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Biden administration wins against Ohio, Kentucky in clash over rules for stimulus funds

Two appeals court panels vacated injunctions against the Treasury Department and ruled Covid-19 stimulus legislation does not prevent states from implementing tax cuts.

CINCINNATI (CN) — The Sixth Circuit on Friday dealt a blow to state governments in their fight against President Joe Biden's implementation of the $1.9 trillion American Rescue Plan Act when the appeals court ruled Kentucky and Ohio lack standing to challenge a tax provision in the stimulus package.

The states – along with Tennessee – had claimed in separate lawsuits the "offset provision" of the legislation prevented them from making any changes to their tax codes under threat of recoupment of the stimulus funds by the U.S. Treasury Department.

The Volunteer State was the only one to prevail in any capacity on Friday, as the panel ruled in its joint case with Kentucky it established standing through increased compliance costs that represent concrete harm.

Shortly after the legislation was signed into law, the Treasury Department passed an interim final rule to provide clarification on the tax mandate and assured states they would not be subject to recoupment so long as stimulus funds were not used to pay directly for tax cuts.

The rule, however, was not enough to overcome constitutional concerns about the provision in the eyes of two federal judges who granted injunctions to prevent its enforcement.

Treasury Secretary Janet Yellen appealed to the Sixth Circuit, which heard arguments in the Ohio case in January, while the case brought by Kentucky and Tennessee was argued in July.

U.S. Circuit Judge John Bush, a Donald Trump appointee, wrote the lead opinion in each case, while U.S. Circuit Judge Bernice Donald, an appointee of Barack Obama, also sat on both panels.

Ohio's case against the federal government was mooted when the Treasury Department issued a flat rejection of its broad reading of the offset provision, according to Bush.

"Treasury ... promulgated a regulation disavowing Ohio's interpretation of the offset provision and explaining that it would not enforce the provision as if it barred tax cuts per se," he said. "We have no reason to believe that Treasury will not abide by its disavowal of Ohio's interpretation ... [and] its credible disavowal of Ohio's broad view of the offset provision mooted the case."

The panel, which also included U.S. Circuit Judge Richard Griffin, a George W. Bush appointee, determined there is no credible threat of enforcement against Ohio by the federal government, regardless of what tax changes it may make in the future.

Ohio argued despite the Treasury Department's insistence it will not penalize tax cuts, the offset provision "proscribes" what tax policies it can implement in the future, but the panel disagreed.

The department "has repeatedly explained its position that it will pursue recoupment under the offset provision only should a state enact a revenue-reducing tax cut and then fail to identify a permissible source of offsetting funds," Bush said.

In a point echoed in the suit brought by Kentucky and Tennessee, Ohio also argued reporting requirements of the stimulus legislation impose compliance costs that grant it standing to challenge the provision, but the panel rejected the claim and noted the reporting requirement is entirely separate from the offset provision.

"Ohio was adamant that its challenge is only to the offset provision; it makes no claim that the reporting requirement itself is void or unenforceable," Bush wrote. (Emphasis in original.)

Bush used much of the same reasoning in his decision to reject Kentucky's challenge to the offset provision and emphasized its lack of evidence to establish standing.

"[Kentucky] furnished no proof about how it intends to violate the rule, or about why it suffers a continuing sovereign injury when it identified no desired tax cut that, if enacted, would likely provoke recoupment," he said. "It also offered no additional theory of injury, such as compliance costs, that might sustain a challenge even in the absence of an imminent recoupment action."

Tennessee, however, is entitled to continue its case against the federal government, according to Bush, through its production of "uncontroverted evidence" of increased compliance costs since it accepted the stimulus funds.

The Treasury Department argued the costs incurred by Tennessee cannot be traced to the offset provision itself, but rather the final rule used to clarify states' ability to implement tax cuts.

Bush admitted a portion of the expenses cited by Tennessee were undoubtedly the result of the final rule, but noted that if the provision itself was enjoined from enforcement, the rule would be as well.

Putting that issue aside, Bush moved to the merits and agreed with Tennessee that both the provision and the rule failed to provide "clear notice" about how states could maintain compliance, the result of which was increased spending by the state to prevent future recoupment actions.

"Control over taxation is a core aspect of state sovereignty," the ruling. "For Congress to impose conditions in that area, it must do so in clear and unmistakable terms." (Emphasis in original.)

Much of the opinion focused on the lack of clarity provided in the provision regarding "direct" and "indirect offsets," and while the Treasury Department claimed the use of the terms in other federal statutes gives Tennessee and other states plenty of guidance, the panel was not convinced.

Bush emphasized the lack of any such phrases in a spending clause statute and said their use in other pieces of legislation could create further confusion.

U.S. Circuit Judge John Nalbandian, another Trump appointee, rounded out the panel in the Tennessee and Kentucky case.

None of the parties involved immediately responded to requests for comment.

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Categories / Appeals, Government, Law, National, Politics

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