WASHINGTON — Ohio became the first state Wednesday to sue President Joe Biden‘s administration over his recently passed American Rescue Plan, arguing the stimulus package holds a “gun to the head of states” by preventing them from cutting taxes.
The suit by Republican Ohio Attorney General Dave Yost against the Treasury Department centers on a provision attached to $350 billion in direct aid to states outlined in the $1.9 trillion legislation that says funds cannot “directly or indirectly” be used to offset a reduction in tax revenue.
The Ohio lawsuit comes after 21 other Republican state attorneys general threatened action in a Tuesday letter to Treasury Secretary Janet Yellen, alleging a broad reading of the provision would “amount to an unprecedented and unconstitutional intrusion on the separate sovereignty of the states.”
“(States) can either have the badly needed federal funds or their sovereign authority to set state tax policy,” Yost says in his suit, which argues the provision exceeds the authority of Congress. “But they cannot have both. In our current economic crisis, that is no choice at all. It is a metaphorical ‘gun to the head.’ “
How states and cities can use their allocation of direct aid has emerged as one of the leading battlefronts of Biden‘s signature relief legislation, which he signed into law last week.
The Biden administration conceived the direct relief for states and cities as a way to replenish revenue shortages that resulted from the coronavirus pandemic and help pay for critical government services, hire police officers and firefighters, and make other investments. Congressional Democrats added the provision to prevent states from using federal dollars meant as stimulus to instead reduce tax rolls further.
Treasury spokeswoman Alexandra LaManna declined to comment on the Ohio lawsuit, which seeks a preliminary injunction to stop enforcement of the new law. But she defended the provision, saying it does not prevent states from making tax cuts but simply says pandemic relief funds can’t pay for those cuts.
“It is well established that Congress may establish reasonable conditions on how states should use federal funding that the states are provided,” she said. “Those sorts of reasonable funding conditions are used all the time – and they are constitutional.”
LaManna said the law “does not say states cannot cut taxes at all, and it does not say that if a state cut taxes, it must pay back all of the federal funding it received.
“It simply instructed them not to use that money to offset net revenues lost if the state chooses to cut taxes. So if a state does cut taxes without replacing that revenue in some other way, then the state must pay back to the federal government pandemic relief funds up to the amount of the lost revenue.”
In their letter to Yellen, the Republican attorneys general, led by officials in Georgia, Arizona and West Virginia, sought clarification about the provision, arguing it could be interpreted as a measure to prevent tax cuts altogether, including those contemplated before the American Rescue Plan’s passage.
The attorneys general pointed to several examples including Arizona phasing out law-enforcement fees on vehicle registration renewal; a proposal in Georgia to give tax credits to families who adopt a child out of foster car; and a bill under consideration in West Virginia to expand a tax credit for neighborhood investment.
“This language could be read to deny states the ability to cut taxes in any manner whatsoever – even if they would have provided such tax relief with or without the prospect of COVID-19 relief funds,” the letter reads. “Indeed, such federal usurpation of state tax policy would represent the greatest attempted invasion of state sovereignty by Congress in the history of our Republic.”
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The letter was also signed by the attorneys general of Alabama, Idaho, Kentucky, Missouri, Oklahoma, Texas, Arkansas, Louisiana, Indiana, Montana, South Carolina, Utah, Florida, Kansas, Mississippi, Nebraska, South Dakota and Wyoming.
House Republican leaders followed up with a letter Wednesday to Yellen citing “serious concerns” about the provision and seeking a formal response to a dozen questions by March 26.
Dire revenue shortages projected last year by many states during the beginning of the pandemic did not pan out. In fact, several states have revenue surpluses. While 26 states experienced a revenue decline, according to a J.P. Morgan study, 21 states saw positive revenue growth in 2020 compared with 2019.
Biden has promised “fastidious” oversight over the use of funds in the relief package. This week he tapped Gene Sperling, former director of the National Economic Council under presidents Barack Obama and Bill Clinton, to manage its implementation.
White House press secretary Jen Psaki on Monday said the original purpose of the state and local funding provision was “to keep cops, firefighters, other essential employees at work and employed, and it wasn’t intended to cut taxes.
“So I think he certainly hopes that that’s how the funding is used,” she said of the president.
Reach Joey Garrison on Twitter @joeygarrison.