Biden Stimulus Bill Provision Targeting State Tax Cuts Might be Struck Down by Courts for Same Reasons as Trump Efforts to Pull Federal Grants From Sanctuary Cities

In both situations, the grant conditions in question were not clearly and unambiguously authorized by Congress.


On Wednesday, the state of Ohio filed a lawsuit challenging the constitutionality of  Section 602(c)(2)(A) of the American Rescue Plan Act (ARPA), the $1.9 billion "stimulus" bill recently passed by Congress. Section 602(c)(2)(A) bars states and territorial government  that receive federal grants under the act (which includes a total of $350 billion in grants to state and local governments) from enacting tax cuts that are "directly or indirectly" offset by ARPA grants:

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, 2024] 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.

State attorneys general from 21 other "red" states have signed a letter complaining about this provision. It is likely that many of them will either join Ohio's lawsuit, or file cases of their own.

In my view, Ohio has a good chance of getting this provision invalidated in court. Ironically, the primary reason why is the same as that which led to the defeat of the Trump administration's efforts to use the threat of withholding federal grants to pressure sanctuary cities into cooperating with federal efforts to deport undocumented immigrants. In both cases, the requirement in question was never clearly authorized by Congress. In addition, it could be that the tax requirement is "coercive"—an issue that also came up in some of the Trump sanctuary city cases.

In cases such as Pennhurst v. Halderman (1981), and South Dakota v. Dole (1987) the Supreme Court has made clear that, if the federal government imposes conditions on grants to state governments, it must do so "unambiguously" in a statute enacted by Congress. The Trump administration suffered repeated defeats in the sanctuary city cases in large part because it tried to leverage vaguely worded statutes to impose conditions related to immigration enforcement that were nowhere near clear from the statutes themselves.

Much the same problem arises in this case. Section 602 does indicate that ARPA imposes at least some constraints on the enactment of tax cuts by recipient states. But it is far from clear exactly which ones, or what the penalty for noncompliance is. Ohio's complaint describes part of the problem:

The [tax condition] 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 ambiguity actually goes well beyond that. Among other things, it is not clear whether a change in tax rates or other relevant policies that was enacted before ARPA passed, but only takes effect during "the covered period" would qualify as a forbidden policy. Also, if a state violates the condition, it is not clear whether it stands to lose all of its ARPA grant money or only the part "offset" by the "reduction in net tax revenue." As co-blogger Josh Blackman notes, the Biden administration Treasury Department seems to have adopted the latter position, which is more generous to states than the former. But nothing in the text of the statute tells us which interpretation is correct.

And if the Treasury interpretation is right, there is also the question of how and when we calculate the amount of money the state must give back to the federal government. Estimating the amount of revenue lost as a result of a tax cut is is a complex business. Economists sometimes differ among themselves on the methodology. In some instances, as Ohio notes, a tax cut might even increase revenue rather than reduce it. Whether a cut results in a decrease in revenue and by how much may not be known for several years. Even then, experts might still differ on how much of the loss was due to the tax cut and how much to changes in background economic conditions.

The text of Section 602 doesn't resolve any of these ambiguities. And, as the Trump administration found in the sanctuary city cases, the gaps cannot be filled by the executive branch making up its own answers. If the executive can use vague statutes to impose its own grant conditions on state governments, it would give the president dangerous leverage to pressure the states and usurp Congress' power of the purse, thereby undermining both federalism and the separation of powers. That was true of Trump's assault on sanctuary cities, and Section 602 raises the same problem.

So far, at least, the Biden administration isn't adopting the most aggressive possible interpretation of Section 602 (as Trump tried to with the authorizing statutes for grants he sought to pull from sanctuary cities). But no administration should have the power to, in effect, make up grant conditions that were never authorized by Congress.

The ambiguous nature of the Section 602 condition is its biggest legal vulnerability. But Ohio also plausibly argues that the condition is coercive:

This scheme violates the Spending Clause, because the "financial inducement" the Act offers "to the States … is much more than 'relatively mild encouragement'" of the sort the Spending Clause permits—instead, "it is a gun to the head." NFIB [v. Sebelius], 567 U.S. at 580–81 (op. of Roberts, C.J.)…. The Act requires every State to choose between money it cannot refuse and limits on its sovereign authority. 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…. 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.

In NFIB v. Sebelius (2012)—Obamacare case—the Supreme Court belatedly gave some teeth to the longstanding principle that conditions on federal grants to state governments cannot be so onerous as to be "coercive." Similarly, at least one lower court ruling invalidated Trump's January 2017 executive order seeking to pull federal grants from sanctuary grants, in part on the grounds that its attempt to pull virtually all federal funds from them was coercive.

Despite the use of the colorful metaphor of a "gun to the head," Chief Justice John Roberts notoriously failed to make clear exactly when the amount of money at stake becomes so large that the state has no real choice but to accept. Ohio is right to point out that the ARPA grants it stands to lose amount to some 7.4% of its total spending, which is arguably in the same ballpark as the "over 10 percent" states stood to lose in NFIB. On the other hand, ARPA is a one-time grant, which the loss of Medicaid funding imposed by the Affordable Care Act would have been repeated every year. Moreover, despite Ohio's claim that the economic crisis makes refusal impossible, most states actually have not suffered major revenue losses over the last year, and many (including Ohio itself) have actually gained tax revenue.

Thus, ARPA is not as obviously an offer the states can't refuse, as the ACA was (or Trump's 2017 sanctuary cities order). But even if it is not a gun to the head, it is still a large amount of money—perhaps enough to be a dagger to the groin. Whether that is enough to cross the line into "coercion" remains to be seen. We may not know unless and until the case gets to the Supreme Court, and the justices deign to enlighten us on that point.

If it were up to me, I would dump the vague and subjective "coercion" test entirely and instead replace it with more vigorous enforcement of the original meaning of the requirement that federal grants may only be used "to pay the Debts and provide for the common Defence and the general Welfare of the United States" (which, contrary to modern mythology, does not cover anything Congress might think is potentially beneficial in some way). But the coercion rule is a second-best principle preferable to simply allowing Congress to enact any conditions it wants. And, regardless of what I might think, it has been adopted by the Supreme Court, and is unlikely to be done away with anytime soon.

There is more than a hint of "fair weather federalism" in this litigation. Many, perhaps most, of the "red state" officials who support Ohio's position had no objection to Trump's efforts to use federal grants to pressure sanctuary cities. For their part, many Democrats who backed legal challenges to Trump's sanctuary city policies, are happy to back the ARPA conditions (though some on the left did engage in more systematic rethinking of federalism in the Trump era).

More generally, Ohio and other red states objection to the ARPA tax condition seem happy to get federal funds, so long as there are no unpleasant conditions attached. Given the generally modest impact of the Covid crisis on the fiscal condition of most states, it would be better to do away with the ARPA grants entirely. A giant handout for states, regardless of any real need, promotes dependency and creates incentives for future profligacy. That's good for state employees (including the present author!), but bad  for the future of federalism.

Be that as it may, the ignoble motives of many of the politicians involved don't change the constitutional issue. The tax condition likely violates the requirement that federal grant requirements must be "unambiguous." There is also a solid—though much less conclusive—argument that it is "coercive." At the very least, this case is likely to prove an uphill struggle for the Biden administration.

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  1. Yeah. Denying grants to sanctuary cities was always a long shot constitutionally.

    Trying to tell states they can’t make tax policy is similar. Democrats have the advantage of dishonest judges though, so they might get away with it for a while.

    1. Seems kind of strange we have a country where a President can sign an executive order stopping a international pipeline specifically authorized by congress, sign a treaty purportedly with enforceable emissions reduction targets without congressional assent, direct the CDC to enact a nationwide eviction moratorium, yet can’t put restrictions on competitive police grants that prioritize departments that cooperate with legal requests from the federal government.

      1. The right answer, of course, is that none of those should be possible.

        1. The right answer is that much of what kazinski says is false. For example, the president did not “sign a treaty purportedly with enforceable emissions reduction targets.”

          1. Eh, he’s obviously talking about the Paris climate accord, which Obama did commit to without sending to the Senate for ratification, and which I believe Biden has recommitted us to. ‘Enforceable’ might be questionable (as the accord isn’t enforceable in and of itself, but executive agencies have plenty of latitude to do much in the way of relevant enforcement should the president desire it). The degree to which his statement is false is rather small.

            The other ones are straight up true. Biden did end the Keystone pipeline, which i recall was authorized by Congress. Biden has extended the eviction moratorium, and Trump originally directed it.

            None of these things should have been within the president’s power to do.

            1. Okay, my memory is slightly faulty on the Keystone pipeline. Obama vetoed the bill, and the senate couldn’t quite get to 2/3. I’m still not sure why the keystone pipeline’s route through Nebraska is a federal issue, as the pipeline already exists in the Dakotas. It should literally be a matter for the state of Nebraska to decide, not a matter of national politics.

              1. And stopping it because you want to hamper oil production, the real political motivation, and not local environmental issues of the pipeline itself, is also dishonest, but that’s lawyers and politicians for you. You get the honor of lying with official cover reasons. All hail “democracy”!

                1. Both reasons are pretty good reasons, though.

                  1. Not really. They just ship it by rail now, which is even worse for the environment, and the oil is still being produced.

                    1. Cut it off at the source.

              2. That’s right, Obama vetoed Congress’s attempt to take the reins. He argued that under existing law it was a regulatory matter for the executive branch to decide and he was going to keep it that way. Trump later issued a permit by executive order (specifically, to allow construction of facilities at the Canada/US border), and that was the permit Biden revoked on his first day in office.
                Domestic oil pipelines are subject to both federal and state regulation. Since oil is environmentally hazardous some federal authority exists even regarding intrastate transport, but the FERC gets involved too when interstate. The number of officials who have to say yes before anything can happen is impressive.

                1. ‘Are’ is not the same as ‘should be’. And just because its potentially hazardous really shouldn’t make it a federal issue.

                  (The alternative, shipping said oil by rail, is even more hazardous, so extra bonus – prohibiting the pipeline fails any sort of ‘minimize hazard’ calculus).

                  But none of this explains why the keystone pipeline needed a state department permit because it ‘crosses the border’, when it *already crosses the border*.

                  1. The pipeline needs lots of approvals. Some for crossing the international border, some for crossing interstate borders, some for wildlife safety, some for stream and aquifer protection. Trump issued one permit that Biden revoked, but that wasn’t by any means the only permit the project required.

                    In Sierra Club v. US Army Corps of Engineers DC Circuit judge Cornelia Pillard summarizes the “is” of the matter for us:

                    The U.S. Secretary of State must approve oil pipelines that cross international borders, see Exec. Order 11,423, 33 Fed. Reg. 11,741 (Aug. 16, 1968), but that requirement is inapplicable to wholly domestic pipelines. Separately, the Pipeline and Hazardous Materials Safety Administration (PHMSA) within the U.S. Department of Transportation must approve oil spill response plans under the Oil Pollution Control Act of 1990 for pipelines that might spill oil into navigable waters or the shoreline, see 33 U.S.C. § 1321(j)5)(A)(i), (C)(iv), (G); Executive Order 12,777, 56 Fed.Reg. 54,757, 54,760 (Oct. 18, 1991), 49 C.F.R. § 194.7, but there is no claim here PHMSA must approve a response plan before a pipeline can be built and begin operating.
                    Notwithstanding the absence of any general permitting requirement for domestic oil pipelines, federal ownership or control of lands and other assets, as well as resource-specific environmental statutes such as the Clean Water Act, often do call for federal approvals before an oil pipeline can be built. Where there is federal action, NEPA requires governmental review, with public input, of the full range of such action’s reasonably foreseeable direct or indirect environmental effects. Federal actions subject to NEPA include federal authorizations granted to private parties, such as oil pipeline construction companies.

                    Now as you say “is” and “should be” are not the same, but which of these items do you want to change? Should there not be a Clean Water Act or an Oil Pollution Control Act? Should the federal government have no say when pipelines cross federal land? How do you plan to run your campaign?

                    1. Well, let’s start with there shouldn’t be vast tracts of federal land to begin with. Turn it over to the states, or sell it to the public – the constitution nowhere gives the federal government the power to manage wilderness. Based on the constitution, the federal government only has power to own post offices, roads, forts, arsenals, naval yards, and the capitol (now Washington DC). (Article 1 Section 8 also includes ‘other needful buildings, which would presumably cover federal court houses – something the founders wouldn’t have seen a need for, since the only one explicitly required under the constitution would be in the capitol. And similar covers federal office buildings. But it only covers *buildings* – wilderness is no such thing).

                      Then: a permit to cross an international border? Fine. But it’s already crossed! Just because it already crosses that border doesn’t mean they should need a new permit to cross the border whenever they want to adjust their pipeline within the US. The actual border crossing was already settled.

                      As to interstate borders – this should primarily be a negotiation between the states themselves, with the federal government acting as arbiter when necessary. The point of the commerce clause was to prevent the states from imposing internal burdens on commerce, which is how the federal government should step in as arbiter. (Yes, 99% of modern commerce clause jurisprudence is simply wrong).

                      And all that means there probably shouldn’t be a Clean Water Act or an Oil Pollution Act – certainly not as they exist today. Most likely, these things should be handled at the state level, either internally, or by compact between states where appropriate.

                    2. Article IV Section 3:

                      The Congress shall have Power to dispose of and make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States

                      is generally taken as clear authority that the United States may own Territory or other Property to make rules about.

  2. I’m curious which motives Mr. Somin considers noble and which ignoble…

    1. Yes — it’s not “fair weather federalism” to say that the court rulings that you got when our guy was in power should also apply to your guy.

      Instead, it’s — perish the thought — considering the law to be objective. Rule of precedent and all of that fun stuff…

      1. I’ve been warning both sides for four years, things will flip and all your no holds barreled new cleverness will be turned against you…and amplified.

        Part of their unending unconstitutional investigation using the power of government against a political opponent was driven by the Republicans doing the same for Bill Clinton. And it’s clear the rights hero here wss not above the same, from “Lock her up!” through “whatever”.

        The amount of popcorn consumed watching partisans flip flop flip in their unending situational ethics, grinding principles underfoot looking for power, has a greater effect on corn prices than ethanol.

        1. Remember: Edit, then save. Edit, then save.


  3. The Trump administration suffered repeated defeats in the sanctuary city cases in large part because it tried to leverage vaguely worded statutes to impose conditions related to immigration enforcement that were nowhere near clear from the statutes themselves

    Professor Somin might ultimately be right that ARPA’s tax cut prohibition will be struck down as ambiguous. However, I don’t think the resolution is clear based on the sanctuary city cases because the Trump administration initially argued to condition funding where Congress was totally silent. In contrast in the ARPA case, Congress spoke but not at all clearly. Perhaps an agency regulation that implements the ambiguous text saves the statute. In contrast, there was no statutory text at all to support the funding conditions in the sanctuary cases.

    Also, if the loss of funding is limited to the size of the tax cut, that ought not be coercive. On the other hand as Somin points out, knowing ahead of time the size of the tax cut may be hopelessly ambiguous.

    1. ” the Trump administration initially argued to condition funding where Congress was totally silent.”

      As I recall, the administration argued that the grant legislation did require recipients to be in compliance with “all applicable federal laws”, and that immigration laws were applicable to the states, and all meant all, so that any jurisdiction which wasn’t in compliance with ANY federal law, including immigration laws, could be denied a grant.

      1. EO 13768 stated

        the Attorney General and the Secretary, in their discretion and to the extent consistent with law, shall ensure that jurisdictions that willfully refuse to comply with 8 U.S.C. 1373 (sanctuary jurisdictions) are not eligible to receive Federal grants

      2. Apparently they didn’t try that argument before the Ninth Circuit, who had this to say on the subject:

        Here, the Administration has not even attempted to show that Congress authorized it to withdraw federal grant moneys from jurisdictions that do not agree with the current Administration’s immigration strategies. Nor could it. In fact, Congress has frequently considered and thus far rejected legislation accomplishing the goals of the Executive order. The sheer amount of failed legislation on this issue demonstrates the importance and divisiveness of the policies in play […]. Not only has the Administration claimed for itself Congress’s exclusive spending power, it has also attempted to coopt Congress’s power to legislate.

        1. Trump Wins Second Circuit Case Against Sanctuary Cities, in Ruling that Goes Against Broad Consensus of other Court Decisions

          “Judge Reena Raggi’s opinion for a unanimous panel concludes that the condition of obeying Section 1373 is authorized by a law requiring Byrne grant recipients to obey “all applicable federal laws.” Other courts that have considered the issue have ruled that “applicable federal laws” includes only those that specifically apply to recipients of federal grants, not all federal laws that regulate state and local governments in some way. But Judge Raggi adopts the much broader interpretation:”

          Really, they did advance that argument, it’s just that the 9th circuit rejected it.

          1. I made a claim about the proceedings at the Ninth.
            The linked opinion from the Ninth says that the government “has not even attempted” to show that Congress had authorized withholding funds in its argument before the Ninth.

            Your rebuttal refers to arguments made before the Second.

            To not put too fine a point on it: 2 != 9

  4. The more Porkulus II: Covid Boogaloo gets savaged in court, the better.

    1. Don’t even balanced budget states have an escape clause for 2/3 supermajority of their legislatures?

      Which, by the way, I still recommend against. You hacks want this power for kickback reasons and tips*, now earn it making the hard decisions.

      * When pointed out, one large government fan stated that graft and kickbacks were ok in the long run because the net effect was [wonderful unicorns for The People].

  5. What is coercive about either taking the money or not taking the money?? If a state can cut taxes they obviously don’t need to federal funds. So expanding Medicaid injected billions into state health care systems but states rejected it because they didn’t want to pretend to increase taxes…so the deal was increase taxes or you don’t get $9 for every $1 of tax increase.

    1. States should not heave their debt onto the federal government. It has enough problems.

    2. “What is coercive about either taking the money or not taking the money?”

      When dealing with such large amounts of money (IE, ~10% of entire state budgets) the funding itself becomes coercive. It’s especially notably that the funding ultimately comes from the state’s citizens, and the coercion is something the federal government couldn’t do independently (IE, control a state’s taxation policy) But, let’s put this in context for you.

      The federal government offers you $50,000 a year in a tax “rebate”. But…as a condition, you have to give up a fundamental right…say the right to vote. Is such “funding” coercive? The government isn’t taking away your right to vote. You’re just “choosing” to do it, as a condition of getting the funding. And you can choose to vote, if you want…you just need to give back all the money.

      You start to see the problems inherent?

      1. I would love for the federal government to offer $50,000 a year in tax rebate to Democrat Party voters in exchange for permanent sterilization. It would fix America’s problems within 25 years.

  6. Sounds like a load of Lawyers Cockswaddle to me.

  7. I predict that the first time the supreme court invalidates a progressive component of any new legislation, it will lead to a lot of discussion about ending the filibuster for the specific reason of packing the supreme court. Whatever will Joe Manchin do?

  8. Hmmmm “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, 2024] 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.”

  9. A key difference between the cases is that California had specific laws and policies against which the Trump Administration had made specific threats of enforcement, creating the kind of concrete interest that gives rise to an Article III case or controversy.

    But nothing like this exists in the Ohio case. Perhaps the Ohio legislature will, at some unknown time in the future, pass a tax cut. Perhaps not. Perhaps the Biden administration will, at sometime in the future after that, threaten or commence an enforcement action. Perhaps not.

    There is no concrete case or controversy at all. Ohio has no standing to sue. It is seeking an advisory opinion from the federal courts, nothing more.

  10. Is there a difference between an “unambiguous” provision and an “unclear” provision?

    It seems to me that the statute is unambiguous in its intent and wording; it is unambiguous as the term is generally used in statutory interpretation, “capable of having two or more meanings; however, it is perhaps unclear.

    It would seem to me that it is possible for a statute to be unambiguous but still have sections that are unclear.

    1. It’s the usual, “Anytime we don’t like the clear meaning of a statute it must be ambiguous” approach to statutory language.

  11. Seems like Ohio’s case is a lot vaguer than the Biden stimulus bill. A judge who rules speculative harms are sufficient in this case to overturn the law would in-effect be ruling generally against federal conditions on use of federal funds. To reliably pass court scrutiny, all federal aid to states would have to be do-what-you-want-with-it unconditional grants—the more so if the grants were large. The bigger the grant, the less the feds can say about what to do with it.

    Plus which, the state’s argument seems conditioned on the notion that it is entitled to specific return of money its citizens pay in federal taxes. Absent that argument, there is no harm to the state in sight. So the case becomes an argument that the federal government may not tax Ohioans at all, unless it gives the money back without conditions.

  12. Ohio and the others are as desperate for the money as any, which always made the GOP’s attempt to turn it into a Blue State Money Grab extra bizarre. Now, in a manner similar to the budget surplus Dubya inherited, rather than think long term these Red States want to use the pandemic money to even out their budgets and declare there’s no need to collect taxes because the budgets are evened out. From what I’ve read, and considering the “conservative” turn of our judiciary, this lawsuit will get them there.

    1. No one is “desperate.” Tax revenues came in nearly as high as they were last year. It’s a blue state pension bailout.

      1. Then they can refuse the money and cut their taxes at will, can’t they? No need for the lawsuit at all.

  13. Where is the live case or controversy? Let Ohio take the money, then cut taxes and then sue after the Feds try to claw back. Before that its just hypothetical.

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