CINCINNATI (CN) — Limitations placed on states that received federal Covid-19 stimulus funds, including an offset provision that restricts their ability to cut taxes, are not coercive measures that violate the spending clause of the U.S. Constitution, the Treasury Department argued Thursday.
The Biden administration told a three-member panel of Sixth Circuit judges the offset provision of the American Rescue Plan Act does not prevent states from cutting taxes, but only "prohibits a state from using the new federal funds to pay for a reduction in net tax revenue," according to the government's brief to the Cincinnati-based appeals court. (Emphasis in original.)
The stimulus package, passed in 2021 and worth over $1.9 trillion, was challenged in federal court by Kentucky and Tennessee, which claimed the offset provision, or so-called "tax mandate," rendered receipt of the money a coercive grant.
U.S. District Judge Gregory Van Tatenhove agreed and granted the states' motion for a permanent injunction in September 2021.
Van Tatenhove, a George W. Bush appointee, criticized the federal government for attaching caveats to the stimulus money, which he said states were obligated to accept to offset "severe budget shortfalls."
"The federal government's rescue boat has arrived in the form of the ARPA," he said, "but instead of offering a hand to hoist up its sinking co-sovereigns, it has offered a pen and paper listing conditions of rescue."
Van Tatenhove's decision ran parallel to that of fellow U.S. District Judge Douglas Cole, who granted Ohio's motion for an injunction several months prior, in July 2021. The Treasury Department appealed both decisions, and the case filed by Ohio was argued before a Sixth Circuit panel in January 2022.
In its brief to the appeals court, the federal government argued Kentucky and Tennessee failed to establish jurisdiction before the lower court because they have not cited any planned tax cuts that would run afoul of the offset provision.
"Dismissing this suit for lack of jurisdiction will not deprive Tennessee or Kentucky of an opportunity to seek relief if either state is ever actually harmed by the offset provision," the brief states. "If a concrete dispute over allegedly misused fiscal recovery funds were to arise, the affected state could assert its challenge at that time."
In their brief, Tennessee and Kentucky adopted an argument similar to the one used by Ohio and claimed the offset provision is unconstitutionally vague.
Several critical terms, including "indirectly" and "net tax revenue," are never clearly defined in the legislation, according to the states, which makes it "impossible to explain how the tax mandate operates."
Kentucky and Tennessee disputed the Treasury Department's arguments on jurisdiction and claimed they have standing because the "tax mandate invades the sovereign interests and traditional prerogative of the states to set their own tax policies."
"While Congress tried to style the tax mandate as nothing more than a restriction on how the states spend federal dollars, the broad and ambiguous language effectively prohibits the states from lowering their taxes during the covered years," the brief states.
Attorney Daniel Winik argued Thursday on behalf of the federal government and said the offset provision "leaves states' tax powers exactly as they were."
He told the panel of judges the Treasury Department has never told states they could not implement tax cuts, only that they must use their own funds to do so.
Regarding the vagueness of the statute, Winik emphasized "rules don't have to specify every detail."
"OK, fine, they specify a condition," U.S. Circuit Judge John Nalbandian, a Trump appointee, quipped, "but they use vague and ambiguous terms. That can't be enough, right?"
"It does not render a statute facially unconstitutional," Winik replied.
Attorney Brett Nolan argued on behalf of the states, and did not mince words in his opening statement.
"This case is about an unprecedented power grab by the federal government during a pandemic," he said.
"The stumbling block has been standing," said U.S. Circuit Judge John Bush, another Trump appointee, who then asked Nolan if Kentucky had failed to implement tax cuts after the legislation was passed.
The attorney claimed such distinctions were irrelevant because the sovereign injury to states occurred when the federal government distributed money with a provision attached to it.
U.S. Circuit Judge Bernice Donald, an Obama appointee who participated remotely, asked the attorney if the states could have refused the money.
"Of course the states could refuse it," Nolan said, "but they are entitled to money without an unconstitutional restraint."
"There is nothing in the statute that tells you what is or is not an offset," he continued. "The rule sets the guiderails, and the statute has no meaning on its own. The core meaning of the statute ... is impossible for the states to know beforehand."
In his rebuttal, Winik disputed his opposing counsel's point and argued the federal government has never taken the position the offset provision precludes states from cutting taxes.
"It's just not right that the statute is contentless or meaningless," he said. "[States simply] cannot use these funds to make the budget numbers add up."
No timetable has been set for the court's decision.
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