Sixth Circuit Concludes ARPA Condition on COVID Relief Violates Spending Clause
Today the U.S. Court of Appeals for the Sixth Circuit issued opinions in two cases chalenging the constitutionality of the American Rescue Plan Act of 2021 (ARPA), undre which the federal government provided financial relief to states on the condition that the funds not be used to finance tax cuts. In one of the cases, Ohio v. Yellen, the court concluded the claims were moot. In the other, Kentucky v. Yellen, the court concluded that at least one of the plaintiff states had standing, and that the relevant provisions of ARPA are unconstitutional.
Although the two cases were before two different panels, Judge Bush wrote the opinion for the court in both cases. Here is how Judge Bush explained the decisoin of the court in Kentucky.
In response to the grave economic challenges posed by COVID-19, Congress enacted the American Rescue Plan Act of 2021 (“ARPA” or “the Act”). Pursuant to Congress’s spending power, ARPA set aside $195.3 billion in stimulus funds, to be distributed by the Treasury Department to states and the District of Columbia. This appeal concerns a challenge brought by Kentucky and Tennessee (“the States”) to what they allege is an ambiguous, coercive, and commandeering condition attached to those funds. Specifically, to get the money, the States had to certify that they would comply with the Act’s “Offset Provision.” Its terms bar the States from enacting tax cuts and then using ARPA funds to “directly or indirectly offset a reduction in [their] net tax revenue” resulting from such tax cuts. 42 U.S.C. § 802(c)(2)(A). And a related portion of the Act explains that should a State violate the Offset Provision, Treasury may initiate a recoupment action to recover the misused funds. 42 U.S.C. § 802(e)(1)–(2).
What the Offset Provision actually means, however, is the subject of grave dispute. Because money is fungible, enacting any tax cut and then spending ARPA funds could be construed, the States say, as having impermissibly used those funds to “indirectly offset” a revenue reduction from the tax cut. Appellees’ Br. at 12–13. As a result, should the States wish to expend their ARPA funds, they are effectively barred from enacting any tax cuts1—despite their desire to do so—for fear that Treasury could construe the cuts as implicating an “indirect offset” and correspondingly pursue recoupment. Id. at 22–23; 38. Compounding the Act’s indeterminacy, the Offset Provision itself never explains which fiscal year (“FY”) serves as the baseline for calculating a “reduction” in net tax revenue. Id. at 13, 40. That omission allegedly leaves the States in the dark about when Treasury may deem them to have violated the Act. Id. And even though a Treasury regulation has since offered a narrowing construction of the Offset Provision, the States assert that this construction in no way follows clearly from the text of the Offset Provision itself. Id. at 41. Thus, the States object that the Offset Provision failed to provide them with clear notice of whatever conditions it entails. And because of those indeterminacies, they contend that the Offset Provision is unenforceable under the clear-statement rule the Supreme Court has long instructed governs spending legislation.
Worse yet, the States argue, they were coerced into relinquishing this control over their sovereign taxing authority. Amended Complaint ¶74, R. 23. By offering such a massive aid package—promising to confer on the States a sum equal to one-fifth of their annual budgets—in a time of fiscal crisis no less, the federal government made the States an offer they couldn’t refuse. Appellees’ Br. at 4, 12. Given these alleged intrusions upon their sovereignty, the States filed suit against the Treasury Department.
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