A federal appeals court in Alabama sided with a lawsuit New Hampshire Attorney General John Formella (pictured) had joined with 12 other states challenging a COVID-19 federal relief act that banned states from using federal money to cut state taxes. The court decided the law was flawed in that it provided states no guidance on how to prove state tax cuts were going to happen with or without the bonus grants from the federal government.
A federal appeals court in Alabama sided with a lawsuit New Hampshire Attorney General John Formella (pictured) had joined with 12 other states challenging a COVID-19 federal relief act that banned states from using federal money to cut state taxes. The court decided the law was flawed in that it provided states no guidance on how to prove state tax cuts were going to happen with or without the bonus grants from the federal government.
CONCORD — A federal appeals court in Alabama has ruled in favor of New Hampshire and 12 other states who sued the federal government, saying a ban against using federal grants for tax cuts was unconstitutional.
The ruling was timely, with Gov. Chris Sununu set to propose another round of tax cuts as part of his state budget blueprint next month.
In March 2021, Congress approved the American Rescue Plan Act, which gave states more than $200 billion in grants to cope with the COVID-19 pandemic and its economic aftermath.
The aid bill included a provision that no state could use those dollars to cut taxes or delay a state tax increase. It gave the U.S. Treasury Department the authority to recoup from states any state tax cuts made possible by ARPA money.
While New Hampshire was receiving ARPA grants in 2021 and 2022, the state was cutting taxes in the current budget signed by Sununu in June 2021.
These included a third and final cut in the business enterprise tax and, starting on Jan. 1, 2023, a five-year phaseout of the state’s 5% tax on stock dividends and bank account interest.
In a unanimous ruling, 11th Circuit Court of Appeals Judge Andrew L. Brasher ruled the ban violated the Spending Clause of the U.S. Constitution because the federal government had not supplied any benchmark for how states could prove those tax cuts were not going to be made even without the ARPA grants.
AG: Ruling upholds ‘sovereignty’
“Thus, the states may cut taxes, but the Rescue Plan leaves them guessing whether and how they can spend Rescue Plan funds after the tax cut,” Brasher wrote.
“The Rescue Plan’s offset provision has affected the states’ sovereign authority to tax by binding them to a deal with ambiguous terms and placing them on the hook for billions of dollars in potential recoupment actions.”
West Virginia’s attorney general had brought the original claim, with New Hampshire joining the lawsuit, along with attorneys general from Alabama, Alaska, Arkansas, Florida, Iowa, Kansas, Montana, Oklahoma, South Carolina, South Dakota and Utah.
“The ARPA tax mandate was an improper and unconstitutional intrusion on the rights of New Hampshire’s elected policymakers to make decisions regarding state tax policy,” Attorney General John Formella said in a statement.
“We are grateful that the Eleventh Circuit upheld the district court’s decision to issue a permanent injunction against the mandate, and that the state of New Hampshire’s sovereignty will remain protected.”
To date, the Treasury Department has made no attempt to recoup any of the ARPA grant money from New Hampshire, said Michael Garrity, the state Justice Department’s communications director.
The ARPA law requires the states to spend all the grant money they receive by the end of 2024.
Sununu told reporters last week he was reviewing a “menu of options” for how the state could cut taxes over the next two years.
Legislative budget officials have predicted the state will end the current budget on June 30 with a surplus of at least $280 million.
House Majority Leader Jason Osborne, R-Auburn, will testify Tuesday on his bill (HB 133) to repeal the state’s communications services tax on landline telephone calls, which raises about $31 million a year.
The conservative New Civil Liberties Alliance also praised the decision after filing a brief in support of the states that challenged the tax ban.
Senior Litigation Counsel Peggy Little said it was important that the court rejected the Treasury Department’s attempt to salvage the ban by carrying out changes to it through agency rule.
“Lawmaking power is vested in Congress, not executive agencies. All circuit courts to have reached the merits of the tax cut ban have now held it unconstitutional,” she said.
