Over half of the states have cut taxes in the past few years, but there was a real danger that the Biden Administration would force those cuts to be unwound thanks to a strangely-worded provision inserted at the last-minute into Congress’s American Rescue Plan Act in 2021. But thanks to extended litigation, that threat seems to have now receded.
That provision, attached as a condition to the $200 billion in emergency aid provided to state governments during COVID, was a requirement that states must agree to not use the funds to “either directly or indirectly offset a reduction in net tax revenue” for five years. NTUF (we filed briefs in every case), the states, and others have argued that this provision is incoherent and ambiguous, and also that the “indirectly” wording violates state sovereignty protected by the Tenth Amendment.
Today, the federal government filed a letter with the Fifth Circuit that essentially concedes that the provision will not be invoked against the states. The letter, from the Solicitor General to House Speaker Mike Johnson dated January 26, explains why the federal government will not be appealing its loss in the Eleventh Circuit ARPA case. The memo still insists that the administration is correct and the Eleventh (and other) circuits are wrong in how they've interpreted the statute and applied the constitutional precedents, but essentially concludes that the whole issue may be moot soon because "the vast majority of the plaintiff States are likely to satisfy" Treasury's position, and the offset provision essentially ends after 2024.
The Fifth Circuit is still writing its opinion in a case brought by Texas challenging the ARPA provision. The Biden Administration has not fared well in its court cases defending its reading of the provision: the Sixth and Eleventh Circuits ruled against the federal government, and even the Ninth Circuit ruled against the administration’s argument on standing in a case that was later abandoned. An amendment to eliminate the provision even won the support of 86 Senators in August 2021.
The memo is a strange one: if the government thinks they’re right, they should appeal, and if they’re declining to appeal they should concede their legal position. I read it as an attempt to save face on an issue they have been worn down on after losing with every court that reached the merits. But ultimately this is good news for taxpayers who won’t need to fear the federal government unwinding years’ of state tax policy decisions. The federal government can sometimes put conditions on direct use of its funds, but going beyond that is constitutionally dubious.