Federal court slaps down Biden administration’s fiscal power grab

Back in March, I wrote that the so-called ‘COVID Relief Bill’ could block Minnesota’s next governor and legislature from cutting taxes:

Senate amendments to the American Rescue Plan Act prohibit the use of any of the $350 billion in State and Local Fiscal Recovery Funds to cut taxes, but there are also concerns that states which accept the funds could be prohibited from implementing tax cuts between now and 2024.

…

If the federal government is dishing out money it is not unreasonable for it to attach some strings – he who pays the piper, and all that. The concern here is that the broad language the bill uses about indirect funding of tax relief could also block tax reforms which aren’t reliant on the American Rescue Plan for funding. 

The relevant passage reads:

“A State or territory shall not use the funds provided under this section or transferred pursuant to section 603(c)(4) to either directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.”

This reads so vaguely that it could allow the federal government to veto almost any state fiscal policy choice through 2024.

This matters:

In 2022, Minnesota will hold elections for Governor, Senate, and House, among others. It is possible that those elections will be won by a party or parties that run on a platform of reducing taxes. But once in office they may not be able to, legally, because of the provisions of the of the so-called ‘Covid Relief Bill’…If these provisions stand, Minnesota’s next governor and legislature might be elected with their hands already tied.

Happily, their is some good news. The Wall Street Journal reports:

Ohio, which is slated to receive $5.5 billion from the bill, sued to invalidate that restriction as an abuse of Congress’s power under the Spending Clause. And in a preliminary opinion last week, federal Judge Douglas Cole found the state has a “substantial likelihood of success on that argument.”

One way the Constitution limits federal intrusions on state sovereignty, the opinion explains, is by requiring that Congress set clear conditions for state aid. It quotes a 2006 Supreme Court precedent (Arlington Central School District v. Murphy): “States cannot knowingly accept conditions of which they are ‘unaware’ or which they are ‘unable to ascertain.’”

Yet that’s exactly what Congress and the Biden Administration are asking Ohio to do as it decides to either forfeit federal funds or forfeit its ability to cut certain undefined taxes. “The Court honestly has no idea what an ‘indirect offset’ to net tax revenues may be,” wrote Judge Cole, referring to the statute’s restriction on state use of the funds. “It became clear at oral argument that the federal government was largely unwilling to hazard a guess as to what it meant either.”

The judge notes that two days before his decision, the Treasury Department filed an “Interim Final Rule” that sought to explain how the anti-tax cut language would be enforced. Yet the 151-page document appears to have confounded as much as it clarifies. An analysis from the Tax Foundation said that “rather than mitigating the concerns addressed in pending litigation, Treasury appears to have created new ones” by putting new limits on state fiscal policy.

Judge Cole declined to issue a preliminary injunction blocking Treasury Secretary Janet Yellen from clawing back funds from Ohio, because the lawsuit is likely to be resolved on the merits by the time that happens. Yet he affirmed that the ambiguity from the mandate harms Ohio’s democratic process by throwing a wrench in its tax and budget plans. His opinion said it is “not at all clear that the Secretary can ever cure a Spending Clause ambiguity program, even through final regulations.”

Judge Cole is right about Ohio and it applies to Minnesota. This grab by the federal government for control of state fiscal policy harms our democratic process too.

John Phelan is an economist at the Center of the American Experiment.