The Volokh Conspiracy
Mostly law professors | Sometimes contrarian | Often libertarian | Always independent
On Saturday, I blogged about Section 602(c)(2)(A) of the American Rescue Plan Act. I questioned whether this conditional spending program was constitutional. On Tuesday, twenty-one Republican Attorneys General wrote to Treasury Secretary Yellen. And they asked many of the questions I posed. The letter was spearheaded by the Attorneys General of Georgia, Arizona, and West Virginia.
Here is the introduction:
The undersigned State Attorneys General request that the Department of the Treasury take immediate action to confirm that certain provisions of the American Rescue Plan Act (the "Act") do not attempt to strip States of their core sovereign authority to enact and implement basic tax policy. Those provisions, found in section 9901 of the Act,1 forbid States from using COVID-19 relief funds to "directly or indirectly offset a reduction in … net tax revenue" resulting from state laws or regulations that reduce tax burdens—whether by cutting rates or by giving rebates, deductions, credits, "or otherwise[.]"2 This language could be read to deny States the ability to cut taxes in any manner whatsoever—even if they would have provided such tax relief with or without the prospect of COVID-19 relief funds. Absent a more sensible interpretation from your department, this provision would amount to an unprecedented and unconstitutional intrusion on the separate sovereignty of the States through federal usurpation of essentially one half of the State's fiscal ledgers (i.e., the revenue half). Indeed, such federal usurpation of state tax policy would represent the greatest attempted invasion of state sovereignty by Congress in the history of our Republic.
I think the easiest way for the states to win is under Pennhurst: there is no clear statement of what the condition requires:
First, if the Tax Cut Prohibition were interpreted to place any limits on how States could enact tax relief not directly connected to the relief funds provided by the Act, it would impose a hopelessly ambiguous condition on federal funding. The examples listed above make the point: how is a State to know, when accepting the relief funds, whether any of these kinds of commonplace and sensible tax relief measures are "indirectly" offset by COVID-19 relief funds? Is it enough that the funds help balance a state budget that also contains tax relief measures? What if the presence of relief funds in 2021's budget effectively frees up funds to offer tax relief in 2022? Absent a clear and narrowing construction by Treasury regulation, States cannot possibly know the bargain they are striking in accepting the relief funds. Yet the "legitimacy of Congress' power to legislate under the spending power … rests on whether the State voluntarily and knowingly accepts the terms of the 'contract.'" Pennhurst State School and Hospital v. Halderman, 451 U.S. 1, 17 (1981).
The letter asks the Secretary for clarification of how the policy will be interpreted.
Given the foregoing, we ask that you confirm that the American Rescue Plan Act does not prohibit States from generally providing tax relief through the kinds of measures listed and discussed above and other, similar measures, but at most precludes express use of the funds provided under the Act for direct tax cuts rather than for the purposes specified by the Act. In the absence of such an assurance by March 23, we will take appropriate additional action to ensure that our States have the clarity and assurance necessary to provide for our citizens' welfare through enacting and implementing sensible tax policies, including tax relief.
The emphasized text means a lawsuit, probably in the 11th or 5th Circuit. The Biden administration should tread carefully here. If it takes a hardline position, the executive branch may suffer a huge defeat at the Court.