On March 11, 2021, President Biden signed into law the American Rescue Plan Act (ARPA), which offers $350 billion dollars in federal COVID relief funding to states. The funding, however, comes with strings, including a condition that bars states from using that funding to directly or indirectly offset revenue loss from tax reductions.
Last week, Ohio challenged that provision – the so-called “Tax Mandate” – in federal court. Ohio asserts that the Tax Mandate conditions “badly needed federal funds” on states agreeing to relinquish their “sovereign authority to set state tax policy.” The state argues that this is a violation of the Spending Clause of the Constitution; South Dakota v. Dole, which established how courts should assess the constitutionality of conditional funding; and NFIB v. Sebelius, which held that tying state Medicaid funding to Medicaid expansion was coercive when the Medicaid funding made up 10% of state budgets.
Because money is fungible, “any money received through the [ARPA] will ‘indirectly’ at least ‘offset a reduction in the net tax revenue’ of a state . . . So every change in tax policy that leads to a decrease in tax revenue violates the Tax Mandate,” the compliant states.
The Tax Foundation’s Jared Walczak analyzed what sorts of state tax cuts may or may not be permissible under the law. According to Walczak, there are certain circumstances where state tax cuts may be permissible, but complications arise quickly. For instance, it is not clear whether a scheme in which a state cuts rates using measures such as revenue offsets, growth, or spending cuts, but also uses ARPA funds to pay health officers, “facilitates” the tax cut. If so, the state would be on the hook for repaying the entire amount of the stimulus it received.
Ohio’s complaint underscores that while Supreme Court precedent allows Congress to condition federal funds in a way that influences state policy choices, these conditions cannot rise to the level of coercion. When states have no legitimate choice, such a law violates our system of federalism, or as Chief Justice Roberts put it in NFIB v. Sebelius, “it is a gun to the head.” Notably, Ohio’s complaint states that the ARPA would give the state $5.5 billion, or about 7.4% of Ohio’s expenditures, which is not far off from the 10% threshold in NFIB. And, according to the Wall Street Journal, the $350 billion in the ARPA represents approximately 9% of total state and local expenditures in 2018.
The complaint further contends that the law runs afoul the Tenth Amendment, noting that to secure the Constitution’s ratification, the Federalists argued that the federal government’s power to tax would exist concurrently with the states’ power to do the same: “By commandeering that power—by effectively requiring the States to tax in the manner the federal government would prefer—the Act undermines that assurance and thus rips at a critical thread of the fabric of our constitutional order.”
Ohio is not alone in challenging the constitutionality of the provision. Twenty-one state attorneys general wrote to Treasury Secretary Janet Yellen questioning the constitutionality of the provision and asking that the Biden Administration to interpret the provision narrowly. The Tax Mandate, they wrote, “could be read to deny States the ability to cut taxes in any manner whatsoever—even if they would have provided such tax relief with or without the prospect of COVID-19 relief funds.” The letter continued, “Such a federal usurpation of state tax policy would represent the greatest attempted invasion of state sovereignty by Congress in the history of our Republic.”
Moreover, additional lawsuits may be on the way. West Virginia’s Attorney General has hinted at such action.
The Biden Administration has indicated that it believes the provision is constitutional. A Treasury Department spokesperson stated that, “It is well established that Congress may establish reasonable conditions on how states should use federal funding that the states are provided . . . Those sorts of reasonable funding conditions are used all the time — and they are constitutional.”
However, South Texas College of Law Professor Josh Blackman has argued that the Administration cannot avoid the constitutional issues through deference doctrines, noting, “the government cannot cure . . . [separation] of powers problem[s] through guidance documents. The remedy for an ambiguous spending provision is to declare it unconstitutional.”