Biden Stimulus Bill Provision Targeting State Tax Cuts Might be Struck Down by Courts for Same Reasons as Trump Efforts to Pull Federal Grants From Sanctuary Cities

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Biden Stimulus Bill Provision Targeting State Tax Cuts Might be Struck Down by Courts for Same Reasons as Trump Efforts to Pull Federal Grants From Sanctuary Cities

On Wednesday, the state of Ohio filed a lawsuit against the constitutionality of Section 602 (c) (2) (A) of the American Rescue Plan Act (ARPA), the $ 1.9 billion “stimulus” bill recently passed by Congress U.S. dollar. Section 602 (c) (2) (A) prohibits states and local authorities receiving federal grants under the Act (including grants totaling $ 350 billion to state and local governments) from making tax cuts that are “directly or indirectly “. balanced by ARPA grants:

A State or Territory may not use the funds provided under this Section or transferred under Section 603 (c) (4) to directly or indirectly offset a decrease in the net tax revenue of that State or Territory due to a change in law. Regulation or administrative interpretation during the period covered [from now till December 31, 2024] This will reduce any tax (by providing a reduction in the tax rate, discount, deduction, credit, or otherwise) or delay the imposition of a tax or tax increase.

Attorneys General from 21 other “red” states have signed a letter complaining about this provision. It is likely that many of them will either join the Ohio lawsuit or file their own cases.

I believe Ohio has a good chance of voiding this provision in court. Ironically, the main reason is the same that led to the defeat of the Trump administration’s efforts to use threats to withhold federal grants to pressure protected cities to cooperate with federal efforts to deport undocumented immigrants. In either case, the request in question was never clearly approved by Congress. In addition, it could be that tax liability is “mandatory” – an issue that has also surfaced in some Trump Sanctuary City cases.

In cases such as Pennhurst v Halderman (1981) and South Dakota v Dole (1987), the Supreme Court has made it clear that when the federal government imposes conditions on granting state governments, it must “clearly” do so in a congressional law Statute. The Trump administration has suffered repeated defeats in the Sanctuary City cases, in large part because it tried to use vaguely worded laws to impose immigration enforcement conditions that are nowhere near clear from the laws themselves.

In this case, the same problem occurs. Section 602 notes that ARPA places at least some restrictions on the introduction of tax cuts by recipient states. However, it is far from clear what the exact or how high the penalty for non-compliance is. The Ohio complaint describes part of the problem:

The [tax condition] is anything but “unambiguous”. What changes in tax policy that lead to a decrease in net income are “indirectly” offset by funds acquired by law? Unless the answer is “any change in tax policy”, neither the English language nor economic theory will give an answer. And how do you know if a change in tax policy will result in a net decrease in revenue? For example, if revenues had continued to fall without a tax cut, would the tax cut still be against the mandate? The tax mandate does not answer these questions. As a result, the conditions it imposes are too ambiguous to be met under the spending clause.

The ambiguity actually goes far beyond that. Among other things, it is not clear whether a change in tax rates or other relevant policy made prior to the ARPA’s existence but only taking effect during the “covered period” would be considered a prohibited policy. If a state breaches the condition, it is not clear whether it can “offset” all of its ARPA grant money or just the portion that is offset by the “reduction in net tax revenue”. As co-blogger Josh Blackman notes, the Biden administration’s finance department appears to have taken the latter position, which is more generous to states than the former. But nothing in the text of the Statute tells us which interpretation is correct.

And if the Ministry of Finance’s interpretation is correct, the question also arises of how and when we calculate the amount of money that the state has to give back to the federal government. Estimating the revenue lost due to a tax cut is a complex business. Economists sometimes differ in methodology. In some cases, as Ohio notes, a tax cut can actually increase revenue instead of reducing it. For several years it cannot be known whether a cut will lead to a decline in sales and by how much. Even then, experts could still differ on how much of the loss was due to the tax cut and how much was due to changes in economic conditions.

The text of section 602 does not resolve any of these ambiguities. And, as the Trump administration noted in the Sanctuary City cases, the loopholes cannot be filled by the executive branch formulating its own responses. If the executive can use vague laws to impose their own licensing requirements on state governments, it would give the president a dangerous leverage to put pressure on states and usurp the purse of congressional power, thereby creating both federalism and the separation of powers will be undermined. That was true of Trump’s attack on protected cities, and Section 602 poses the same problem.

At least until now, the Biden administration is not adopting the most aggressive interpretation of Section 602 possible (as Trump attempted to authorize grants to be drawn from protected cities). But no administration should have the power to actually create grant terms that were never approved by Congress.

The ambiguity of the Section 602 condition is its greatest legal weakness. But Ohio also plausibly argues that the condition is imperative:

This system violates the spending clause because the “financial incentive” that the law offers “to states” is much more than “relatively mild encouragement” as the spending clause allows – instead, “it is a weapon for the head.” “NFIB [v. Sebelius]567 US at 580–81 (op. Von Roberts, CJ)…. The law dictates that every state must choose between money that it cannot refuse and restrict its sovereign authority. In the NFIB, the court found that the Medicaid expansion forced states to do so because it “threatened” to refuse states funding “over 10 percent” of their “total budget”[s]”Unless they have agreed to expand their Medicaid programs. The law is similarly mandatory: Ohio will be denied funding for 7.4 percent of its total spending in 2020 – funding the state that is in dire straits of economic downturn is needed – unless it agrees to limit its programs. ” Tax authority.

In NFIB v. Sebelius (2012) – Obamacare case – the Supreme Court belatedly gave some teeth to the longstanding principle that the conditions for federal grants to state governments cannot be so burdensome that they can be “compulsive”. Similarly, at least one lower court ruling has invalidated Trump’s January 2017 order attempting to draw federal grants out of protection grants, in part on the grounds that the attempt to pull virtually all federal funds from them was compulsory .

Despite the use of the colorful “gun to the head” metaphor, Chief Justice John Roberts has notoriously been unable to pinpoint exactly when the amount of money will get so high that the state has no choice but to accept. Ohio rightly points out that the ARPA grants provide a loss of approximately 7.4% of its total spending, which is arguably in line with the “over 10 percent” states that lost in the NFIB. On the other hand, ARPA is a one-time grant, the loss of which would have been repeated every year under the Affordable Care Act. Additionally, despite Ohio claims that the economic downturn is making it impossible to go down, most states have not suffered any major loss of revenue in the past year, and many (including Ohio itself) have actually generated tax revenues.

Thus, ARPA is not as obviously an offer that states cannot refuse as the ACA was (or Trump’s 2017 Order of Protected Cities). But even if it’s not a weapon for the head, it’s still a huge amount of money – maybe enough to be a dagger for the groin. It remains to be seen whether that will be enough to cross the line to “coercion”. We can’t know until the case goes to the Supreme Court and the judges tell us about it.

If it were up to me I would take the vague and subjective “compulsory test” entirely and instead replace it with a stronger enforcement of the original meaning of the requirement that federal grants be used only to pay off debts and provide common defense and that general good of the United States “(which, contrary to modern mythology, does not cover anything that Congress deems potentially beneficial in any way). The rule of coercion, however, is a second best principle that it is preferable to simply allow Congress to do all of it and regardless of what I think, it was passed by the Supreme Court and it is unlikely to be abolished anytime soon.

There is more than one reference to “fair weather federalism” in this dispute. Many, perhaps most of the “red state” officials who support the Ohio position, have not objected to Trump’s efforts to put pressure on protected cities with federal grants. Many Democrats who campaigned for legal challenges regarding Trump’s urban politics are happy to support the ARPA terms (although some leftists in the Trump-era thought more systematically about federalism).

In general, Ohio and other red states that object to the ARPA tax condition seem happy to receive federal funding as long as there are no awkward conditions attached. Given the generally modest impact of the Covid crisis on the budgetary positions of most states, it would be better to abolish the ARPA grants entirely. A huge leaflet for states, whatever their real needs, encourages dependency and creates incentives for future waste. This is good for government employees (including the current author!), But bad for the future of federalism.

Be that as it may, the ignoble motives of many of the politicians involved do nothing to change the constitutional question. The tax condition likely violates the requirement that federal grant requirements be “unique”. There is also a solid – albeit much less conclusive – argument that it is “obsessive-compulsive”. At least this case should prove to be an uphill battle for the Biden government.