MORGANTOWN, W.Va. — West Virginia Attorney General Patrick Morrisey recently announced victory in a 13-state bipartisan lawsuit filed against the U.S. Treasury Department regarding an American Rescue Plan Act provision prohibiting states that received ARPA funds from lowering taxes for three years.
Morrisey originally announced the case in March. Alabama and Arkansas were co-leaders in the case, filed in the U.S. District Court for the Northern District of Alabama.
Morrisey said in his announcement, "This is a great victory for states' sovereignty and it sends a clear signal to the administration and Congress that they must operate within the confines of the Constitution. Our lawsuit was designed to protect West Virginia from federal overreach. We have accomplished this. This decision by the court also ensures our citizens aren't stuck with an unforeseen bill from the feds years from now."
The original filing said, "The American Rescue Plan Act of 2021 ... includes a short—but incredibly impactful—provision, which impermissibly seizes taxing authority from the States. ... They must either relinquish control over a core function of their inherent sovereign powers, or else, in the midst of a deadly and destructive pandemic, forfeit massive and much needed aid that represents approximately 25 % of plaintiff states' respective annual general budgets."
The filing continued, "Specifically, the federal tax mandate disables states from decreasing taxes on their citizens for a period of over three years, while allowing them to increase taxes on their citizens and residents without restriction. The federal tax mandate thus usurps the ability of the plaintiff states' citizens to reduce their tax burdens and creates an impermissible chilling effect on their elected officials' willingness to do the same—based on a threat that the federal government may claw back some or all of the States' share of critical ARPA funding."
As reported in March, part of ARPA is devoted to various COVID-19 relief measures. The bill forbids states from using COVID-19 relief funds to "directly or indirectly offset a reduction in ... net tax revenue, " whether by cutting rates, giving rebates, deductions, credits, "or otherwise."
The 13 states took issue with the word "indirectly " because it could effectively bar any tax-cut legislation this year or for years to come, they said. Any money that Treasury regards as misspent on tax cuts would be subject to recapture by Treasury.
Before filing the suit, the states wrote a letter to Treasury Secretary Janet Yellen, named as a defendant along with Treasury itself, seeking clarification of the word "indirectly " and citing the problems they face with tax-cut plans. Yellen wrote back and said it's well established that Congress may place reasonable restrictions on the use of federal funds, and Congress does it routinely.
"Nothing in the act prevents states from enacting a broad variety of tax cuts, " she said. "It simply provides that funding received under the act may not be used to offset a reduction in net tax revenue resulting from certain changes in state law." Replacing lost funds by other means isn't part of the prohibition.
The court in it ruling explained that Congress must be clear if it intends to impose a condition on the granting of federal monies—that is, it must do so unambiguously, Morrisey's announcement said. The court also agreed with the plaintiff states that the federal tax mandate was ambiguous and violated the conditional spending doctrine, thus making it unconstitutional.
The court granted the request by the states' attorneys general for a permanent injunction preventing the federal government from enforcing this provision against the 13 plaintiff states.
Joining the three lead states were Alaska, Florida, Iowa, Kansas, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota and Utah.
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