Treasury dealt blow over ARPA Offset Provision

BY SourceMedia | MUNICIPAL | 11/21/22 02:07 PM EST By Connor Hussey

The Treasury Department has been dealt a blow in its defense of the American Rescue Plan's Offset Provision, which bars states from using federal funds, directly or indirectly for tax cuts, as Sixth Circuit of Appeals Judge John K. Bush concluded that relevant provisions of ARPA are unconstitutional.

That was the result following two opinions by Judge Bush, a Trump Administration appointee, issued in Ohio v. Yellen, which was thrown out after concluding the claims were moot, and in Kentucky et al. v. Yellen, in which the plaintiffs are both Kentucky and Tennessee, ruled that at least one of the plaintiff's had standing and that the relevant provisions in ARPA are unconstitutional. That ruling is a win for states who sought protection for what they view as their fiscal sovereignty.

"These opinions continue the trend of every time a judge reaches the merits of the ARPA provision, they strike it down as unconstitutional," said Joseph Bishop-Henchman, executive vice president of tax policy and litigation at the National Taxpayers Union Foundation, which has filed amicus briefs in support of the states. "That a state could lack standing to challenge a federal condition on it is strange from the panel majority but doesn't change the fact that Treasury lost here."

More than 20 states have filed six different lawsuits challenging the government's restriction and last month, Missouri asked the nation's top court to take up the issue, but the question of standing is still in play for Missouri's case in the Eighth Circuit.

Both Kentucky and Tennessee in their initial challenge of the provision, arguing that the provision intrudes upon their own state taxing authority, had standing as the court ruled that the Offset Provision "at least arguably threatened a significant intrusion upon state taxing authority?an intrusion that arguably offended the Spending Clause because it was not clearly authorized by the Offset Provision itself," the opinion in Kentucky et al. v. Yellen said.

But after Treasury's Final Rule was issued, with its guidance on implementation, the Sixth Circuit disavowed this interpretation by publishing certain safe harbors which permitted States to cut taxes.

"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 to state law," Treasury Secretary Janet Yellen said in a statement to state attorney generals at the time. "If States lower certain taxes but do not use funds under the Act to offset those cuts-for example, by replacing lost revenue through other means-the limitation in the Act is not implicated."

In response, both Kentucky and Tennessee did not provide the Sixth Circuit with any evidence of a plan they had to violate the rule and thus failed to establish that Treasury will seek recoupment.

Ohio's challenge to the rule became moot for similar reasons, as the Final Rule provided Treasury with coverage from the claim that such a broad reading could be leveled against them and failed to allege further injury.

But Tennessee did provide evidence of a "distinct theory of injury," that Treasury's Rule and the underlying Offset Provision burden the state with compliance costs.

"Far from mooting the compliance-costs theory of injury, the Rule in fact exacerbated the harm with its more detailed explanation of the measures required to comply with the Offset Provision," Judge Bush's opinion in Kentucky et al. v. Yellen said. "Thus, we hold that Tennessee's challenge is justiciable."

"As a result, Treasury cannot use its Rule to impose compliance requirements upon Tennessee that are not clearly authorized by the Offset Provision itself," the opinion said.

The court also agreed that the provision is so vague as to not provide the "clear notice" to Tennessee that the federal government must constitutionally provide when conditioning funds to states.

"The statute itself, according to the Sixth Circuit, is defective, and the only question now is does someone have standing to challenge it," said Steve Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center.

Judge Bush, in the example of Tennessee, has now given states a roadmap to challenge this provision, Rosenthal said. But Congress is also likely to appeal, which could set up a broader fight on what constitutes standing in this matter.

"You can imagine that the US government will appeal the Sixth Circuit Tennessee decision and say that compliance burdens are not sufficient to create standing," Rosenthal said. And that would yet be an interesting question for the Supreme Court to take up and might give you more of the scope of what the standing issue is."

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