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Federal Judge Allows Three States' ARPA Challenge to Proceed

Updated: Mar 22, 2022

Texas, Mississippi, and Louisiana may continue to litigate their claim that a provision under the American Rescue Plan Act...

Texas, Mississippi, and Louisiana may continue to litigate their claim that a provision under the American Rescue Plan Act unconstitutionally bars states from using the act's aid to offset reductions in net tax revenue, a federal district judge ruled. In a March 4 order in Texas v. Yellen, Judge Matthew J. Kacsmaryk of the U.S. District Court for the Northern District of Texas denied Treasury’s motion to dismiss the case, finding that it failed to demonstrate that the three states have no standing to bring their case or that they failed to state a claim upon which relief may be granted. Although Kacsmaryk didn't decide whether to grant the states’ request for injunction, he found plausible their arguments that the statute’s provision unconstitutionally interferes with and proscribes tax policies the states intend to enact, agreeing that they have standing to bring their case. The provision, found in section 9901 of ARPA (P.L. 117-2) and codified at 42 U.S.C. sections 802–805, restricts aid from the act from being used by a state or territory to “either directly or indirectly offset a reduction in the net tax revenue of such state or territory resulting in a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.” States that violate the provision are required to repay the funds. The challenge is one of six similar lawsuits filed in federal district court by state attorneys general. Federal judges in Ohio, Kentucky, and Alabama have declared the provision unconstitutional and enjoined Treasury from enforcing it, while federal judges in Missouri and Arizona concluded that the challenging states lacked standing to bring their claims. The Sixth Circuit and the Ninth Circuit have heard oral arguments in subsequent appeals. In concluding that the three states in this case have standing to bring their claims, Kacsmaryk addressed Treasury’s argument that the states lack pre-enforcement standing, declining to find that their alleged injuries are merely hypothetical or speculative. The judge noted that the states claimed they would continue to enact tax laws during the time period prescribed by the "Tax Mandate," and he pointed out that Treasury has already demonstrated its intent to recoup misused ARPA funds by issuing rules defining when a state has used the funds “directly or indirectly” to offset tax revenue. Kacsmaryk noted that the states need not confess that they plan to violate the questioned law. He explained that they are facing the threat of enforcement and that an actual enforcement action is not a prerequisite to challenging a law. “The Court thus finds Plaintiffs have standing to raise each of their claims even if their alleged injuries are considered at a pre-enforcement stage,” Kacsmaryk said. Rule 12(b)(1) Standing In his order, Kacsmaryk first rejected Treasury’s motion to dismiss the case for lack of Article III standing, or subject matter jurisdiction, under Rule 12(b)(1) of the Federal Rules of Civil Procedure. He established that the three states have suffered an injury in fact that is traceable to the challenged action and that the injury is likely to be fixed by a favorable decision. Kacsmaryk rejected Treasury’s argument that the injury is only hypothetical, accepting the states’ argument that they have already suffered an injury in fact. He added that the injury is traceable to Congress’s actions, because it committed the injury when it passed a law offering the states money with ambiguous terms, writing that he “finds Section 802(c)(2)(A) presents a mandate of such an ambiguous nature that [it] may deprive Plaintiffs from receiving the information which [they are] entitled to under the Constitution.” Kacsmaryk added that even if the provision were unambiguous, the states would still have shown they suffered an injury in fact because they were unconstitutionally coerced into accepting the funds. He wrote that the states “face an injury by being put in the position of having to choose between being injured by the loss of a substantial amount of federal funds or the invasion of their constitutional authority to tax.” Kacsmaryk also found that the injury would be amended if the court were to issue a decision favorable to the plaintiff states. “A declaration of unconstitutionality and an injunction will halt the enforcement of Section 802(c)(2)(A) against the Plaintiffs and thereby eliminate the alleged irreparable harm on state sovereignty present since the enactment of ARPA,” he wrote. Failure to State a Claim Kacsmaryk also declined to dismiss the suit under Rule 12(b)(6) for failure to state a claim, finding that the plaintiff states pleaded sufficient facts to state a facially plausible claim for relief. Kacsmaryk found that the states had shown they could make a claim against the constitutionality of the provision under the spending clause. While acknowledging that Congress may wield its spending power to encourage states to follow federal policies, Kacsmaryk said there are limits. “Congress must use its spending power in pursuit of the ‘general Welfare’ and may only place conditions on State receipt of federal funds that are unambiguous, do not violate other constitutional provisions, and are reasonably related to the purpose of the federal grant,” Kacsmaryk wrote. The judge accepted that the states “assert a plausible coercion claim” based on the sheer amount of COVID-19 funds each state was offered, pointing out that the amounts offered to Texas, Mississippi, and Louisiana would have totaled 13 percent, 31 percent, and 7 percent of each state’s 2021 budget, respectively. He noted that the Supreme Court in 2012 held in NFIB v. Sebelius that a “threatened loss of over 10 percent of a State’s overall budget” amounted to an “economic dragooning that leaves the States with no real option but to acquiesce” and surrender their sovereignty. That choice “crossed the line between persuasion and coercion,” Kacsmaryk added. Kacsmaryk also accepted as plausible the states’ claim that the provision’s conditions are unrelated to Congress’s professed goal of achieving economic recovery in light of COVID-19, pointing out that tax relief is a tool for economic recovery. Kacsmaryk also found plausible the states’ argument that the conditions of accepting the funds are ambiguous, agreeing that Congress didn't speak clearly enough for states to make an informed choice as to whether they should accept the funds. He rejected Treasury’s argument that its rules can provide the clarity a state needs to knowingly accept conditions tied to federal money. He noted that “federal courts require Congress to state conditions on federal funds unambiguously” (emphasis in original). “The Secretary of the Treasury’s attempts to clarify the conditions in Section 802(c)(2)(A) [by issuing rules] arguably allows the Executive — rather than Congress which is empowered through the Spending Clause — to place conditions on federal grants,” Kacsmaryk wrote, adding that this attempt to clarify the statute “serves as an acknowledgment of the statute’s ambiguity.” Kacsmaryk also found that the states asserted plausible 10th Amendment claims. “The U.S. Supreme Court recognizes the taxation authority of state governments as a traditional power central to state sovereignty,” he wrote, adding that although the statute’s provision “may appear neutral on its face,” it “runs the risk of intruding into a sensitive area of state policymaking by conditioning a federal benefit on States forgoing their sovereign power to tax.” In a March 4 emailed statement, Joseph Bishop-Henchman of the National Taxpayers Union Foundation noted that the federal government is “2 for 6” in defending what he called a “poorly drafted and overbroad provision.” At the U.S. District Court for the Northern District of Texas, Texas v. Yellen is Docket No. 2:21-CV-079-Z.

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