Federal judge slaps down Biden administration’s fiscal power grab

Did you know? 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.

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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.

In May, a federal issued a preliminary opinion saying that Ohio, which was challenging the rule, had a “substantial likelihood of success on that argument.” On November 15:

U.S. District Judge L. Scott Coogler ruled…in Alabama that Congress exceeded its power in putting the so-called tax mandate on states. He entered a final judgement in favor of 13 states that had filed a lawsuit and instructed the Treasury Department not to enforce the provision. The judge left the rest of the law in place.

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The judge described the tax-cut restrictions as “a federal invasion of State sovereignty” that was “unconstitutionally ambiguous” — leaving states guessing as to whether their tax cuts would trigger a repayment of federal funds.

“The Tax Mandate’s restriction on direct or indirect state tax cuts pressures States into adopting a particular — and federally preferred — tax policy,” Coogler wrote. That “may disincentive” states “from considering any tax reductions for fear of forfeiting ARPA funds,”

This is, again, good news. It looks increasingly as though the Biden administration’s unconstitutional attempt to tie the hands of state governments will fail.