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Ninth Circuit revives Arizona fight over Covid relief restrictions

The appeals court agreed Arizona could be forced to return the funds under the relief package’s ambiguous language.

PHOENIX (CN) — Arizona has standing to challenge a provision in the $1.9 trillion Covid-19 relief package that bars states from using the federal funds to cut taxes, a Ninth Circuit panel ruled Thursday, reversing a federal judge's decision.

Arizona Attorney General Mark Brnovich filed the federal suit against the U.S. Department of Treasury in 2021. According to the complaint, a provision in the American Rescue Plan Act of 2021 unconstitutionally forbids states from using Covid-19 relief funds to offset a reduction in revenue from tax cuts and intrudes "on the separate sovereignty of the states through federal usurpation of one half of the state’s fiscal ledgers — control of their revenues."

Arizona says it accepted the terms of the relief because the funds were necessary at the height of the pandemic. After accepting the aid, Arizona lawmakers passed a $1.9 billion tax cut amid concerns that they would be forced to repay the federal assistance.

In 2021, Treasury Secretary Janet Yellen told Brnovich that the law does not prevent Arizona from cutting taxes. However, The New York Times reported the bill’s principal contributor U.S. Senator Joe Manchin “argue[d] that states should not be cutting taxes at a time when they need more money to combat the virus. He urged states to postpone their plans to cut taxes.”

U.S. District Judge Diane Humetewa, a Barack Obama appointee, found this past July that the state lacked standing to challenge the act, which designated $4.7 billion for Arizona.

Arizona argued the restriction’s ambiguity could put it in a position where it could be forced to return the funds to the Treasury Department.

“This argument makes sense in the abstract,” Humetewa wrote in her ruling. “But Arizona has offered no concrete facts showing the restriction’s impact on policymakers. Although Arizona has recently passed a budget providing for $1.9 billion in tax cuts, there is no evidence that the lawmakers’ decision was at all influenced by the restriction.”

The state appealed. And on Thursday, a three-judge Ninth Circuit panel found Arizona could be forced to return the funds under the relief package’s tax provision.

“That the federal government has not disavowed enforcement of the offset provision is evidence of an intent to enforce it,” U.S. Circuit Judge Ronald M. Gould, a Bill Clinton appointee, wrote for the panel.

The panel found Arizona’s tax cut would presumably reduce Arizona’s net tax revenue, therefore violating the offset provision of the relief package. 

“On this point we diverge with the district court because its reasoning approximates requiring Arizona to admit to violating a law in order to have standing to challenge it, a prerequisite the Supreme Court has repeatedly rejected,” Gould wrote.

The court also disagreed with Humetewa's rejection of standing and held Arizona has illustrated a credible threat of enforcement to bring a pre-enforcement challenge of the offset provision.

“There is a realistic danger that Arizona, after accepting federal funds under ARPA and passing a billion-dollar tax cut, will be forced to repay federal funds for directly or indirectly using those funds to offset its tax cut, in violation of the offset provision,” Gould wrote.

The case goes back to Humetewa for further proceedings.

U.S. Circuit Judge Ryan Nelson, a Donald Trump appointee, agreed Arizona had standing to challenge the provision based on sovereign injury. But he said the standing argument is doomed because the state never claimed it took an action proscribed by the provision.

“Had Arizona alleged an intent to offset a reduction in net tax revenue in some specific way, it may have separately established standing under its preenforcement theory,” Nelson wrote in a partial dissent. “But as things stand, the specter of enforcement is too hypothetical to present a ‘case’ or ‘controversy’ for our review.”

Brnovich celebrated the decision in a statement Thursday.

"The federal government does not get to tell states how to set their tax rates," he said. "Yet, the Biden administration is attempting to intimidate and punish states with the loss of Covid-19 relief funding if they don’t submit to these unconstitutional demands.”

U.S. Circuit Judge Mark Bennett, also a Trump appointee, rounded out the panel.

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