Ninth Circuit Concludes Arizona Has Standing to Challenge Conditions on COVID Relief Funds

Language in the American Rescue Plan Act prohibits states from using the funds "directly or indirectly" to offset lost revenues from tax cuts.

In March 2021, Congress enacted the American Rescue Plan Act, providing almost $200 billion to the states in pandemic relief funding. As is usual, the money came with strings attached. One ARPA provision prohibits states from using the funds "directly or indirectly" to offset lost revenues from tax cuts. Multiple state objected to this condition, arguing it is both coercive and ambiguous, though they still accepted the money.

A half-dozen suits were filed by states challenging the ARPA provision. The federal government responded by arguing, among other things, that the states lacked standing to challenge this provision. Some district courts accepted this argument. Some others, including one here in Ohio, did not.

Earlier today, the U.S. Court of Appeals for the Ninth Circuit concluded that Arizona has Article III standing to challenge the ARPA provision. Judge Gould wrote the opinion for the court, joined by Judge Bennett. Judge Nelson concurred. This decision in Arizona v. Yellen is the first federal appellate court decision to resolve this question.

Here is how Judge Gould summarizes his opinion:

It is well established that Congress has the power pursuant to the Spending Clause to pass legislation authorizing federal grants to the States that come with strings attached. For the most part, cases challenging Spending Clause legislation come to us arising from a specific dispute between the federal government and the recipient of federal funds. Usually, the federal government will claim that the recipient violated a condition that Congress placed on the federal grant and demand repayment. The recipient, in turn, will claim that the condition on the funds violates the limits of the Spending Clause, as enumerated in South Dakota v. Dole, 483 U.S. 203 (1987).

This appeal, however, requires us to decide whether a State has standing to challenge the constitutionality of Spending Clause legislation before a specific and concrete dispute arises between grantor and grantee. We hold that Arizona has standing to challenge the American Rescue Plan Act, 42 U.S.C. § 802(c)(2)(A), ("ARPA" or "the Act"), both because there is a realistic danger of ARPA's enforcement, and because there is a justiciable challenge to the sovereignty of the State, which alleges infringement on its authority to set tax policy and its interest in being free from coercion impacting its tax policy.

Judge Nelson disagreed on the former argument, but agreed on the latter.

Here is more from Judge Gould's opinion, discussing the injury to Arizona's sovereign interests:

Arizona seizes upon several of these limitations to bring a facial challenge—or so we interpret—to ARPA's Offset Provision. To Arizona, the inherent limitations on Congress's power to "lay and collect Taxes" and "provide for the . . . general Welfare of the United States," U.S. Const. art. I, § 8, cl. 1, create constitutionally-imposed and enforceable criteria that "contractual" funding offers from the federal government must meet. When Congress does not meet one of these criteria, and say, extends a federal grant with ambiguous or coercive terms to the States, Arizona contends that this offer offends state sovereignty and gives rise to a cognizable injury in fact. We agree. . . .

Arizona has alleged sufficiently concrete and particularized harms to its ability to exercise its sovereign prerogatives, intangible as those prerogatives may be. Just as a contract can be challenged under state law for containing ambiguous terms or being a product of duress, so too do we think that the quasicontractual funding offer at issue here can be challenged by Arizona at the outset for offering conditions that are
unconstitutionally ambiguous or coercive. . . .

An appeal of the aforementioned Ohio decision is also pending in the U.S. Court of Appeals for the Sixth Circuit. We'll see if the Sixth Circuit agrees with the Ninth.