COLUMBUS, Oh. (CN) — Ohio Attorney General Dave Yost won a federal injunction Thursday to prevent enforcement of a provision in the $1.9 trillion American Rescue Plan Act he claimed held stimulus funds hostage and allowed the federal government to "commandeer state taxing authority."
The Buckeye State initially refused more than $5.5 billion in federal stimulus funds because of the so-called "Tax Mandate," which prevents states from using the money to offset tax reductions or make changes to their tax policies.
Yost, a Republican, sued Treasury Secretary Janet Yellen in March but was denied a preliminary injunction because of standing issues.
Once Ohio accepted the stimulus funds, however, it sought a permanent injunction. In taking the funding, the state agreed to be bound by all the terms and conditions included in the legislation.
The federal government said Ohio's taking of the stimulus money mooted the case, but U.S. District Judge Douglas Cole found the state likely now to succeed on its claims.
"Ohio legislators considering tax changes will have unconstitutionally insufficient information (assuming Ohio is right about what the Spending Clause requires) to determine the impact that such changes will have on Ohio's ability to retain the federal grant money that the state has begun to receive," the Trump appointee wrote.
"That ambiguity, in turn, will cast a pall over legislators' abilities to contemplate such tax changes."
Cole concluded that the injury from which Ohio now suffers is distinct from the one it alleged when it first filed suit. He said it is not moot because the present injury "strikes the same constitutional chord."
On to the merits of Ohio's claim, COle determined the mandate "falls short of the clarity required for Spending Clause legislation."
Cole expounded on the importance of checking the spending power of the federal government to ensure that states maintain their sovereignty and pointed out that states must have specific knowledge of the "strings" attached to federal grants.
According to the opinion, this is where the Tax Mandate fails, despite efforts by the Treasury Department to clarify the provision during litigation.
At issue are several phrases within the mandate, including "indirectly offsetting a reduction in the net tax revenue," which Cole says "raises a host of interpretive problems."
"Even armed with the court's guidance as to the source of the ambiguity," he continued, "the Secretary provides no workable definition of what an 'indirect offset' is. Indeed, if anything, the briefing confirms that even the Secretary struggles to distinguish between a 'direct' and an 'indirect' offset, at least based solely on the statutory text."
Cole said the ambiguity within the provision could easily disincentivize states from making any changes to their tax policies for fear of losing the grants, and concluded "that is the type of federal invasion of state sovereignty that Spending Clause jurisprudence disfavors."
The Treasury Department relied on its Interim Final Rule — passed immediately before the court denied Ohio's motion for a preliminary injunction — as a means of providing clarification to render the mandate constitutional, but Cole was unconvinced.
He cited the 1997 Fourth Circuit case Virginia Department of Education v. Riley, and noted that "only the statutory language, and not any regulatory follow-on, is what matters for Spending Clause clarity purposes," although he admitted the decision is not binding.
Cole opined that the federal government must be more deliberate when it writes legislation that deals with issues of "deep 'economic and political significance,'" and questioned its failure to take more time to craft the Tax Mandate.
The injunction granted by Cole prevents the Treasury Department from seeking to enforce the Tax Mandate against Ohio, but does not extend to other states.
Yost did not mince words in a statement released Friday morning that celebrated the victory.
“The Biden administration reached too far, seized too much and got its hand slapped,” Ohio’s attorney general said. “This is a monumental win for the preservation of the U.S. constitution – the separation of powers is real, and it exists for a reason.”
“American democracy once again defeats an attempt to take away states’ rights,” he continued. “This case is about the separation of power and I am pleased that the court agreed with our position that the Tax Mandate is out of bounds.”
The New Civil Liberties Alliance, a conservative-minded nonprofit, filed an amicus in the case and applauded the court's decision in a statement.
"As we approach the Fourth of July," said Peggy Little, senior litigation counsel, "NCLA is delighted to celebrate today's decision... to enter a permanent injunction preventing Congress from telling the states that they cannot cut state taxes as a condition of receiving federal funds.
"As NCLA argued in its amicus brief, this unprecedented seizure of power by Congress over state fiscal affairs undermines federalism as well as federal separation of powers."
The Treasury Department did not immediately respond to a request for comment.
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