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Eighth Circuit hears challenge to ban on using stimulus aid to offset tax cuts

Missouri argued a provision prohibiting states from using coronavirus relief funds to cut taxes is overly broad, while the feds countered that the Show-Me State has not shown a concrete harm.

KANSAS CITY, Mo. (CN) — The state of Missouri argued Tuesday before the Eighth Circuit to revive its challenge to a tax provision in the Biden administration’s American Rescue Plan.

Michael Talent, Missouri’s deputy solicitor general, pushed back on a lower court’s decision last year to dismiss the case due to lack of standing.

“This is kind of a basic contract dispute with the agent. The Congress, as the contractors' agent, is not enforcing the contract with what the principal said the contract terms are going to be,” Talent told the three-judge panel during the 30-minute hearing held via teleconference.

U.S. Justice Department attorney Daniel Winik countered that Missouri’s arguments are based on a hypothetical.

“There's simply no concrete controversy here at all,” Winik said. “They haven't pointed to anything that they're doing, or that they concretely plan to do," that would violate the statute.

At issue is the American Rescue Plan signed into law by President Joe Biden in March 2021, which allows states to receive funds to help offset the losses caused by the Covid-19 pandemic.

Missouri, which received $2.7 billion from the plan, joined a group of Republican-led states challenging a provision that prohibits states from using the federal funds to offset a reduction in the net tax revenue. Missouri, in its lawsuit, argued that provision was too broad and unconstitutional and dubbed the provision the “tax mandate.”

U.S. District Judge Henry Autrey, a George W. Bush appointee in the Eastern District of Missouri, dismissed the lawsuit last May after finding the matter is not ripe for adjudication and that Missouri lacked standing. Autrey’s decision prompted the appeal to the St. Louis-based Eighth Circuit.

U.S. Circuit Judge Jane Kelly, a Barack Obama appointee, questioned Talent on actual harm during Tuesday's hearing. She noted the state hasn’t proposed a specific tax plan that would run contrary to the provisions governing use of the funds.

“Missouri needs certainty simply to basically run its fiscal tax policy options,” Talent said. “That's the sort of damages. At any point in time the Missouri General Assembly wants to come in session, for example, and cut the gas tax which it passed last year, it needs to know that to give relief [complies with the mandate].”

Chief U.S. Circuit Judge Lavenski Smith immediately jumped in once Talent mentioned the gas tax passed by state lawmakers last year. Smith, a George W. Bush appointee, pointed out that it was a sizeable tax and asked if the increased revenue it is expected to generate would give the state room to cut other taxes.

“Each General Assembly doesn't know if it decides to consider a gap and what the fiscal implications of that are going to be,” Talent answered.

Winik countered by arguing Missouri is free to cut taxes in several ways: economic growth, an increase in other taxes, and by cutting spending outside of areas where it is using federal recovery funds.

“The one thing they can't do is use these fiscal recovery funds to displace some of their own spending, and then take that savings of state money and pay for a tax cut,” Winik told the court. “It's really a fairly straightforward provision for states to implement.”

U.S. Circuit Judge Duane Benton, another George W. Bush appointee, and Smith questioned Winik about the merits of the case.

“Missouri hasn't identified any way in which it  has been concretely harmed by this provision,” Winik said. “It hasn't said what it concretely is doing or imminently plans to do that it supposedly can't do because of this provision. It's certainly not the case that they can't cut taxes. Plenty of states have cut taxes since the enactment of provision.”

He continued, “And again, even if Missouri had greater specificity, pleaded that they wanted to cut taxes or pay for the tax cut in a way that could arguably implicate the provision, that's just not the sort of context in which the meaning of conditions and use of federal funds has ever been resolved. It would be purely an advisory opinion for a federal court to say in this context, what the offset provision means.”

The panel took the arguments under advisement. There is no timetable for a decision.

A similar case brought by Ohio was heard by the Sixth Circuit last month, after a federal judge blocked enforcement of the tax mandate based on his determination that the language in the American Rescue Plan Act gave state legislators insufficient information regarding how much of the money would be available if they altered tax rates. U.S. District Judge Douglas Cole, an appointee of Donald Trump, said the law's language "raises a host of interpretive problems." The Cincinnati-based appeals court has not yet issued a decision in that case.

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