Paul L. Caron
Dean




Monday, July 5, 2021

Federal Judge Blocks Biden Administration From Enforcing State Tax Cut Ban In Stimulus Package

Following up on my previous post, Wall Street Journal Editorial: Biden's COVID-19 Stimulus Bill Prohibits States From Cutting Taxes:  Cleveland.com, Ohio Federal Judge Blocks Biden Administration From Enforcing Tax Cut Ban in Stimulus Package:

A federal judge in Ohio has blocked the Biden administration from preventing Ohio from using money it got from a federal coronavirus relief bill to pay for tax cuts, ruling in favor of a lawsuit from state Attorney General Dave Yost [Ohio v. Yellen), No. 1:21-cv-181 S.D. Ohio (July 1, 2021)].

Congress designed the American Rescue Plan Act, which will send billions in federal funds to the state and local governments in Ohio, so that states could not use the money to pay for tax cuts. But U.S. Southern District of Ohio Judge Douglas R. Cole wrote “the Tax Mandate’s language falls short of what settled law requires in terms of such clarity,” and issued a permanent injunction blocking the U.S. Treasury Department from enforcing it in Ohio. ...

Yost, a Republican, issued a statement calling the decision a win. “The Biden administration reached too far, seized too much and got its hand slapped,” Yost said. “This is a monumental win for the preservation of the U.S. Constitution — the separation of powers is real, and it exists for a reason.”

Jonathan H. Adler (Case Western), Federal Court Enjoins Enforcement of "Tax Mandate" Barring States Receiving COVID-19 Funds from Cutting Taxes (Updated):

This afternoon, a federal district court in Ohio entered a permanent injunction against enforcement of the so-called "Tax Mandate" against the state of Ohio. This mandate bars states that receive COVID-19 relief funding from using such funds, directly or indirectly, to cut taxes. Ohio's challenge raised interesting and challenging federalism and delegation issues, and while the court previously rejected Ohio's bid for a preliminary injunction, it found the criteria for a permanent injunction satisfied here. (For more background, see these posts by Josh Blackman and Ilya Somin.) ...

The two primary federalism arguments against the Tax Mandate are that a) Congress did not specify the terms of this condition with sufficient clarity (i.e. the condition is ambiguous), and b) the Mandate is unduly coercive. Judge Cole's opinion rests on the former of these arguments, concluding the terms of the Mandate in ARPA were "too ambiguous" and that the Treasury Department's subsequent interim regulations were unable to cure that deficiency. ...

[R]elief in this case is properly limited to Ohio. This is not a case in which a federal district court judge unnecessarily entered a nationwide injunction.

Ilya Somin (George Mason), Federal Court Strikes Down Tax Mandate Requirement in Biden Stimulus Spending Bill:

The key to Judge Cole's thorough opinion is that the tax mandate condition is extremely vague, and therefore runs afoul of longstanding Supreme Court precedent requiring that conditions imposed on state governments receiving federal funds must be clear. The judge also rejected the argument that the necessary clarity could be provided by the Treasury Department, which issued an Interim Final Rule (IFR) attempting to clarify the condition. ...

[I]t's important to recognize how extraordinarily vague the tax mandate provision really is. In a previous post about the case, I noted that the text leaves several key points unclear, including 1) how we calculate whether a tax cut causes "a reduction in the net tax revenue," 2) whether it applies to previously enacted tax cuts that only take effect during the covered period, and 3) whether, if a state violates the condition, it stands to lose all of its ARPA grant money or only the part "offset" by the "reduction in net tax revenue." ...

The Treasury Department clears up most of the ambiguity and the resulting policy strikes me as very reasonable. But, as Jonathan Adler explains, the court ruled that Congress had not delegated to the Treasury the power to make such determinations. Assuming that it did so without a clear statutory statement to that effect goes against the "major questions" doctrine, which creates a presumption against assuming that Congress empowers executive agencies to decide major policy issues. What exactly qualifies as a "major" question as opposed to a "minor" one is often far from clear. But Judge Cole does a great job of explaining why this situation is clearly on the "major" side of the line.

He also offers some compelling analysis showing that Congress did not delegate this issue to the Treasury ...

Judge Cole does not decide the issue of whether Congress had the power to delegate the resolution of these issues to Treasury, if only it had done so more clearly. He suggests this is a close question, one that he need not resolve, given his conclusion that Congress did not in fact make such a delegation, even if it could have. I agree that he didn't need to resolve it. But, to my mind, the issue (which is likely to come up again as the case gets appealed) is not actually a close one under current Supreme Court precedent. I explained why  a post on Judge Cole's earlier ruling in this case. ...

Yesterday's ruling will surely be appealed, and is only the start of what is likely to be a prolonged legal battle. Several more lawsuits against the tax mandate have been filed by other "red" states, and it is possible that other judges will support the Biden administration, or rule against it for somewhat different reasons than Judge Cole.

That said, Cole's ruling is exceptionally thorough and well-reasoned. At the very least, it will not be easy for the Biden Administration to overcome the arguments it lays out.

Update:  Darien Shanske (UC-Davis), (Critical) Observations on the Ohio District Court Decision Enjoining the Rule Limiting the Use of ARPA Relief Funds Provided to States:

The decision goes to great lengths to reach an implausible result and does not seem fully aware of the nature and extent of existing federal-state entanglements as to budgeting. ...

There is much I don’t agree with in the opinion, but in this post just want to make one broad and one narrow point.

First, the broad point. ... [T]his decision is, at best, ambiguous as to advancing federalism concerns because it makes it harder for the federal government to ask less of the states. Further, the decision strains to reach this peculiar result. The Treasury Department has issued an interim final rule that in effect make it extremely unlikely that any state, including Ohio, would run afoul of the prohibition on the use of relief funds for tax cuts. And this is not just my opinion of the regulations, but the opinion of state-level advocacy groups who are all about supporting tax cuts. See here and here — the latter article includes the following memorable line: “When all is said and done, the ARPA clawback, following the interim rule, seems to be a bit of a nothingburger.” If the Treasury has issued rules that are so state-friendly that no state is likely to run afoul of them, and Ohio has already certified that it can live by these rules, then where is the injury? ...

The narrow point I wanted to make has to do with “federalism norms.” This notion plays a minor role in the district court’s analysis. The idea is that Congress needs to be particularly clear when it upsets federalism norms, which is something, it is claimed, that the ARPA provision does as to state taxes. There is a lot here to be unpacked, from the underlying principle to whether the provision is unclear, but for the sake of argument I will grant that there is such a principle and even that the provision at issue is unclear. But what I don’t want to grant is that this is some big violation of federalism norms.

https://taxprof.typepad.com/taxprof_blog/2021/07/federal-judge-blocks-biden-administration-from-enforcing-state-tax-cut-ban-in-stimulus-package.html

Tax, Tax News | Permalink