Eleventh Circuit Becomes Second Federal Court to Strike Down Tax Mandate Condition in 2021 Covid Stimulus Bill
On January 20, in West Virginia v. Department of Treasury, the US Court of Appeals for the Eleventh Circuit became the second federal appellate court to rule that the “tax mandate” provision of the 2021 Covid stimulus bill (officially called the American Rescue Plan Act) is unconstitutional, because it doesn’t clearly state the condition states are subject to.
ARPA gave hundreds of billions of dollars in grants to state governments. But states that accept the money must obey various conditions, including the tax mandate requirement, which bars states from using the grant money “to either directly or indirectly offset a reduction in [their] net tax revenue” that results from a change in law that “reduces any tax” between the time ARPA was enacted and December 31, 2024.
Longstanding Supreme Court precedent in cases such as Pennhurst v. Halderman (1981), and South Dakota v. Dole (1987) states that if the federal government imposes conditions on grants to state governments, it must do so “unambiguously” in a statute enacted by Congress. Courts take this rule seriously. Just as the Trump Administration which suffered repeated defeats in its efforts to use spending grant conditions to pressure sanctuary cities into doing its bidding. Courts repeatedly ruled against Trump because the conditions he sought to impose on state and local government recipients of various federal grants were not clearly authorized by Congress.
When the tax mandate was enacted, I predicted that it could well suffer the same fate, because the Biden Administration could not make its requirements clear without creating rules that were never unambiguously authorized by Congress.
That’s exactly what the Eleventh Circuit ruled in West Virginia, a lawsuit challenging the tax mandate brought by thirteen Republican-controlled state governments. Upholding a district court ruling against the mandate, the court found three major ambiguities in the statute:
[T]he Rescue Plan’s offset provision forbids states from using recovery funds “to either directly or indirectly offset a reduction in [their] net tax revenue . . . resulting from a change in law, regulation, or administrative interpretation . . . that reduces any tax.” 42 U.S.C. § 802(c)(2)(A). Certain parts of this provision are clear enough…..
But there are three aspects of the Rescue Plan that give us pause. We do not address whether any of these aspects would independently violate the Spending Clause. But, when combined, we believe these three aspects of the Rescue Plan are inconsistent with the constitutional imperative that Congress’s funding conditions be ascertainable.
First and most importantly, the offset provision does not provide a standard against which a state can assess whether it will reduce or has reduced net tax revenue. The prohibition on any “reduction in the net tax revenue” presupposes a baseline against which to measure a potential reduction. Reduced as compared to what? The Rescue Plan does not offer a baseline….
Second, the Rescue Plan’s prohibition against “either directly or indirectly offset[ting]” net tax reductions with recovery funds exacerbates this ascertainability problem…. Even if we accept that everyone understands what constitutes a “direct” offset, Section 802 does not explain what constitutes an “indirect” offset. The Secretary [of the Treasury’s] illustrations of the difference between “direct” and “indirect” offsets fail to clear this fog…. [B]ecause money is fungible, the Secretary could always assert a plausible argument that a state, after a tax cut, committed an unlawful indirect offset of the attendant revenue shortfall.….
Third, we think the Rescue Plan’s novelty and scope compound these problems. Though “[l]egislative novelty is not necessarily fatal,” it raises a red flag. NFIB, 567 U.S. at 549 (opinion of Ro
Article from Reason.com