July 1, 2021
By Jacob Huebert

President Joe Biden’s “American Rescue Plan Act,” gives states billions of federal dollars to help them recover from the COVID-19 pandemic—but only on the condition that they won’t cut taxes through 2024. Not only does this reward bad tax-and-spend behavior on states’ part, it’s illegal, too: Today, a federal judge ruled that this “tax mandate” is unconstitutional.

The Act says states can’t use federal COVID relief money to “directly or indirectly” offset a loss of revenue resulting from a tax cut enacted between March 2021 and the end of 2024. If they do, the U.S. Treasury Department will take the state’s federal grant money back, up to the amount of revenue the state lost. In response, several states’ attorneys general filed legal challenges to the legislation.

Ohio was the first to file a lawsuit challenging the tax mandate as an unconstitutional exercise of Congress’s spending power and a violation of states’ power to determine their own tax policies. Under Supreme Court precedent, the federal government can place conditions on grants to the states, but those conditions have to be unambiguous and reasonably related to the purpose of the grant. Also, a condition cannot be unduly coercive—that is, it can’t make states an offer they can’t practically refuse.

Ohio argued that the mandate is unconstitutional because it’s both ambiguous—it’s not clear what it means to “directly or indirectly” offset a loss of revenue—and coercive, and because it violates states’ authority to set their own tax policies under the Tenth Amendment. In addition, the Goldwater Institute filed a brief supporting the state arguing that the rule isn’t reasonably related to the grants’ purpose of providing COVID relief. Instead, it just serves to prevent states from lowering their taxes and competing with high-tax states for residents.

In his order issued today, U.S. District Court Judge Douglas R. Cole agreed with Ohio that the tax mandate is ambiguous and therefore unconstitutional, and he enjoined the federal government from enforcing the mandate against the state. Cole rejected the federal government’s argument that it could clarify the law through regulations because the Constitution requires Congress to specify conditions for federal grants. Because he found the statute to be unconstitutional based on its ambiguity, the court did not address the other constitutional arguments against the mandate.

It’s an important decision, but it won’t be the federal courts’ last word on this issue. The state of Arizona is awaiting a decision from a federal district court judge in its own challenge to the mandate, as are the 13 states, led by West Virginia, that are challenging the mandate in an Alabama federal court. Those cases will inevitably go to the U.S. Court of Appeals (the state of Missouri’s challenge is already before the Eighth Circuit Court of Appeals), and it’s likely the Supreme Court will ultimately resolve the issue.

The other federal courts should follow the example set today by Judge Cole’s thorough, well-reasoned opinion. And as they hear these cases, the Goldwater Institute will continue to file briefs urging them to stop Congress’s effort to stop states from giving their residents tax relief.  

Jacob Huebert is a Senior Attorney at the Goldwater Institute.

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