CINCINNATI (CN) — President Joe Biden's $1.9 trillion American Rescue Plan Act contains an unconstitutional provision that precludes states from using funds to offset lower tax revenue and effectively holds stimulus funds hostage, according to a lawsuit filed by Ohio's Republican attorney general.
AG Dave Yost's complaint says the so-called tax mandate "allows the federal government to commandeer state taxing authority ... and coerces the states into accepting."
The suit says Ohio, which is set to receive $5.5 billion in aid under the legislation, will only get the full amount if it complies with the mandate and agrees not to make changes to its tax policies.
In remarks made Wednesday afternoon, however, the Treasury Department clarified the provision, and said tax cuts are permissible so long as the states use their own money.
"In other words," a spokesperson told the Associated Press, "states are free to make policy decisions to cut taxes --- they just cannot use the pandemic relief funds to pay for those tax cuts."
It remains unclear how the Treasury Department's comments will affect the litigation filed by Yost.
According to the complaint, a violation of the mandate allows the federal government to "recoup the lesser of: (1) the amount of the applicable reduction to net tax revenue; or (2) the amount of funds the state received from the federal government."
Yost argues the mandate violates the spending clause of the U.S. Constitution and he seeks a injunction to prevent its enforcement.
"Congress violates its spending clause power when it coerces states into agreeing to limit their sovereign authority by offering financial inducements that states cannot practically refuse," the complaint states.
In a statement released shortly after the complaint was filed in Cincinnati federal court, Yost said the tax mandate "exceeds the authority of Congress."
"The federal government should be encouraging states to innovate and grow business, not holding vital relief funding hostage to its preferred pro-tax policies," he said.
The AG pointed out that Ohio has seen a $1.1 billion drop in tax revenue because of the Covid-19 pandemic, and is now faced "with a choice to either accept the stimulus funds or keep their sovereign authority to reduce taxes."
"Slipping last-minute conditions into a plan meant to help people that instead handcuffs Ohio is why people don't trust government," he added. "And it almost always leads to constitutional mischief."
The suit argues that tax changes may be necessary in Ohio to maintain a balanced budget, especially considering the revenue shortfall for 2020.
Ohio's decision to sue the federal government comes on the heels of a letter sent to Treasury Secretary Janet Yellen earlier this week by some 21 Republican attorneys general – a group that did not include Yost – who questioned the constitutionality of the provision.
"We ask that you confirm that the American Rescue Plan Act does not prohibit states from generally providing tax relief," the letter said.
Yellen is named as a defendant in the Yost lawsuit, alongside Richard Delmar, the acting inspector general of the Treasury Department.
Attorney Benjamin Flowers filed the suit on behalf of the state, as well as a corresponding motion for a preliminary injunction.
"In our current economic crisis," Flowers said in that motion, "[the mandate] is no choice at all. It is a metaphorical 'gun to the head.'"
The attorney admitted that Congress has the authority to "encourage" states to act certain ways regarding tax policies, but said the tax mandate goes a step further because the "funds comes with strings attached."
"The unconstitutionality is particularly stark here," the motion states, "because the Act coerces states into acquiescing in the commandeering of their taxing authority. In essence, states that abide by the tax mandate's terms are conducting their tax policy at the behest of the central government."
Read the Top 8
Sign up for the Top 8, a roundup of the day's top stories delivered directly to your inbox Monday through Friday.