Several states including West Virginia, Mississippi, Arkansas and Idaho are considering tax cuts to attract people and business. Some GOP legislatures also want to start or expand private-school choice programs that give tax credits to businesses and individuals that donate money for scholarships. Treasury could say these policies break the law. Beltway Democrats are essentially barring GOP-led states from improving their competitiveness against high-tax Democratic states.

Senator Braun of Indiana has already proposed legislation that would remove this restriction. But bicameralism and presentment is unlikely here. The far more likely path, of course, is litigation.

The Wall Street Journal questioned whether this provision is constitutional:

The constitutionality of this is open to question. The Supreme Court's "anti-commandeering" doctrine prohibits Congress from using federal funds to coerce states.

There are a few doctrines at play here. First, New York v. United States held that Congress cannot force states to enact legislation. Such a federal mandate would amount to unconstitutional commandeering. But New York held that Congress can create financial incentives for states to enact legislation. In other words, Congress can offer money to the states with strings attached.

The second doctrine stems from South Dakota v. Dole and NFIB v. Sebelius. The Court has recognized that the Constitution imposes limits on Congress's power to put strings on federal payments to states. To be precise, legislation that runs afoul of these limitations is not a "proper" exercise of federal power.

Dole identified four, and really five limits on the federal spending power. First, "the exercise of the spending power must be in pursuit of 'the general welfare.'" This factor is almost always satisfied.

Second, Congress must place conditions on the funds "unambiguously." States need to know what they are getting into when they accept federal money. Section 602(c)(2)(A) may have some ambiguity problems. It isn't entirely clear what type of state legislation is prohibited. Indeed, if this provision unambiguously restricts a state's power to reduce taxes, then it may run into other problems.

Third, the conditions must "relate" to "the federal interest" for which the spending program was established. Dole did not define how closely "related" the condition must be to Congress's "purpose." Justice O'Connor's dissent provided a more narrow test for "relatedness," or "germaneness." I suppose the federal government could contend that avoiding tax cuts is "related" to Congress's intent to help provide relief. Senator Manchin's comments suggest this intent.

Fourth, "[o]ther constitutional provisions may provide an independent bar to conditional grant of federal funds." For example, the Dole majority held held that the Twenty-First Amendment, which allows states to regulate alcohol, was not such a bar. In dissent, Justice Brennan found that the Twenty-First Amendment did impose a bar.

The Court also found that the federal highway spending program did not violate the Tenth Amendment. Dole explained that the Tenth Amendment operates differently in the context of conditional spending, than it does in the context of "congressional regulation of state affairs." For example, Oklahoma v. Civil Service Comm'n (1947) upheld the Hatch Act's restrictions on state employees, because Oklahoma accepted federal funds. Chief Justice Rehnquist wrote:

The State contended that an order under this provision to withhold certain federal funds unless a state official was removed invaded its sovereignty in violation of the Tenth Amendment. Though finding that "the United States is not concerned with, and has no power to regulate, local political activities as such of state officials," the Court nevertheless held that the Federal Government "does have power to fix the terms upon which its money allotments to states shall be disbursed." The Court found no violation of the State's sovereignty because the State could, and did, adopt "the 'simple expedient' of not yielding to what she urges is federal coercion. The offer of benefits to a state by the United States dependent upon cooperation by the state with federal plans, assumedly for the general welfare, is not unusual."

Rehnquist observed that the "independent constitutional bar" restriction is very, very narrow: Congress cannot force states to take unconstitutional actions.

These cases establish that the "independent constitutional bar" limitation on the spending power is not, as petitioner suggests, a prohibition on the indirect achievement of objectives which Congress is not empowered to achieve directly. Instead, we think that the language in our earlier opinions stands for the unexceptionable proposition that the power may not be used to induce the States to engage in activities that would themselves be unconstitutional. Thus, for example, a grant of federal funds conditioned on invidiously discriminatory state action or the infliction of cruel and unusual punishment would be an illegitimate exercise of the Congress' broad spending power. But no such claim can be or is made here. Were South Dakota to succumb to the blandishments offered by Congress and raise its drinking age to 21, the State's action in so doing would not violate the constitutional rights of anyone.

Would Section 602(c)(2)(A) run afoul of the "independent constitutional bar" doctrine? As defined by Dole, I doubt it. There is nothing unconstitutional about failing to reduce taxes. Still, it feels unsatisfying that Congress could use conditional spending programs to control a state's fiscal decisions–a core function of state sovereignty. These facts remind me of Coyle v. Smith (1911). In that case, Congress required Oklahoma to keep its capital in Guthrie, as a condition of statehood. Later, the state enacted a law to move the capital to Oklahoma City. The Court held that this federal law violated the so-called "equal footing doctrine." New states could not be treated worse than the original 13 states. In that opinion, the Court explained that this intrusion on state sovereignty, including its fiscal powers, was unconstitutional:

The power to locate its own seat of government and to determine when and how it shall be changed from one place to another, and to appropriate its own public funds for that purpose, are essentially and peculiarly state powers. That one of the original thirteen States could now be shorn of such powers by an act of Congress would not be for a moment entertained.

I need to give this position some more thought.

In addition to these four limitations, Dole identified a fifth factor: A condition becomes unconstitutional when "the financial inducement offered by Congress might be so coercive as to pass the point at which 'pressure turns into compulsion.'" Such coercion would, in effect, commandeer the state legislature to comply with the condition. In Dole, South Dakota would have only lost 5 percent of "certain federal highway funds." This incentive was "relatively mild encouragement." Therefore, the condition was constitutional.

In NFIB v. Sebelius, however, the Court found that the condition would run afoul of this fifth limitation. With the Medicaid Expansion, "pressure turn[ed] into compulsion." Chief Justice Roberts explained:

Spending Clause programs do not pose this danger when a State has a legitimate choice whether to accept the federal conditions in exchange for federal funds. In such a situation, state officials can fairly be held politically accountable for choosing to accept or refuse the federal offer. But when the State has no choice, the Federal Government can achieve its objectives without accountability, just as in New York and Printz. Indeed, this danger is heightened when Congress acts under the Spending Clause, because Congress can use that power to implement federal policy it could not impose directly under its enumerated powers.

How much money would the states have lost if they declined to expand Medicaid? The Chief observed that states could lose as much as 10% of their overall budgets:

Medicaid spending accounts for over 20 percent of the average State's total budget, with federal funds covering 50 to 83 percent of those costs . . . The threatened loss of over 10 percent of a State's overall budget, in contrast, is economic dragooning that leaves the States with no real option but to acquiesce in the Medicaid expansion. FN12

FN12 . . . More importantly, the size of the new financial burden imposed on a State is irrelevant in analyzing whether the State has been coerced into accepting that burden. "Your money or your life" is a coercive proposition, whether you have a single dollar in your pocket or $500.

Does the American Rescue Plan Act amount to "economic dragooning"? As a threshold matter, this law differs from NFIB in that states would not lose pre-existing funding. But states would be turning down significant sums of money. In NIFB, Arizona stood to lose about $8 billion for failing to expand Medicaid. A decade ago, that amount represented a quarter of the state's budget. According to the Tax Foundation, the American Rescue Plan Act provides Arizona with about $4.8 billion. Texas would stand to lose $16.5 billion. My quick googling suggests that Texas's annual budget is about $100 billion. If we take the percentages used in NFIB, Texas's loss could amount to "economic dragooning."

I'm sure we will hear far more about this provision.