The Volokh Conspiracy

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Breaking: Ohio Challenges Constitutionality of American Rescue Plan Act (Updated)

"The Tax Mandate thus gives the States a choice: they can have either the badly needed federal funds or their sovereign authority to set state tax policy. But they cannot have both. In our current economic crisis, that is no choice at all. It is a metaphorical 'gun to the head.'"


Yesterday, I noted that 21 State Attorneys General threatened to challenge the American Rescue Plan Act. They alleged that a conditional spending provision was inconsistent with South Dakota v. Dole. Missing from that list was Ohio. Now we know why.

Today, the Ohio Attorney General filed suit against Secretary Yellen and the Treasury Department. The Buckeye State seeks a preliminary injunction.

Here is the introduction:

The Tax Mandate bars States that take money under the Act from using that funding to "directly or indirectly" offset revenue loss from tax reductions. Id. (emphasis added). But since "[m]oney is fungible," Holder v. Humanitarian Law Project, 561 U.S. 1, 37 (2010), any money that a State receives through the Act will necessarily offset, either directly or indirectly, every tax reduc-tion that the State might pursue. The Tax Mandate thus gives the States a choice: they can have either the badly needed federal funds or their sovereign authority to set state tax policy. But they cannot have both. In our current economic crisis, that is no choice at all. It is a metaphorical "gun to the head." Nat'l Fed'n of Indep. Bus. v. Sebelius ("NFIB"), 567 U.S. 519, 581 (2012) (op. of Roberts, C.J.).

This coercive offer of federal funds violates the Constitution. The Spending Clause empowers Congress to "provide for"—that is, to spend money in support of—the "general Welfare." Art. I., §8. c.1. But while "Congress has substantial powers to govern the Nation directly, including in areas of intimate concern to the States, the Constitution has never been understood to confer upon Congress the ability to require the States to govern according to Congress' instructions." New York v. United States, 505 U.S. 144, 162 (1992). And Congress may not circumvent that limitation by using its spending power to "indirectly coerce[] a State to adopt a federal regulatory system as its own." NFIB, 567 U.S. at 578 (op. of Roberts, C.J.). That is precisely what the Tax Mandate attempts to do: it seeks to "drive the state legislatures under the whip of economic pressure into the enactment" of Congress's preferred tax policies. Stew-ard Mach. Co. v. Davis, 301 U.S. 548, 587 (1937).Congress exceeded its constitutional authority when it passed the Tax Man-date. The Court should enjoin the provision's enforcement, at least in its application to Ohio.

The relief bill would give Ohio about $5.5 billion, which translates to roughly 7.4% of the Ohio's total expenditures. Definitely in the 10% ballpark referenced in NFIB.

In NFIB, the Court determined that the Medicaid expansion coerced the States because it "threatened" to deny States funding equal to "over 10 percent of" their "overall budget[s]" unless they agreed to expand their Medicaid programs. 567 U.S. at 582. The Act is similarly coercive: Ohio will be denied funding equal to 7.4 percent of its total expenditure in 2020—funding the State badly needs in an economic crisis—unless it agrees to limits on its power to tax.

The suit also explains that the condition flunks the Pennhurst test:

The Tax Mandate is far from "unambiguous." What changes to tax policy that cause a decrease in net revenue are "indirectly" offset by funds acquired through the Act? Unless the answer is "every change to tax policy," neither the English language nor economic theory provides an answer. And how does one know whether a change to tax policy causes a net reduction in revenue? For example, if revenue would have decreased even further but for a tax cut, would the tax cut still violate the Mandate? The Tax Mandate does not answer these questions. As a result, the conditions it imposes are too ambiguous to be upheld under the Spending Clause.

The Biden Administration may not be ready for this suit. At present, there is no confirmed Solicitor General. Acting Solicitor General Prelogar has spent all her time flipping positions before the Supreme Court. I'm sure Roberts is seething. And I have no clue who is running the Office of Legal Counsel. Someone in the White House must know this case is a loser. And even if Secretary Yellen issues some favorable guidance, I don't think Ohio's injury will be satisfied. An agency cannot avoid a Pennhurst problem through Chevron deference. In other words, if the spending provision is ambiguous, the government cannot cure that separations of powers problem through guidance documents. The remedy for an ambiguous spending provision is to declare it unconstitutional. Merrick Garland knows all too well how this case will end.

Update: A Treasury Department spokesperson gave a statement to the New York Times:

But the Treasury Department said on Wednesday that if a state that took relief money cuts taxes, that state must repay the amount of lost revenue from those cuts to the federal government.

"It is well established that Congress may establish reasonable conditions on how states should use federal funding that the states are provided," said Alexandra LaManna, a Treasury spokeswoman. "Those sorts of reasonable funding conditions are used all the time — and they are constitutional."

She added that the new law "provided funds to help states manage the economic consequences of Covid-19, and gave states flexibility to use that money for pandemic relief and infrastructure investments."

The Treasury Department rejected the idea that the provision, which was added to the relief legislation at the last minute, was prohibiting states from cutting taxes. States are free to decline the federal funds, or they can repay the money if they are in fiscal shape to cut taxes.

"The law does not say that states cannot cut taxes at all, and it does not say that if a state cut taxes, it must pay back all of the federal funding it received," Ms. LaManna said. "It simply instructed them not to use that money to offset net revenues lost if the state chooses to cut taxes. So if a state does cut taxes without replacing that revenue in some other way, then the state must pay back to the federal government pandemic relief funds up to the amount of the lost revenue."

That is one interpretation of the statute, but not the only one. Indeed, I'm not even sure that's the best reading. Putting the word "simply" in the sentence is misleading. I really dislike the word "simply," and its close cousin, "clearly." These are word designed to obfuscate legal argumentation.

We also learn that West Virginia is working on a suit. But I am confident this case will not be brought in the Fourth Circuit:

More lawsuits could soon follow. Attorney General Patrick Morrisey of West Virginia said such action would include seeking a court ruling "that the unprecedented and micromanaging provision violates the U.S. Constitution."

At a briefing with reporters on Wednesday, Mr. Morrisey said he had been working on a draft of a complaint. He has been talking to other states about the mechanics of the legal challenge and where it should be filed.

"There are huge legal and constitutional problems with this provision," Mr. Morrisey said. "This may be one of the greatest attempted invasions of state sovereignty by Congress in the history of our Republic."