What is the American Rescue Plan Act (ARPA)?

The American Rescue Plan Act is a $1.9 trillion stimulus bill geared toward providing economic relief from the damages caused by the Covid-19 pandemic. Congress passed the act, and it was signed into law by President Biden on March 11, 2021. Of the $1.9 trillion, ARPA grants approximately $195 billion directly to the states, provided that they certify to the U.S. Secretary of the Treasury the adherence of the states to the conditions that the ARPA mandates.

Why do some states have a problem with ARPA?

On March 31, 2021, 13 states sued the Treasury Department, Treasury Secretary, and Inspector General of the Treasury Department over the American Rescue Plan Act in a case captioned West Virginia v. U.S. Department of the Treasury. The states contended that a provision within the act, the offset provision, exceeds Congress’ allotted power under Article I, Section 8, Clause 1 of the Constitution (the Spending Clause). 

The offset provision states that “a State or territory shall not use the funds provided . . . to either directly or indirectly offset a reduction in the net tax revenue of such state or territory resulting from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.” The states asserted three claims:

  1. The offset provision is an unconstitutionally ambiguous and coercive condition under the Spending Clause.

  2. The offset provision violates the Tenth Amendment’s anti-commandeering doctrine.

  3. The harms alleged in the first two counts entitle the states to declaratory relief.

The Treasury Department issued an interim final rule on May 17, 2021, to refine the ARPA’s scope. The rule made it clear that if a state fails to comply with the conditions of the ARPA, the Treasury Department may recover funds granted to the violating states, providing a process by which such recovery would occur. In order to judge states’ compliance with the offset provision, this rule established that “fiscal year 2019 tax revenue adjusted for inflation” would serve as the base to measure whether ARPA funds have been used in violation of the offset provision. Under this rule, states cannot cut spending in areas where they have used ARPA funds in order to offset a decrease in tax revenue. This interim rule became the final rule, with no material changes on January 27, 2022.

What have the courts determined?

On November 15, 2021, the U.S. District Court for the Northern District of Alabama sided with the 13 states and concluded that the offset provision was unconstitutionally ambiguous under the Spending Clause. The court granted the states’ motion for a permanent injunction of the enforcement of the provision. The court did not make a determination with regard to the states’ anti-commandeering claim and did not provide the states with declaratory relief as it was determined that the permanent injunction was an adequate remedy.

In making this determination, the court found that the states had standing and rejected the Treasury Department’s contention that the case became moot as the scope of the provision was narrowed by the interim (and later final) rule. The court instead found that even after adopting a more narrow approach, the provision would still regulate how states could use federal funds. Additionally, such a limitation would still be unconstitutional to the extent that it was unascertainable.

While the Spending Clause of the Constitution does allow Congress to attach strings to the receipt of federal funds—essentially an expansion of Congress’ Article I powers—the Supreme Court has somewhat curtailed this power. The Court has recognized that Congress must be abundantly clear and unambiguous on what the conditions are so that the states can make a fully informed decision on whether or not to participate. The Court further found that a state cannot make a fully informed decision to accept funding if it is unable to fully understand how it is expected to comply with the restrictions.

The Northern District Court of Alabama found three reasons why the ARPA provision was too ambiguous:

  1. The offset provision did not provide standards for states to determine whether net tax revenue has been or will be reduced.

  2. “Directly or indirectly” is not defined by ARPA and is extremely broad.

  3. Congress aimed this restriction at the entirety of states’ budgets and each of their taxes, making it even more important that it speak with a clear voice.

Upon finding that ARPA violated the Spending Clause, the court found no need to address the coercion and Tenth Amendment claims advanced by the states. The court granted a permanent injunction and found that such injunction would fully redress the harms such that there was no need to issue declaratory relief. On January 20, 2023, the Eleventh Circuit affirmed the decision of the Northern District Court of Alabama and upheld the permanent injunction. The Eleventh Circuit held that the offset provision is an unconstitutionally ambiguous condition affecting states’ reception of federal funds.

The U.S. Supreme Court recently declined to hear the case of Missouri v. Yellen. This case, like West Virginia, challenged ARPA’s restrictions on using funds for state tax reductions. The Eighth Circuit affirmed the prior decision that Missouri lacked standing. Missouri’s suit challenged the offset provision, not as it was written but under a hypothetical interpretation, and therefore the state did not suffer any injury.

In  Ohio v. Secretary, Department of Treasury, U.S. District Judge Douglas R. Cole issued a permanent injunction against the tax mandate provision of ARPA. In doing so, he found that the provision did not meet the clarity requirement for legislation that concerns the Spending Clause, and that Ohio’s attorney general proved that ongoing harm arises from such ambiguity.

Another similar case is Kentucky v. Yellen. Kentucky and Tennessee claimed that the offset provision was hopelessly ambiguous, that the provision was unequally applied, that the size of the potential loss of funds made the provision coercive, and that the provision violated the anti-commandeering doctrine. Initially, Judge Van Tatenhove of the Eastern District of Kentucky enjoined the enforcement of the tax provision. However, the Sixth Circuit panel overturned this decision in part, asserting that Kentucky lacked standing due to a failure to show a valid theory of injury. On the other hand, Tennessee showed evidence of injury by showing the burden compliance costs would cause the state. The lower court’s injunction was upheld with respect to Tennessee because the provision is “impermissibly vague.”

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