January 14, 2022

By Jacob Huebert

President Joe Biden’s American Rescue Plan Act gives states billions for COVID-19 relief, but that money comes with strings attached: States that take it are effectively banned from cutting taxes through 2024. The U.S. Court of Appeals for the Ninth Circuit heard arguments in Arizona’s case challenging the ban this week, and the Goldwater Institute has called on the court to strike down this unprecedented assertion of federal power.

Many states have filed lawsuits to stop U.S. Treasury Secretary Janet Yellen from enforcing the no-tax-cut rule, including Arizona, with support from the Goldwater Institute. Arizona’s lawsuit argues that the Act’s “tax mandate” is unconstitutional for several reasons.

First, the law invades state sovereignty by dictating state tax policy.

Second, the law doesn’t just encourage states to avoid tax cuts; it coerces them, because states—whose citizens pay federal taxes and expect to receive their share of federal benefits—have no practical choice but to accept the relief money.

Third, the Supreme Court has said that when Congress imposes a condition on a grant of money to the states, that condition must be clear and unambiguous—but this Act isn’t clear when it prohibits states from “directly or indirectly” using federal money to offset a loss of revenue resulting from tax cuts.

Finally, the Supreme Court has also said that a condition on a federal grant to a state must be reasonably related to the grant’s purpose—but prohibiting tax cuts has nothing to do with the Act’s supposed purpose of providing COVID-19 relief. The Goldwater Institute has expanded on that point in an amicus brief, showing that the mandate isn’t about making sure states spend their grant money on COVID-19 relief—as Yellen claims—but about forcing all states to adopt the tax-and-spend ways of high-tax states that have long been losing businesses and residents to lower-tax states.

In July, an Arizona federal district court judge dismissed the case because, the judge said, the state lacks standing to bring it. Ordinarily, to have standing to challenge a law, a plaintiff must allege that the law injures it in some way. The court said the tax mandate hasn’t caused Arizona any injury because the rule isn’t actually coercive or ambiguous. (It ignored the argument that the condition isn’t reasonably related to the grants’ purpose.)

That was a mistake: standing isn’t about whether a plaintiff’s legal theory is correct, but about whether it’s alleged harm to itself. Arizona certainly did that: it alleged that it’s being forced to accept an unconstitutional intrusion on its sovereignty. And the state has an especially strong interest in this issue because it recently enacted the Goldwater Institute’s plan to dramatically reduce income taxes and make Arizona one of the lowest-tax states.

In yesterday’s argument, the panel of three Ninth Circuit judges appeared concerned about that. Two of the judges asked what they should do if they think the lower court was wrong about Arizona’s standing: should they rule on the constitutional claims now, or should they send the case back to the district court so it can rule on them first? Arizona Deputy Solicitor General Drew Ensign said there would be no point in sending the case back, because the district court judge’s opinion shows that she thinks the claims must fail.

The Ninth Circuit judges didn’t suggest how they’re likely to rule on the constitutional issue. But Judge Ryan Nelson, appointed to the court by President Trump in 2018, did repeatedly tell Secretary Yellen’s attorney that he thinks the state’s arguments are stronger than the federal government says they are.

He’s not the only judge who thinks so: Other federal courts that have heard challenges to the tax mandate have ruled against Yellen. Federal judges in Ohio and Alabama have declared the tax mandate unconstitutionally ambiguous, and a Kentucky federal judge has ruled that the mandate is unconstitutionally coercive. The U.S. Court of Appeals for the Sixth Circuit will hear arguments in the Ohio case on January 26.

The Ninth Circuit should follow these other courts’ example, rule that Arizona may challenge the mandate, and strike down this unprecedented assertion of federal power.

Jacob Huebert is a Senior Attorney at the Goldwater Institute.

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