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Federal Court Enjoins Enforcement of "Tax Mandate" Barring States Receiving COVID-19 Funds from Cutting Taxes (Updated)

In a careful ruling, Judge Cole concludes Ohio made its case, and enjoins enforcement of the mandate against Ohio.


This afternoon, a federal district court in Ohio entered a permanent injunction against enforcement of the so-called "Tax Mandate" against the state of Ohio. This mandate bars states that receive COVID-19 relief funding from using such funds, directly or indirectly, to cut taxes. Ohio's challenge raised interesting and challenging federalism and delegation issues, and while the court previously rejected Ohio's bid for a preliminary injunction, it found the criteria for a permanent injunction satisfied here. (For more background, see these posts by Josh Blackman and Ilya Somin.)

The opinion in Ohio v. Yellen by Judge Douglas Cole of the Southern District of Ohio begins:

Through the American Rescue Plan Act ("ARPA"), Congress has exercised its power under the Spending Clause to make nearly $200 billion available to the States to assist with their COVID-19-ravaged state coffers. But that money comes at a price. To receive its share, a State must agree to be bound by certain conditions. In this action, Ohio sues the Secretary of the Treasury (who is charged with enforcing aspects of ARPA) claiming that one of those conditions—which it calls the "Tax Mandate"— exceeds Congress's authority. Ohio argues that this overstep threatens to undermine the federalist system our Constitution enacts.

Before accepting the funds ARPA made available, and thereby subjecting itself to ARPA's conditions, Ohio sought a preliminary injunction to prohibit the Secretary from enforcing the Tax Mandate while this suit is ongoing. The Court denied that request. Now, having opted in to ARPA, Ohio seeks a permanent injunction to prevent the Secretary from enforcing the Tax Mandate against the State.

Ohio's action raises fundamental constitutional concerns. The Constitution incorporates strong separation-of-powers principles. That is true both as between the federal government and the States, which the Constitution makes dual sovereigns, and within the federal government itself, where the Constitution allocates separate powers to the Legislature, the Executive, and the Judiciary. And this is not division for division's sake. At its founding, the country had just escaped a system that concentrated vast governmental power in a single person—the monarch. The Framers adopted a system of checks and balances meant to prevent that coalescence from reemerging here—a structural mechanism to promote the underlying goal of individual liberty.

Ohio's arguments here, and the Secretary's response, require the Court to consider both federal/state (sometimes called "vertical") and intra-federal (sometimes called "horizontal") separation-of-powers principles. In particular, Ohio claims that the Tax Mandate is ambiguous, and that this ambiguity violates settled Spending Clause jurisprudence that requires Congress to clearly state any conditions it imposes on federal grants offered to the States. And here, Ohio says, that violation results in an impermissible federal intrusion on the States' sovereign authority to tax, a power that the Supreme Court has long recognized as "indispensable" to the States' very "existence." Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, 199 (1824).

The Secretary's efforts to refute these ambiguity concerns, meanwhile, implicate horizontal separation-of-powers concerns. That is so because, according to the Secretary, even if the Tax Mandate were unconstitutionally ambiguous (which the Secretary disputes), recently issued Treasury Department regulations clarify the Tax Mandate's contours, and thus cure any potential constitutional defect. But that argument raises questions about the extent to which Congress can delegate to an agency the power to "fix" shortcomings in legislative enactments that make conditional grants to the States under the spending power, a thorny issue in its own right.

Separately, the Secretary also raises a jurisdictional challenge to this Court's power to hear the case, which is itself another aspect of the horizontal separation-of-powers framework. Under the Constitution, the judicial power extends only to "live" disputes. Here, the Secretary notes that the original harm that Ohio claimed in filing suit—the difficulty that the Tax Mandate's ambiguity created for Ohio in deciding whether to accept the funding—ended when, ambiguity notwithstanding, Ohio filed its certification with the Secretary, which bound Ohio to ARPA's terms. And the Tax Mandate's alleged ambiguity cannot harm Ohio going forward, the Secretary says, as the Treasury Department regulations have now clarified the Tax Mandate's terms.

None of these are easy questions. As to many parts of the necessary analysis, case law is sparse or itself somewhat ambiguous. Ultimately, though, the Court concludes that Ohio has articulated an ongoing harm arising from the alleged ambiguity in the Tax Mandate, thus creating jurisdiction for this Court to hear Ohio's challenge. On the merits, the Court concludes that the Tax Mandate, as written, falls short of
the clarity that Supreme Court precedent requires for Spending Clause legislation that provides conditional grants to the States. And the Court also rejects the Secretary's argument that the Treasury Department regulations cure that ambiguity. In that regard, the Court stops short of holding that Congress can never authorize an agency to supply the requisite clarity, but instead holds that, under ARPA, Congress did not do so here.

Accordingly, the Court finds that the Tax Mandate exceeds Congress's power under the Constitution. The Court further finds that Ohio has met the conditions for injunctive relief to prevent the ongoing harm that this constitutional violation is causing. Thus, the Court PERMANENTLY ENJOINS the Secretary from enforcing the Tax Mandate against Ohio. But, because the permanent injunction suffices to remedy Ohio's ongoing harm, the Court DENIES Ohio's requested declaratory relief.

The two primary federalism arguments against the Tax Mandate are that a) Congress did not specify the terms of this condition with sufficient clarity (i.e. the condition is ambiguous), and b) the Mandate is unduly coercive. Judge Cole's opinion rests on the former of these arguments, concluding the terms of the Mandate in ARPA were "too ambiguous" and that the Treasury Department's subsequent interim regulations were unable to cure that deficiency.

I suspect one or more of us may have more to say about this opinion later.

UPDATE: And later arrived sooner than you might have expected. I wanted to highlight a key portion of Judge Cole's analysis, and it's below the fold.

As noted, current Spending Clause doctrine requires, among other things, that the conditions placed upon federal spending are clear and unambiguous. In effect, the states must know what is demanded of them when they accept the money, and the details matter.

In this case, the statute is ambiguous on the precise contours of the condition and how to determine whether ARPA funding is indirectly facilitating tax cuts. The question thus arises whether Congress can delegate responsibility to the implementing agency (here, Treasury) to resolve the ambiguity and, if so, whether Congress did so.

In Judge Cole's analysis, such a delegation implicates the so-called "major questions" doctrine, and he finds the evidence of a congressional delegation lacking. Here is the relevant portion of the opinion.

the Court concludes that it need not answer the question of whether the Spending Clause allows Congress to delegate to an agency the power to create the requisite clarity, i.e., the issue that Riley reached. That is because, even assuming Congress can do so, it did not do so here.

The Court arrives at that answer based both on the Tax Mandate's statutory language and ARPA's overall structure. Start with the former. Even assuming that the Tax Mandate meets the "intelligible principle" standard, there can be little doubt that the language of that provision leaves open "major questions." The Tax Mandate "involv[es] billions of dollars in spending each year," see Burwell, 576 U.S. at 485, and is expressly directed at a core State function, the power to tax, that has long been recognized as "indispensable" to the States' very existence. See, e.g., Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, 199 (1824) ("The power of taxation is indispensable to [the States'] existence."); Bode v. Barrett, 344 U.S. 583, 585 (1953) (observing that the power of a State to tax is "basic to its sovereignty"); Dows v. City of Chicago, 78 U.S. (11 Wall.) 108, 110 (1871) ("It is upon taxation that the several States chiefly rely to obtain the means to carry on their respective governments.").

Given the scope of the ambiguity in the Tax Mandate's language, the choices made in deciding how to resolve that ambiguity and implement the mandate cannot help but raise "question[s] of deep 'economic and political significance.'" Burwell, 576 U.S. at 486 (quoting Util. Air Regulatory Grp. v. EPA, 573 U.S. 320, 324 (2014)). Thus, just as the Supreme Court observed in Burwell, "had Congress wished to assign that question to an agency, it surely would have done so expressly." Id. (citing Util. Air Regulatory Grp., 573 U.S. at 324 (quoting FDA v. Brown & Williamson, 529 U.S. at 160)). A general provision that "[t]he Secretary shall have the authority to issue such regulations as may be necessary or appropriate to carry out this section,"8 42 U.S.C. § 802(f) does not suffice—indeed, as Ohio points out, the statute at issue in Burwell had a similar provision.

The point is simply this—when Congress seeks to alter the constitutional design by delegating its powers to agencies on topics of such importance, Congress must do so clearly, especially when federalism concerns are at issue. Carter, 736 F.3d at 734; see also Ala. Assoc. of Realtors v. Dept. of Health and Human Servs., 594 U.S. __ (June 29, 2021) (Kavanaugh, J., concurring in denial of certiorari) (explaining that "clear and specific congressional authorization (via new legislation) would be necessary" for an agency to extend an eviction mortarium after the scheduled deadline passed). Congress did not do so here. . . .

In sum, even assuming that Congress can outsource to an agency the obligation to provide the answers needed to meet the Spending Clause clarity requirement, Congress made no such delegation in ARPA. Accordingly, the Tax Mandate must sink or swim on its own. And, as already explained above, the Court concludes that the Tax Mandate's language falls short of what settled law requires in terms of such clarity. Thus, the Court finds that the Tax Mandate violates the Spending Clause, the IFR notwithstanding.

I hope readers caught Judge Cole's citations to UARG and Justice Kavanaugh's opinion respecting the denial of a stay in CDC eviction moratorium case (which cites UARG as well).

One other quick note is that relief in this case is properly limited to Ohio. This is not a case in which a federal district court judge unnecessarily entered a nationwide injunction.