A Helping Hand or a 'Gun to the Head'?

The war of words between Republican state leaders and the Biden administration over state aid in the new federal relief package is headed to the courtroom.

Arizona Attorney General Mark Brnovich announced he would sue the administration Tuesday, shortly after receiving a letter from Treasury Secretary Janet Yellen about the conditions Congress imposed on states that receive the money.

Brnovich and other Republican attorneys general say the law’s prohibition on using state aid to offset tax increases infringes on the rights of states to set their own tax policies.

In fact, Ohio Attorney General Dave Yost beat Brnovich to the punch, filing a lawsuit to block those restrictions last week, before Yellen even had a chance to respond to the complaints.

That’s the story this week, as President Joe Biden visited Yost’s home state of Ohio to sell residents there on the benefits of the rescue package.

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It’s practically a law on Capitol Hill these days that, for any legislation that passes, there is equal and opposite litigation waiting to undo it. So it’s hardly a surprise that Republican attorneys general are attacking the first major law signed by President Joe Biden.

But the pending court cases are significant in the short term because of what impact they might have on the money states are set to receive under the American Rescue Plan. And in the long term, they could shape the ever-treacherous relationship between states and the federal government.

At the heart of the matter is the strings that Congress attached to the $195 billion of new money the federal government is sending to states. The law specifically prohibits states from using the money to “deposit into any pension fund” or to “either directly or indirectly offset a reduction in the net tax revenue” of a state that cuts taxes.

In other words, the money can’t be used to pay for tax cuts.

Nearly two dozen Republican attorneys general sent Yellen a letter last week asking for more clarification about those conditions. They said the restriction, if it were imposed too broadly, could prevent states from having control over their own tax policies. Even tax cuts that states passed before the recession could run afoul of the law if it was interpreted too broadly, they warned.

“Many states put to the Hobson’s choice of taking this financial support or maintaining their sovereign independence to set their own tax policy will be hard pressed to decline the federal funds,” they wrote.

“We ask that you confirm that the American Rescue Plan Act does not prohibit States from generally providing tax relief … but at most precludes express use of the funds provided under the Act for direct tax cuts rather than for the purposes specified by the Act,” they asked Yellen.

But the attorneys general also included a thinly veiled warning that they would “take appropriate additional action,” or, in other words, a lawsuit, if Yellen didn’t agree with their interpretation.

This week, Yellen wrote back.

“Nothing in the Act,” she said, “prevents states from enacting a broad variety of tax cuts.”

“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 in state law. If states lower certain taxes but do not use funds under the Act to offset those cuts – for example, by replacing the lost revenue through other means—the limitation in the Act is not implicated,” Yellen explained.

She also clarified that the restriction wouldn’t mean that a state would lose its entire allotment of federal aid if it went ahead with the tax cuts; it would only apply to the amount of money used to pay for the tax cuts.

The treasury secretary noted that federal funds for Medicaid, education and highways often come with conditions for the states that use them. In fact, she noted, previous coronavirus relief packages limited what states could spend their money on, too.

Yellen also said that the Treasury Department would provide more detailed guidance soon.

Brnovich, the Arizona attorney general, was not impressed. “Looks like we will see the Biden Administration in court. It forgot that the states created the federal government, not the other way around,” he wrote on Twitter.

As of this writing, Brnovich had not yet filed the lawsuit. But the Ohio lawsuit gives us a pretty good look at what the core issues are likely to be.

In that filing, Yost asked a federal court to put the “tax mandate” in the Rescue Act on hold. He argued that Congress was overstepping its authority by forcing state officials to carry out policies that Congress itself could not do on its own.

“The unconstitutionality is particular stark here because the Act coerces states into acquiescing in the commandeering of their taxing authority,” Yost’s lawyers wrote in the lawsuit.

“In essence, states that abide by the tax mandate’s terms are conducting their tax policy at the behest of the central government. That allows Congress to control indirectly what it cannot control directly. And that violates the Tenth Amendment,” they argued.

The Ohio attorneys repeatedly compared the situation to the provision in the Affordable Care Act (Obamacare) that tried to induce states to expand Medicaid coverage to single adults. The ACA threatened states that did not do so with the possibility of withholding all of a state’s federal Medicaid match if it did not carry out the expansion.

That penalty could easily amount to taking away 10 percent of a state’s annual budget, the Supreme Court noted in an opinion written by Chief Justice John Roberts.

“In this case,” Roberts wrote in a 2012 decision on the legality of the ACA, “the financial ‘inducement’ Congress has chosen is much more than ‘relatively mild encouragement’—it is a gun to the head.”

The high court struck down the penalties for states that chose not to expand Medicaid coverage.

In the lawsuit over Biden’s coronavirus package, the Ohio attorney general’s office said the same logic should apply.

“The tax mandate thus gives the states a choice: they can have either the badly needed federal funds or their sovereign authority to set state tax policy. But they cannot have both. In our current economic crisis, that is no choice at all,” they argued. “It is a metaphorical ‘gun to the head.’”

Whatever the legal merits of that argument are, they run counter to the political arguments that advocates on the right and even some Republican governors have been making in recent months.

Many have said they don’t want – or need – help from the federal government.

Just a few months ago, South Dakota Gov. Kristi Noem told lawmakers that her state successfully navigated the COVID-19 crisis and did not need any help from Washington.

“South Dakota won’t be raising taxes on our citizens or our businesses,” she said in a December budget address. “We won’t be borrowing billions of dollars to cover our budget shortfalls. And we won’t be looking to Congress to send us more stimulus money.”

“It’s time for Congress to draw a line in the sand for states and to send a message that states should take responsibility for getting spending under control and managing their affairs,” Nebraska Gov. Pete Ricketts wrote last October. “They should not reward years of mismanagement unrelated to the pandemic with a D.C. bailout, while making states like Nebraska foot the bill.”

In Iowa, Gov. Kim Reynolds recently indicated that she had not yet decided how Iowa would use the federal relief money.

But low-tax advocates urged her to reject the money outright.

“The American Rescue Plan is another example of the consequence of states accepting federal dollars. Uncle Sam’s generosity is never free. It is also another example of a law passed by Congress that is confusing and requires wide rule-making by unelected federal bureaucrats,” wrote John Hendrickson, the policy director of Tax Education Foundation of Iowa, and Pete Sepp, the president of the National Taxpayers Union.

“Iowa’s economy is recovering, and taxpayers should not be punished by having tax reform delayed because of the federal government centralizing power. If federal guidelines affirm that the Legislature cannot reduce tax rates, then Iowa should forgo the federal funds. Gov. Reynolds should not allow the federal government to dictate Iowa fiscal policy and she should continue to fight for lower taxes and allow taxpayers to keep more of their hard-earned income,” they added.

Yost, the Ohio attorney general, though, told Fox News that “if you’re trying to avoid wasting taxpayers, the worst thing you could do is leaving stimulus money back in Washington.”

Steven Schwinn, a law professor at the John Marshall Law School at the University of Illinois at Chicago, said it would be hard to predict how courts would handle the Ohio lawsuit.

He said that the Obamacare case and other U.S. Supreme Court rulings have changed the legal rules that applied to the relationship between states and the federal government.

But Schwinn said the Rescue Act’s provisions were likely the result of “sloppy” drafting. It’s unlikely that Congress wanted to undo state tax cuts that had already been on the books and were set to go into effect in the coming year, he said. What they wanted to do is to prevent state officials from using the money to provide their own largesse to taxpayers.

“One thing that Ohio talks about in its motion is political accountability,” Schwinn said. “Actually, this tax requirement is designed to promote political accountability.”

“If it were otherwise, a state like Ohio could receive a huge pot of money from the federal government and immediately cut its own internal state income taxes, and it’s citizens and voters would think, ‘Wow! That’s a great gift that the state has just given me. The federal government sucks,’” Schwinn explained. “In fact, that’s not what’s happening at all. The tax restriction is actually promoting accountability.”

Schwinn also said that usually states aren’t in such a hurry to bring lawsuits over the details of a law like this.

“In the ordinary course of things, we wait until there is enforcement,” he said. This situation is a little different, because states need some answers in order to plan their upcoming budgets, he said.

“But if I were a state governor, what I would want is some guidance from the [Treasury] secretary about what taxes this is going to cover,” Schwinn said. “I’m not sure that [the attorneys general] are going about it in that problem-solving spirit. This seems to just be creating a bit of political havoc.”

“I think this is all Sturm und Drang about politics,” he added. “I don’t think it has anything to do with constitutional law or federalism.”

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