Can Congress Forbid A State from Cutting its Taxes?

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Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group Teleforum calls, become a Federalist Society member today at fedsoc.org.

 

Evelyn Hildebrand:  Welcome, everyone, to this Federalist Society's virtual event. This afternoon, September 27, we discuss the anti-commandeering principle at an event titled Can Congress Forbid A State from Cutting its Taxes. My name is Evelyn Hildebrand, and I'm an Associate Director of Practice Groups at The Federalist Society.

 

      As always, please note that all expressions of opinion on our call today are those of the experts on today's call.

      Today we are fortunate to have with us an excellent line up of speakers whom we're very delighted to welcome. The panel this afternoon will be moderated by the Honorable Eileen J. O'Connor who will introduce our speakers.

      Lee is the chairman of The Federalist Society's Practice Group Executive Committee for Administrative Law & Regulation. She also served for six years as the Assistant Attorney General for the Tax Division of the DOJ. We're very pleased that she agreed to moderate this afternoon, and as I said, she'll introduce our speakers.

      After our speakers give their opening remarks, we will turn to audience questions toward the end of this afternoon's program. If you have a question, please enter it in the Q&A feature at the bottom of your screen. We will handle questions as they are received towards the end of this afternoon's program.

      With that, thank you for being with us today. Lee, the floor is yours.

Eileen J. O'Connor:  Thanks, Evelyn. Welcome everybody to today's discussion. More so than ever before it seems, we often find ourselves asking, "Can they do that? Can a mayor require you to wear a mask? Can a county executive forbid you from leaving your house? Can a governor require you to get vaccinated? Can Congress forbid a state to lower its taxes?" It's that last question we'll address today.

      In March of this year, the American Rescue Plan Act was signed into law. Reportedly intended to help states recover from the economic impact of the novel coronavirus and the steps taken to prevent its spread, it calls for the Federal Treasury to provide approximately $350 billion in aid to state governments. The act imposes on states that accept the aid a four-year prohibition against lowering taxes. Within a month of its enactment, 16 states, including Ohio, Kentucky, Tennessee, and Arizona, had filed suit to challenge the prohibition claiming that the Constitution does not permit Congress to dictate how states handle their budgets.

      We're fortunate today to with us two very knowledgeable speakers to discuss the authorities on each side of the argument. Links to our speakers' bios are in the email and on the website description of this program. So I'll just briefly introduce them.

      Brett Nolan is Deputy Solicitor General of the Commonwealth of Kentucky, one of the states that has challenged Congress's authority to forbid a state to lower its taxes. He will speak first.

      Next, we'll have Steven D. Schwinn, Professor of Law at the University of Illinois Chicago School of Law where he teaches, writes, and speaks on issues related to constitutional law. He is the Editor of the American Constitution Society Supreme Court Review, and he is the author, among other things, of a 2017 essay explaining his view of Congress's authority in matters like the one we're discussing today.

      As Evelyn said, after our speakers have made opening statements and engaged in discussion with each other, we'll endeavor to respond to questions from the audience. So as questions occur to you, please tap the Q&A icon and enter them there.

      Brett, the floor is yours.

Brett Nolan:  Thanks, Lee. And let me just start by thanking The Federalist Society for hosting this Teleforum. I think that the legality of this tax mandate and what Congress has done it raises a lot of really interesting issues—they are kind of unprecedented—about the balance of federal and state power. I wanted, before I get into a little background about this issue, I wanted at the outset sort of frame two questions that I think are at the heart of the cases that have been filed.

      The first question is in the description, Lee, that you just gave, can Congress ever tell states that they are not allowed to lower their taxes? That's a big, flashy question. It raises questions about the Tenth Amendment and anti-commandeering.

      The second question I want to talk about—and I think I'll spend most of my time talking about—is if Congress can do that, what must it do in order to impose that restriction in a constitutional manner? I'm going to talk a lot about that because that's really where the cases have been driven in talking about the Spending Clause and, of course, Spending Clause jurisprudence.

      Before I get there, let me just give a little bit more background about what's going on. As you mentioned, the Congress passed the American Rescue Plan Act or ARPA in March in which they -- it's sort of Congress's latest iteration of the COVID relief bill. It does a lot of things, but important here, it provides states governments about $200 billion in federal funds that they can use to respond to the pandemic. Like most federal grants of funding, the Congress gives this money to the states, and then it says, "Here's how you can use it. You can't use it in other ways." But here, those restrictions are pretty broad. It ranges from everything from states can use it to deal with healthcare costs, things that you associate with COVID more prominently, but they can also do things like use it for broadband infrastructure investment, which are related to the pandemic and a lot of the issues that states have seen come with internet access for people as they're stuck in home quarantines. The restrictions are related to COVID, but they're pretty broad.

      I think what's unusual about ARPA and what has made this an issue is this provision that imposes an additional restriction on states as they spend all the funds that we've called the tax mandate. Essentially, what the tax mandate says is that states are not allowed to use ARPA funds to either directly or indirectly offset a reduction in state tax revenue that's caused by the state changing its tax laws. So essentially the way to think about that is if the state chooses to lower its taxes, either through rate reductions or tax credits, the state is not allowed to use ARPA funds to offset the loss in revenue either directly or indirectly. And that last part has really what has given rise to the dispute here.

      The best way to think about the problem is this. Because money is fundal, anytime a state spends ARPA funds while at the same time lowering its tax revenue, the ARPA expenditure could be deemed to be an indirect offset of the lower tax revenue. The tax mandate itself in the statute doesn't provide any real guideposts or parameters for states to determine how to know if something really is an indirect offset, or another problem is how to measure the state's loss in the net tax revenue caused by a tax change that might take effect over multiple years or might have unpredictable results.

      So the takeaway is that even though the tax mandate sort of builds itself out as a restriction on how states use funds, because of these ambiguities in the law and its use of the phrase indirectly offset as opposed to just direct offsets, the effect of the tax mandate is that states are prohibited from lower their taxes while spending ARPA funds or else face the possibility that their ARPA expenditure could be deemed to be an indirect offset of their lower tax revenue. So this bill has passed, and there's this rush of commentary. What's it mean? Is it legal?

      As you mentioned at the beginning, Lee, there are a lot of states that are filing suit over this. I think that there are five total lawsuits with different coalitions of states. They've been filed one in Alabama, Arizona, Missouri, Ohio, and then I'm involved in one here in Kentucky. Tennessee's involved in that one as well. All those suits are still pending. Two, the case in Arizona and Missouri, both of those cases were dismissed on standing grounds, and they're on appeal, and they're currently being briefed. I think both of those cases are still several weeks away from being fully briefed on merits.

      The case in Alabama is still pending in the district court there on dispositive motions. Ohio was the first state out of the gate on this in the Southern District of Ohio. The district court ruled in Ohio's favor on July 1. That case is now on an expedited appeal in the Sixth Circuit. And then the case that I'm involved in here in Kentucky with Tennessee, we just got a ruling from the district court in our favor on Friday afternoon, and so it's not on appeal yet. We expect it will be on appeal soon. It's unclear when that will happen, whether it will be consolidated with the Ohio case. That just happened, so we're waiting for that to go on.

      As I talk about the issues in this case, I'm going to go back to the first two questions I raised. The first is whether Congress can ever tell states that they can't lower their taxes. And the second is if they can, what do they have to do in order to do that. I'm going to just very briefly talk about that first question. The arguments that the states have raised here under the Tenth Amendment and some anti-commandeering principles are essentially that the state's authority to set its own tax policies are different in kind from a lot of other policy choices that they might make. There's a lot of Supreme Court precedent going back to the 19th century and early 20th century and even later where the Court has talked about how the ability to set tax policy is essential to the existence of the states. It is a central part of their sovereignty.

      Part of the argument here, under the Tenth Amendment is that, yeah, Congress can do a lot of things with Spending Clause powers. What it can't do is it can't tell states what their tax policies are going to be. Congress might even be able to tell states that they have to enact a certain program. It might require states to raise revenue, but Congress cannot tell states how they're going to raise that revenue. That's up to the states to decide.

      So far, the courts have not engaged in an in depth analysis on these issues, on the merits because the courts that have gotten to the merits of this case in Ohio and Kentucky have focused only on issues related to the Spending Clause. So I'm going to address a couple of those.

      There are several Spending Clause arguments that have been raised, and two have been the most prominent. So I'm just going to go through those each briefly and talk about what the Ohio and Kentucky court did.

      A quick overview of the Spending Clause and the requirements that the federal government has to meet in order to impose conditions on grants of federal funds, let's go back to South Dakota v. Dole. That's a case where Congress was providing federal funds for highways and as a condition to receive those funds, the states had to agree to raise the minimum age for drinking alcohol. And there was a challenge to that. Congress, you can't tell the states that they have to do this, and the Supreme Court said that it was constitutional so long as you meet certain conditions, and the conditions that Congress imposes have to be clear or unambiguous, as some courts have said. They have to be related to the grant of funds, and they can't be coercive. On the coercion issue, the Court talked about how the grant of funds, the highway funds at issue, was a relatively small part in the state's budget, and so it wasn't so enormous that it would coerce the states and that they felt that they had no real ability to say no to the funds and therefore get out from the conditions the federal government wants to impose on them.

      So the Ohio court is the court that first addressed this issue on merits, and it focused solely on the issue from Dole, the requirement that a spending condition be unambiguous. The problem with—the ambiguity problem in this case is basically this. What does it mean to indirectly offset a reduction in the state's net tax revenue? Now, because the statute itself doesn't really tell us what an indirect offset is -- and that's incredibly broad language -- Congress has created a condition that's virtually every expenditure of ARPA funds could be considered an indirect offset. And so whether it runs afoul of the tax mandate is sort of up in the air and in the eye of the beholder or maybe everything does. Maybe only some things do, but there's no real standard for the states to be aware of to know in advance what exactly are we agreeing to. That's sort of the central part of the Spending Clause is giving the states clear notice as to what their obligation are going to be if they accept these funds.

      The Ohio court issued two opinions. The first opinion, it had some interesting language where the court said, the court had spent hours or days or something pouring over the language of this provision, and it still has no idea what it means to indirectly offset a state's net reduction in tax revenue. And the argument is this basically if you can't know what it means, it's not clear enough for the states to satisfy that Dole test.

      Now, Treasury's response to this has been sort of to sidestep the state's primary argument and instead of directly confronting, hey, is the language clear? Are these sort of ambiguities that the states have highlighted are those real ambiguities or is this much ado about nothing? What the Treasure's primary response has been that the Constitution doesn't actually require those obligations to be clear. Instead, what the Constitution requires is that the states get clear notice that an obligation exists. And then, once the states know the obligation exists, the details of that condition could be left to an agency or litigation or something like that.

      The Ohio courts rejected that argument on a couple of different grounds. It looked at the fact that the Spending Clause governs Congress in cases like Pinehurst and Arlington School District are two big Spending Clause cases. They say that the obligations themselves must be unambiguous, not merely the existence of the obligations. And the court also, in the Ohio court, an issue that's sort of arose in that case and then maybe didn't come up in some of the other cases is whether or not an ambiguous spending condition in the statute could be cured by an agency regulation. If an agency comes along, which Treasury has done here, and provided a regulation that maybe is more clear or gives the states better notice, does that cure the deficiency of the original statutory ambiguity? The states argument has been that no, it can't because the Spending Clause governs Congress, and it is clear in cases like Arlington Central School District that the Congress is required to make the obligations that the states face clear. And so it's no answer to say well, the obligations are unclear, but in an agency did come along later and fix it.

      The second Spending Clause issue I'll get to briefly, before I run out of time here, is the coercion issue. I'll note briefly, the Ohio court addressed the ambiguity issue, and it declined to address any of the other arguments. So it enjoined the statute as to Ohio, and it only addressed the ambiguity. So then in our Kentucky case that we have, the decision we got from the court there is our favor enjoining the tax mandate against Kentucky and Tennessee did something similar and different. It addressed only the coercion issue. They found that the grant of money was coercive, and then it declined to address the other issues.

      The basic coercion argument is this which is the amount of money that has been offered to the states is so large. For Kentucky, it's something like one fifth of Kentucky's annual revenue. So that amount is so large in the sort of once-in-a-century pandemic, the dire sort of circumstances that had been created by that pandemic are so—it's such a significant crisis that those two things working together makes this so that this is not a real choice when the money is offered to the states. The states can't reasonably decline billions of dollars to help them get through this pandemic and respond to this pandemic. And so it's coercive to require them to do some [inaudible 17:35] not lower their taxes. So that's how the Kentucky court addressed that, and then declined to address everything else.

      I know that I'm running up on my time here, so I'm going to go ahead and turn it over to Steve, and I'm sure he's got a lot more thigs to say that are probably a lot more interesting than what I said so...

Steve Schwinn:  Brett, you give me way too much credit. I appreciate the set up, but I hope I don't disappoint. Lee, Brett, everybody at The Federalist Society, I truly, truly want to thank you for the invitation to participate today. It's such an honor and pleasure to be involved in this program. Lee mentioned in my introduction, I do work with the American Constitution Society, sort of the progressive answer to The Federalist Society. I'm deeply involved in that organization. But I will say that some of the most gratifying and best quality programs that I've had the pleasure of being involved in in my career have been with The Federalist Society. And so I do appreciate the opportunity to engage with you all. Brett, the set up, I think, was perfect. I like the way you set it up. I think you identified the issues exactly. Obviously, you did.

      The only thing I would add to that is that what Congress is trying to do here is to avoid giving money to the states and then having the states simply take the money, use it for some purpose, but cut taxes in proportion to the amount of money that they spend so that states can opportunistically take advantage of claiming that they've cut taxes on the one hand but receive revenue from the federal government on the other.

      I guess I just want to start by saying that that gambit, if that is indeed what states were to do with the money -- and I don't make a judgement about that -- but that's what it's designed to guard against. That gambit actually undermines the very purpose of the anti-commandeering principle and cooperative federalisms principles in our system. The Court has been quite clear that political transparency and political accountability are really important values when we think about conditioned spending programs and when we think about cooperative federalism programs. So when Congress builds in a mechanism to protect political accountability, to make sure that the proper level of government is held to account for the decisions that it's making in a federal spending package, that's exactly what cooperative federalism and conditioned spending is all about and what the Court has said time and time again that that's what it's designed to protect.

      So again, what Congress is trying to do here is protect against that kind of potential abuse by the states. Again, whether that will happen or is likely to happen is way above my paygrade and I won't opine on that. But by trying to protect against it seems to me a laudable goal.

      Brett quite clearly laid out the spending requirements in South Dakota v. Dole and identified the issues in litigation. I actually think it's kind of interesting to look at some of the preliminary issues in the litigation. So if participants are interested I hope we can provide some resources or citations to them to look at. Some of the standing questions, the rightness questions, even the mootness questions, and some of the remedies questions, I actually find really fascinating in these cases given the procedural posture of them. So I would invite participants to explore further some of those issues as well.

      But as to the merits, I think just in the interests of time -- I was taking notes while Brett was talking -- and I think what I'd like to do is just react to the excellent points that Brett laid out. And we can kind of go from there. I think what I'm going to do is collapse what I take to be his first and third point, that is the first point that taxes are different and unusual, and the third point, the anti-commandeering point, and sort of collapse those and react to them together as one, and then the second point, react to that separately.

      So let's actually start with that second point. The way Brett framed the issue, I think, is exactly right and certainly the issue that the lower courts are now dealing with. But I want to put a slightly finer point on it. Treasury has now issued interim final regulations that will deal with how to administer the funds, how states can use the funds, and how Treasury will enforce a kind of clawback if states use them in a way that violates the tax reduction clause that Brett so eloquently talked about. These are extraordinarily detailed , a whole set of regulations dealing with every kind of nook and cranny of how a state can spend this money and how it cannot spend the money.

      When we get to how it cannot spend the money, that's really the important piece. That's what the states are challenging in this case. What they're challenging is the indeterminacy in the statutory language that they can't indirectly cut taxes in reaction to offset the federal spending that they're getting through this bill.

      So what does that mean, indirect? Well, it turns out the interim federal regulations answer that with extreme detail, I'll say as an understatement. They use accounting methodologies that are tried and true in the states, projecting out what state revenues are going to be given a particular tax cut, their offsetting spending measure, how does economic growth projection play into that, in order to determine the net effect of any tax cut that a state were to make in reaction to receiving this federal spending and then moreover to tie that tack cut to the federal spending in ways that would prohibit the federal government from clawing back a good portion of the money that the state attorneys general have identified, for example in their letter to Secretary Yellen when the bill first passed. And so I guess in my view, the interim final regulations take care of the indeterminacy in the statutory language, this word direct, indirect.

      And then, the question is, well, can we use -- as I think again Brett really quite eloquently laid out -- can we use the regulations to interpret the statute. Brett is entirely correct that so many of the Supreme Court decisions that talk about Congress's spending power and conditions on spending refer to Congress specifically and talk about Congress by name. But if we look at the broader context of those cases and we think about administrative law principles overlaid with those cases, it's quite clear that what the Court is really talking about here is not just Congress's appropriation power, but Congress's appropriation power plus its power to delegate to the agencies to fill in the blanks and do the hard work of coming up with the particular regulations about how to enforce particular spending programs. We've seen that time and time again in administrative law of course and time and time again in spending measures as well. So I guess what I would say is that when Congress is -- or when the Court is using the term Congress to refer to Congress's spending power, it really is referring more broadly to Congress's power not only to spend money, but then to direct the agencies how to spend that money and to develop regulations to spend that money or not, and that the regulations are and must be an integral part of that.

      One of the courts, I think, had a really interesting discussion about this, Brett, and you can correct me if I'm wrong, I think it was the West Virginia court that talked about the ability of Congress to delegate to agencies and use an agency's interpretation as part of the figuring out whether the condition is clear enough and putting that in the context of the nondelegation doctrine which I think is another way of thinking about it. And if we do think about it that way, we know that the Supreme Court has given Congress wide berth in delegating vast amounts of authorities to the federal agencies. And so if we take that view, as opposed to a strict spending view, we arrive at the same answer.

      Just in quick reaction to Brett's other two points, kind of taken together, taxes are different and that this amounts to commandeering, I'd argue, Lee, as you pointed out in the introduction quite kindly, I've argued that there is not anti-commandeering principle, that this isn't a thing. It's made up out of old cloth, and I argue that I think with pretty good reason. We can start with the text of the Tenth Amendment. There really is nothing in the text of the Tenth Amendment that supports anti-commandeering or in the broader structure of the Constitution, particularly when we look at things like the Supremacy Clause or the Thirteenth, the Fourteenth, the Fifteenth Amendment, the Seventeenth Amendment, so many amendments that have changed the Constitution to empower the federal government in relationship to the states. And so a textual approach, I think, with would counsel against that.

      A historical approach, similarly, would counsel against it. It's well documented that at the founding, the framers, including both Hamilton and Madison, who came down on very different sides of Congress's general welfare power, they both understood that the federal government would use -- and this I think is particularly pertinent to the cases that we're talking about -- that the federal government would use state officers to collect federal taxes. And if that's not strong evidence that the federal government can commandeer the states, I'm not sure what is.

      So beyond text and history, we can look at precedent. The anti-commandeering principle of course comes into its sharpest focus in New York v. United States, and then there are a couple of other cases that follow that that expands the principle. As Justice White pointed out in New York itself, the anti-commandeering principle is essentially made up out of whole cloth. The Court cites a couple of other cases, Hodel and the FERC case, that both sort of casually refer to something that might be an anti-commandeering principle in dicta, but if you telescope out and look at the broader context or the statements in those cases, it's quite clear that the Court is not establishing an anti-commandeering principle, but simply noting the fact that Congress has rarely if ever directly commandeered the states in the way that Congress might have in those cases. And again, those cases—at least Hodel—didn't directly deal with commandeering anyway. So the Court was really outside of its lane in making statements about commandeering.

      So text, history, precedent in my view all counsel against an anti-commandeering principle. I think particularly in a case like this where you have historical examples of Congress actually directly imposing on states and their taxing authority by using state officers to collect not state taxes but federal taxes, again, a well-documented phenomenon or at least understanding at the time of the framing. And when we think about political accountability, it seems to me that the political accountability reason for the determinacy that's required in the South Dakota v. Dole test and the anti-commandeering principle that's also embedded into that test, that when we think about political accountability that's exactly what Congress is trying to do in this act.

      So I would argue that political accountability counsels in favor of upholding the condition in this act as well. I'm kind of keeping an eye on my time as well, and I think, Lee, I'm just going to stop at this point and see if we have discussion or questions. Does that make sense?

Eileen J. O'Connor:  It does. Thanks very much. And I think that each of you merit many more minutes because you teed up some things that you weren't quite able to finish up on. And I'm not seeing any questions in the Q&A yet, so we wanted you to go ahead and engage with each other first anyway. Brett, before I ask a question or two, would you like to comment on some of the things that Steve has just said?

Brett Nolan:  Sure. And I think that Steve makes a lot of really, really good and interesting points. I think that the kind of interesting thing about these cases is that they implicate so many different doctrines where you have—we're talking about the Spending Clause and then all of a sudden we're talking about nondelegation. Nondelegation is obviously a huge issue in the courts right now and what that looks like going forward. So you're not only talking about this balance between federal and state power and what the federal government can tell the states what do you and how it can tell the states that it can do it, but who is the federal government in that instance. And what can Congress tell the states that it's going to require the states to do by delegating it to an agency? What are the limits of that?

      Steve, you mentioned—I think it was the Ohio court that had this long nondelegation discussion, which is really interesting, really thoughtful. You could tell that Judge Cole in that case had really thought through these issues that are really complicated. What he sort of came to the conclusion was—he talked a lot about the major questions doctrine, and I'm by no means an experts in that world. But I think part of where he came at from was that this grant of funds and then this restriction on what states do with their taxes while they receive and spend it have such big economic and political ramifications that if Congress really wanted to delegate the details on what that means, it would have been a lot clearer about it.

      And I think a different point that we've made, in our case at least, is that there's got to be a difference between a statue, like a condition like this in which there are marginal ambiguities about how it might apply in certain circumstances, and the case where here our position is that really the core meaning of this provision is just up in the air. It doesn't seem like a case where Congress has said to an agency listen here's some money that you can enter into contracts with states and you can set the conditions of those contracts. This is a case where Congress has attempted to describe a pretty specific condition that it wants the states to follow, but it has done so in a way that it's just almost incomprehensible and the entire core of what it means had been left to the agency with this sort of detailed rule making.

      I think that there are a lot of nondelegation questions that intersect with what does the Spending Clause require. I don't think—the department has pointed out that there are cases where courts have afforded Chevron deference to Spending Clause grants of funding. And their argument has been essentially well, look a Spending Clause grant has to be able to be at least somewhat ambiguous, otherwise wouldn't it be affording Chevron deference to the agency as it applies it. Those cases haven't teed up this issue in particular. They sort of talked about Chevron deference. No one's disputing that. But I do think that there is a difference between an ambiguity on the margins of a case and how you apply law. It's sort of ambiguity of the core of how the law might apply. So I think that's sort of at stake here. I think Judge Cole's opinion in Ohio was a really good discussion of that issue and some related issues.

      The point about political accountability is really good, Steve, because that is the current that runs through these Tenth Amendment and anti-commandeering issues. I think that it's possible to see what Congress wanted to do here, perhaps was trying to do, was to prevent states from lowering their taxes but not really lowering their revenue and then taking credit for it. The department has certainly made that argument in court. And the response to that has been that there are actually cases which Congress does exactly that, and they look very different than this one. So the Bennett case is one. If you look at the Court's opinions in all these cases and briefs, this was a case about Spending Clause. I think it was either a university or the State of Kentucky that was involved in this case as well, and it was about spending programs related to education. The Court talks about what they call anti-supplanting provisions where a spending condition in enacted where the money is given to a state and said listen we want you to spend this on healthcare or we want you to spend this on education, but what we don't want you to do is lower what you would have spent on education and then take that money and do something else because our goal is for you to spend more on education than what you would have done before.

      Bennett sort of talks about those anti-supplanting conditions and how they work. And this is nothing like that because Congress here as not told the states, for example, you can spend money on COVID testing, but we don't you to decrease your healthcare budgets otherwise. It's actually under the tax mandate. It's perfectly permissible—it seems to be at least and the department hasn't disputed this yet—for a state to take ARPA funds to spend them on healthcare and then to lower their preexisting healthcare budget commitment and go take that money and do something like build a golf course or increase executive salaries. The tax mandate doesn't prevent what we would think of as anti-supplanting in that way. All it does is prevent states from lowering their taxes. If they keep their taxes the same and then spend that money on all sorts of things they could go take credit for, the tax mandate says nothing about that.

      I think these political accountability questions are really good and you see them a lot in other cases. But I think that at least the way the tax mandate has been written and structured here, it's harder to see how that fits there, even if it was the case that that's what Congress intended.

      The last thing I'll say is that the issue of whether the Tenth Amendment or anti-commandeering questions about are taxes different—and there might be this other question sort of lurking in the background there which is is anything different; and is Congress allowed to use its spending power to do anything that it wants; are there any sort of policy decisions the state might make that are just off limits? There's a comparable, although not directly on floors, case that's been cited in some briefs in which Congress attempted to condition Oklahoma's acceptance into the union on an agreement that Oklahoma would keep its capital city in a certain location. When Oklahoma wanted to move that, it was challenged, and the Supreme Court said that Congress has no authority to do that. And the reasons were different. The reasons there were because once Oklahoma became a state, it had to be treated equally as all the other states and sort of this equal sovereignty principle amongst the states, and so Congress can't hold Oklahoma to that.

      But I do think it sort of raises this question that just frankly haven't seen litigated that much which is are there any limits to what Congress requires a state to do with the grants of federal money. I think so far, the department's position is there are no limits, that Congress could require a state to do whatever it wants. And if that's true, there might be a whole host of problems that you could see in the future. Could Congress attach as a spending condition that the state modify the way its executive branch is structured in its constitution? You could sort of see a long list of problems. If there are no limits as to what Congress could impose on a state, what could Congress do?

      And then, even if you said well, yeah Congress can do anything, I think there's this other question of -- well, I'm sorry. I think what it really does is it puts the spotlight on issues like coercion. So if there's no limit as to what Congress can do, then surely in a time where you have this once in a century pandemic and you have a Congress with this unlimited purse, surely in those circumstances, that's the way we can stop Congress from taking advantage of those circumstances. I think it was the chief's opinion, and then it might have been that one of the dissenting opinions, that said that the point of this restriction, the coercion restriction, is prevent the federal government from bringing its full force onto the state and bending it to its will. I think that that issue becomes a lot more important if we get to a point where we say that Congress really could do anything that it wants in terms of attaching conditions on spending.

Eileen J. O'Connor:  Steve.

Steve Schwinn:  Those are awesome points. I'd like to react to the last point and then make a couple of comments about nondelegation and Chevron because I think those are moving targets in our current constitutional world.

      What can Congress do under its Spending Clause? In my view, it can do quite a bit. And that's not just a matter of federal force and power but also federal supremacy and our history and tradition not only going back to the founding. The structure of the Constitution, the things that I've talked about, seemed to give Congress quite a bit of authority to spend money on the conditions that states adopt certain policies.

      What's the outer boundary of that? Well, Brett is quite right in saying relocating the state capitol might be an outer boundary of that. There might be related sort of things like states have to adopt a unicameral legislature or have to do something else pretty dramatic that goes to the core of their state sovereignty.

      I guess there are two reactions to that. One is states can say no. And I know that the amount of federal money here is extremely attractive. I totally get that, but this is a program that is not yet implemented. States are not yet relying on these funds unlike the Medicaid expansion in NFIB v. Sebelius where states stood, according to the Court, states stood to lose their entire federal Medicaid allotment if they declined to expand Medicaid. And not only that, the Court noted it wasn't just the amount of money, which was hugely significant to states, but also the fact that they were enmeshed and enmired in this federal Medicaid program since its inception, many of them, and had systems built up that were designed to provide medical insurance for poor citizens and so relied on those systems as well. It was more than just losing the money, which alone was quite significant.

      This case is very different. States have not yet received this money. I understand that we all are in a dire circumstance and need it. Although I think the record in these cases -- and Brett can correct me -- is that some states need it substantially less than others. But nevertheless, states, at least in theory, can say no. So I guess that's one reaction.

      The second reaction to that point is the Court's jurisprudence on this I think puts us in a real bind. So the Court has said, on the one hand as I mentioned, that Congress can condition the receipt of federal funds on states applying federal wage and hour standards to state employees for example. It seems like a pretty significant intrusion into a core sovereign function. The Court has also said that Congress can impose anti-bribery conditions on state employees, again, a pretty significant federal intrusion on what many would consider a core sovereign function. And so where to draw the lines here? What's a sovereign function? What's not a sovereign function? How do you figure out when Congress is going too far?

      The Court strikes me as quite confused on that question, and I've got to tell you, it has confused me and my students for many years as well. If we're allowing federal government to condition the receipt of federal funds on things like federal wage an hour standards or federal anti-bribery standards as applied to state employees, it's hard for me to see why we couldn’t similarly require states to do something like this even before they've agreed to accept the funds.

      Just a quick bead on nondelegation and Chevron, so there's a Chevron case that's going to be argued in December at the Supreme Court. Many of us watching this are thinking the Supreme Court is probably going to scale back the Chevron doctrine or change it significantly. The anti-commandeering -- I'm sorry -- the nondelegation doctrine has long been in at least a portion of the Court's crosshairs, and I think given the current composition, I'm expecting that we can probably see the Court make some significant changes in the nondelegation doctrine as well. I think both of those are something that we need to keep our eye on as these cases proceed.

Eileen J. O'Connor:  Thank you so much. We do have some questions from our audience. And like they do in Jeopardy—I've been watching a lot of Jeopardy lately. There's this big intrigue about who's going to be the host. So whoever rings in first is going to answer this question. How will Treasury clawback funds that it determines were spent, directly or indirectly, to offset a state tax cut?

Brett Nolan:  So the statute provides a recoupment mechanism so that if the secretary determines that a state has spent the money in violation of the tax mandate, it can initiate a recoupment proceeding against the state to get it back. And just as a side note—because Steve mentioned that there are a lot of interesting standingness rightness concerns and this is actually the part of one of the standing issues that the states have been fighting with the department over which is—the department's position is that the states really don't have standing here unless there's an imminent fear of recoupment. And as of now, the department has said states really don’t fear that recoupment and that even if they did, there's sort of this orderly mechanism in which the states could raise their constitutional objection in that proceeding as well. So that's at the heart of the standing challenging that the courts have dealt with.

      For our part at least in Kentucky, the district court found that unpersuasive. Somewhat in part by Secretary Yellen's letter to the states which showed that she clearly intends to enforce this against the states. The Treasury regulation's another indication that they clearly intend to enforce it. So if you're thinking about this case as a pre-enforcement challenge before recoupment takes place, it seems clear that the department's going to enforce it and so we might as well tee the questions up and have them resolved sooner and know whether there are standingness or rightness issues that might be there.

Eileen J. O'Connor:  Steve, do you want to address that?

Steve Schwinn:  Yeah. I'll just say I totally agree with Brett on the justiciability questions. I think that these cases are and ought to be justiciable and the courts ought to hear them that they're standing and rightness. I will note that the Secretary's regulations do provide for a kind of, as Brett said, orderly process for recouping the funds, which includes an initial step that the Treasury Department would simply inform a state when it has a concern that a state is considering a tax measure that would run afoul of this. So there is or at least appears to be an opportunity for some—I don't want to say negotiation. I think that probably stretches it too far—but at least some notification that a state's proposed tax measure could run afoul of this provision.

Brett Nolan:  And I'll just add to that that we have seen Spending Clause cases reach the Court in both routes. In the Bennett case I mentioned earlier, I believe that the facts in that case—that was essentially what was a recoupment proceeding where Treasury was—the Department of Education maybe was trying to come after the money from Kentucky at that's where Kentucky raised its challenge. And then we've seen of course NFIB, a preemptive spending challenge and that kind of thing. So both have been the vehicle to get these cases to the courts.

Eileen J. O'Connor:  Thank you. I have a question of my own. Did the law provide any means test? Does the state have to show that its revenues have fallen or its expenses have increased in order to get some of this money?

Brett Nolan:  No, but what's interesting is that—I mentioned before that there's the list of ways in which states can use the money. There are four categories of usages, and one of those is that the state can use the money to fill in for lost revenue if that lost revenue was caused by the pandemic as opposed to caused by a change in tax law. And so if the states want to use it in that way, I think that they do have—the statute, unlike the tax mandate, that part of the statute actually says here's how you measure it against this baseline, and this is how you know if you have this lost revenue, and then you can use the money to make up those holes. But in general the states just have to certify, I believe, that they need the money and then...

      I know Steve had mentioned before that the money hadn't been dispersed. The money has been dispersed to some states. I know Kentucky has received part of it. I think Ohio has as well. I don't think Tennessee has yet, but it has been dispersed, and it's sort of being dispersed in these pockets.

Eileen J. O'Connor:  Right. Steve, do you want to comment on that?

Steve Schwinn:  No. Only that states don't need to certify that they need it in the first instance, but if recoupment or clawback is an issue, the Treasury regulations provide actually for a fairly detailed calculations in term so of the net effect of any taxes, which would include looking at state spending measures and projected economic growth that might impact taxes and revenue in a way that actually is a pretty tried and true methodology for states in determining and projecting out the likely net effect of a tax measure. And so while that question doesn't come in at the threshold, it does come in at the recoupment or clawback level.

Eileen J. O'Connor:  Thanks. Another question I have is why four years?

Brett Nolan:  The four years, I believe, is tied to the amount of time that this money can be dispersed and I think spent. There's actually sort of an outstanding question about—that we've at least raised in our briefing—as to how long these restrictions stay in place and can continue to bind the states. An example being suppose a state implements a tax reform in year four that has a long effect where it eventually causes lower revenue, and you could see if you buy this argument that you're worried about states being nefarious, then maybe they do that knowing they have all this money up front and they can take the hit later. It's really unclear how long the reach of Treasury goes with tax policies that have these long term effects or could change.

Eileen J. O'Connor:  Professor Schwinn, I've got a question that's directed to you. You mentioned that the founders anticipated state officers collecting federal revenue. Does this historical record show the founders intended this to be compulsory over the objections of the state officers?

Steve Schwinn:  Yeah. That's a really interesting question. So there's good evidence that the founders thought that this kind of control over the states would be compulsory. Actually I think the best evidence for this -- I would recommend this to participants -- is Hamilton's Federalist 27, where toward the end, he just talks in really muscular terms about Congress's authority over the states and just says out at a couple of points that Congress has authority over the states and can commandeer the states. The dissenters, in New York v. United States and in the Printz case, both cite to Federalist 27, but the majority doesn't really give it significant attention. So there is good historical evidence that the idea was that the federal government could commandeer in that way.

      But moreover, I guess, the other thing is the Court has been quite clear in these federalism questions that it doesn't matter. It doesn’t matter if the states consent to commandeering. That's true at separation of powers as well, it doesn't matter if one branch of government consents to a violation of the separation of powers. And the theory here is that those structural protections in our Constitution are really designed to preserve individual liberty not to preserve necessarily the states' rights as such. And so the Court has been clear that it doesn't matter if the states consent or not. If there's a violation, there's a violation. And presumably, if there's not a violation, there's not a violation.

Eileen J. O'Connor:  Brett, do you want to comment on that?

Brett Nolan:  I don't think I have much more to add to that.

Eileen J. O'Connor:  All righty. We have another question from the audience. Apparently we have a state lawmaker in the audience who said, "I have proposed and advocated for state income tax reductions with a concurrent rise in consumption taxes. Often this sort of tax reform causes a reduction in state tax revenues the short run but enhances revenues in the longer run. Is there any amount of short term revenue loss that Treasury will not try to recoup?" Steven, I see you reacting.

Steve Schwinn:  Let me say that that kind of calculation is built into the Treasury regulations. How it will actually work out on the ground, I really have no idea and don't venture to predict. But I will say that the regulations, at least on the face of them, account for that kind of problem and would control for it.

Brett Nolan:  So if you set the regulation aside and you look at just the tax mandate, that kind of question really goes to the heart of the ambiguity arguments that have been made. You have the indirectly offset sort of language in its ambiguity, and you have this language about the net tax reduction. What does that mean? I would again on the ambiguity point I would refer to Judge Cole's opinion in Southern District of Ohio because he talks at length about this and about how these tax policies have these short and long term effects and sometimes those effects are unintended. Sometimes you know that they're coming. And there's really no standard in the tax mandate that tells the state what does it mean to have a net tax reduction. Is that measuring by the year before? Are we allowed to project out for three years? It's just really unclear. The Treasury regulation does attempt to address this and tell states how they should go about calculating it, but the tax mandate itself, the statutory provision just leaves it all up in the air. And that's a big part of the Spending Clause challenge that the states are making.

Eileen J. O'Connor:  Maybe that's why it's four years? Is it a year by year loss if you have a loss in any one year? What if over the four year period you don't have a revenue loss because of whatever changes you're making or however the law works?

Steve Schwinn:  I don't remember the exact language in the regulation, so I don't recall mechanically how that works. But the regulation does take account of it. But Brett's exactly right. If you leave the regulation out of it, the statute itself is utterly indeterminate. So if the Court decides that interpreting the regulation is part of that language indirect in the statute, that they can't use the regulation, then I think it's far more likely that the Court is going to say that that's just not a clear enough condition.

      And you know, given what I've said about the trend lines for nondelegation doctrine and Chevron deference and given the way the Court treated—remember in NFIB v. Sebelius, Secretary Sebelius certified to the Court that the department would not seek to recoup federal Medicaid expansion funds from the core Medicaid program. They simply wouldn't pay the expansion which changes the analysis entirely. But what the Court said is, "Yeah, that's fine, that this secretary said that, but what about the next secretary, right?" And kind of projecting out, I would imagine that the Court would move in a similar direction, especially as it's currently composed.

Eileen J. O'Connor:  Excellent. I see Evelyn's joining us again. But let's each of you take a minute to make any final closing remark. Brett, you first?

Brett Nolan:  Sure. My only closing remark is that I would encourage everyone to read the briefs and the opinions in these cases because there are a lot more issues that we haven't even talked about here that I think are really interesting. I think that the states have raised some interesting arguments about what it means to have a condition that relates to the funding and the states have—and like Steve mentioned earlier, the department has raised some rightness and mootness issues that the courts have really struggled to get their heads around. And so I think that we've talked about maybe the most interesting issues or the issues that are likely to get the most attention today, but there are a lot of other issues that you could see pop up as the court of appeals wrestles with these issues.

Eileen J. O'Connor:  Steve?

Steve Schwinn:  Yeah, same. I'll just echo those sentiments. Brett said it better than I could. Fascinating, fascinating cases with really important implications. I guess the only thing I would add is what I always tell my students. We make constitutional commitments to structural features of our Constitution with regard to federalism, separation of powers, what have you. And we do that in a particular political context where we have a feeling about a particular political issue which is always important. I don't want to devalue that. But in order to seriously test our constitutional commitments, change the politics. So if the federal bill looked different and promoted a politically conservative objective but read similarly and operated similarly, would we feel differently about it? I try to use that gauge myself to test my own constitutional commitments and certainly offer it to my students as well.

Eileen J. O'Connor:  Excellent. Thank you so much. Excellent discussion. Evelyn, you have some closing comments, I think.

Evelyn Hildebrand:  Yes. Thank you. On behalf of The Federalist Society, many thanks to our speakers and our moderator this afternoon for taking the time to comment and for your excellent discussion. And thank you to our audience for participating and sending in your questions and listening to the great discussion this afternoon. We welcome listener feedback by email at [email protected], so if any of our participants want to send in feedback, please feel free to do so that way. Keep an eye on your email for upcoming events and without any other announcements, we're adjourned. Thank you.

 

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Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s Practice Groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at www.fedsoc.org.