SDOH Finds That Tax Mandate of American Rescue Plan Act Likely Unconstitutional

The Court declined to enter a preliminary injunction, but set an expedited briefing schedule for a permanent injunction.

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In March, I wrote about a potentially-unconstitutional aspect of the American Rescue Plan Act. This omnibus statute imposes a conditional spending program. As I read the law, states that accept federal funds may be barred from reducing taxes. Nearly two dozen attorneys general asked the Treasury Department for clarification. Ohio went ahead and sued the feds.

Today, Judge Douglas Cole of the Southern District of Ohio found that Ohio was likely to prevail. Judge Cole stated that "the conceded ambiguity in the Tax Mandate, as written, establishes that Ohio has a substantial likelihood of showing that the ARPA violates the Spending Clause." But the court denied the state's request for a preliminary injunction. There is no immediate threat of enforcement, so interim relief is premature. The court set an expedited briefing schedule for a permanent injunction.

As I anticipated, the Court's analysis focuses on the "ambiguous" element of the Dole test. There is no need to determine coercion, if the terms of the program are unclear. The Court also addresses a point I raised back in March: can the Treasury Department cure an ambiguous statute through regulations? My tentative answer was no. And Judge Cole seems to agree:

Second, and more fundamentally, it is not at all clear that the Secretary can ever cure a Spending Clause ambiguity program, even through final regulations. As noted above, it may be the case that, because the Spending Clause is an Article I power, it is Congress, not Executive Branch officials, that must provide the requisite clarity.

This last issue is worth clarification by the Supreme Court.

Stay tuned. The permanent injunction briefing should be completed by mid-June.

NEXT: Sixth Circuit Rules Property Owners Can go to Federal Court to Argue Takings Clause Bars Seizure of Home Equity in Cases Where Property is Foreclosed to Pay off Tax Delinquencies

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  1. I think regulations are at least potentially relevant to Pennhurst type Spending Clause cases.

    Standing in Pennhurst cases requires establishing that the federal government will enforce a requirement that the state wasn’t aware of and didn’t consent to. So if there’s a regulation saying the federal government won’t force the requirement in the manner the state says it will, that cuts against the standing claim.

    It may be the case that the statute itself has to say what the rules are. But the state only has standing if there’s a likelihood the federal government will cut off its funding. If it won’t, the situation is much like any other unenforced law. Only enforced laws are subject to having their comstitutionality challenged, because only endorced laws confer standing. And regulations are relevant to the likelihood of enforcement inquiry.

    1. Only enforced laws are subject to having their comstitutionality challenged, because only endorced laws confer standing.

      You would think so. And yet a bunch of conservatives bought the claim that there was standing to challenge the zeroed out penalty of Obamacare.

      1. What about standing from the fear of enforcement?

    2. I’m not sure that’s actually right. Or appropriate. If the government states an intent to enforce (and the Trump precedents say that even informal tweets can meet that standard) and if the government has nothing preventing it from arbitrarily turning that intent on and off, then other precedents say that can be good enough to confer standing.

  2. Section 602(c)(2)(A) 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 (sic)] 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.

    I don’t see how this is unconstitutional.

    Congress can set whatever conditions they want and states can accept or not.

    I do agree in practice this law is highly problematic, e.g. would ANY state tax cut or fee reduction be covered?

    If a state’s DMV reduced the license fee from $25 to $10, would that count?

    1. There are two factors regarding the unconstitutionality: Vagueness and Coercion.

      1. Vagueness. If a law is sufficiently vague that it may chill constitutionally protected behavior, it is unconstitutional. The classic example is if Congress passed a law that banned “bad behavior”, punishably by 20 years in prison. What’s “bad behavior”? It’s left undefined. So, an FBI agent comes up and says “better testify, or I’ll get you under the bad behavior law”? The very vagueness makes it unconstitutional.

      2. Coercion. When a large chunk of a state’s funding is dependent on the state agreeing to give up part of its constitutional rights (like its rights to control its own taxation policy), it’s viewed as coercion, intruding too far into the separation of powers, and is unconstitutional.

      1. Thanks.

        I agree 1. might apply.

        Not sure if 2. does.

        1. Regarding point 2.

          So, the classic example there is the ACA Medicaid expansion. The federal government said to the states “you either fund part of this new Medicaid expansion, or we’ll strip all of your current federal Medicaid funding.” The courts ruled that was coercive, and violated separation of powers. One reason it was coercive was because it was such a large amount of the state budgets.

          Now the ARPA just provided $26 Billion to California in funds. California ALSO just announced a massive $12 Billion tax rebate to it’s citizens. Does California now have to refund the entire $26 Billion to the Treasury?

          1. Ok, someone explain this. CA has a balanced budget requirement. Last year they were screaming unheard of debt due to collapsed revenue from covid. But they have a $12 billion surplus this year?

            1. It’s booming capital gains taxes. There is a Apr 28 NYT article headlined “California Is Awash in Cash, Thanks to a Booming Market”.

              Apparently the plan is to send out another set of (state, not federal) stimulus checks.

              If you can’t lower state taxes, is it OK to send out stimulus checks instead?

              1. Yes, if you’re a Democrat run state, and the administration issuing orders to the DOJ is a Democratic administration. Most of the point of this provision was to allow selective enforcement, after all.

            2. State balanced budget requirements usually have loopholes allowing borrowing or incurring future obligations, bigger loopholes in some states than others. I suspect California’s loopholes are bigger than most.

              Anyway, they’ve got a surplus they need to hand out to the citizens because Newsom is facing a recall, and wants to buy some votes. Simple as that.

    2. Yeah the wording is fairly broad. I think that is the problem.

      But I understand why its there? I can imagine some logic for it (not the one they used) is: hey, here is some money to offset shortfalls due to destroying the economy, however, if the economy is less destroyed than it should be then please don’t pump all the money into the economy via tax cuts that would be bad.

      If you think the G multiplier is greater than the T multiplier, which many liberal economists do (I do as well, but I’m more of a monetarist anyhow), it makes perfect sense. You want to increase G, but you really don’t want to have actually decreased T.

      So I understand it as a matter of economic policy. The issue becomes how you translate that into law without violating state soverignity. It appears they haven’t done a great job, but Idk how you would phrase that.

      1. Look, it would make sense if the grant was reduced by the amount of the tax reduction; You could say that the reduction proved the grant unnecessary to that extent.

        But, no, they give the state a big bolus of money, and order them to spend it all, or they get none of it. The goal here is to force states that have adopted a low tax, low spending model, to raise their spending for a while. Then, when the federal bolus isn’t renewed, reducing spending will be politically difficult, and those states will have to increase taxes, instead.

        Thus forcing them to adopt the high tax, high spending model that has rendered ‘blue’ states economically noncompetitive with ‘red’ states.

        It’s kind of the mirror image of the Trump policy of capping SALT deductions in order to punish HIGH tax states.

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