Federal judge denies Biden administration bid to block state tax cuts

In March, I wrote that the so-called “COVID Relief Bill” could block Minnesota’s next governor and legislature from cutting taxes. In May, I followed up, writing that a federal court had slapped down this fiscal power grab by the Biden administration. And last week brought more good news as a federal judge granted Ohio a permanent injunction against the part of the bill that prohibits states from using pandemic aid to offset tax cuts, banning the U.S. Treasury from enforcing the provision against the state.

The tax measure in question bars states, territories and localities that accept funds from the COVID-19 Relief Bill from “directly or indirectly” using the money to offset a reduction in net revenue. If they do, they risk having to return the amount that is used to offset a tax cut. As I pointed out in March, and as Ohio Attorney General Dave Yost argued, this wording is ambiguous and violates states’ rights under the 10th Amendment by commandeering state taxing authority.

In Ohio’s case, Law360 reports:

U.S. District Judge Douglas R. Cole issued the permanent injunction against the so-called tax mandate provision of the American Rescue Plan, finding Ohio’s attorney general proved ongoing harm arises from the provision’s ambiguity. The provision “falls short of the clarity” U.S. Supreme Court precedent requires for legislation that concerns the U.S. Constitution’s spending clause when it comes to conditional grants to states, the court said.

“The court finds that the tax mandate exceeds Congress’ power under the Constitution,” the court said. “The court further finds that Ohio has met the conditions for injunctive relief to prevent the ongoing harm that this constitutional violation is causing.”

The court also rejected arguments from U.S. Treasury Secretary Janet Yellen that regulations the agency released cure that ambiguity. While the court stopped short of finding Congress can never authorize an agency to supply such clarity, it said under the American Rescue Plan, Congress failed to do so.

The court noted that even though it previously identified the source of ambiguity to be what an “indirect offset” is, the Treasury secretary still has struggled to distinguish it from a direct offset based on the text of the statute. Examples Yellen used didn’t distinguish the two but were “substantively identical,” the court said.

“In short, it appears that even now the secretary lacks a coherent theory as to what an ‘indirect offset’ may be, as distinct from a ‘direct offset,’ further confirming the court’s suspicion that the phrase is unintelligible as used in the context of the tax mandate,” the court said.

This decision is good news, but the fight is not over yet.