Taxpayers have won a case in Kentucky, challenging the new federal law that, if you read it literally, bans states from cutting taxes. NTUF had urged the judge to rule that the provision in question was an unconstitutional condition on the states, which he did.
NTUF became engaged in this issue after the American Rescue Plan Act (ARPA) of 2021, signed by President Biden in March of this year, included a section that forbids federal funds from being used “to either directly or indirectly offset a reduction in the net tax revenue.” If this provision is violated, the state will be forced to pay an amount to the Treasury “equal to the amount of funds used in violation.” 20 states have filed six lawsuits challenging the provision’s constitutionality, and NTUF has been filing briefs on the taxpayers’ side in each of the cases.
Judge Van Tatenhove just announced his decision in the Kentucky ARPA case, ruling for the state and enjoining the Treasury Secretary from enforcing the provision against Tennessee and Kentucky.
First, the judge found that the states have standing. They made a valid constitutional claim because they honestly interpret the provision as proscribing their preferred tax policy, and there is a credible threat of enforcement because Treasury Secretary Yellen wrote on March 23 that she would enforce it.
The judge then discusses the plaintiff's unconstitutional condition argument, characterizing the cases as a spectrum between the Dole case (loss of 5% of funds for not raising the drinking age) at one end and the Affordable Care Act Medicaid expansion case (expand Medicaid or lose all Medicaid funds) at the other. The judge notes that the Medicaid case involved 10 percent of state funds, while this case involves 20 percent of state funds, given at a time when the money is needed to balance budgets.
This "gun to the head contract of adhesion," the judge concludes, "is exactly the kind of intrusion on state sovereignty that the Constitution prohibits." While those conditions make the provision coercive, the judge writes, so too does the use of the power to "unduly influence the States' power to set their own tax policies" because this "threaten[s] the dual nature of our federalist system."
The judge does not address the anticommandeering, lack of reasonable relationship, or ambiguity claims by the plaintiffs, seeing no need to after finding for them on the unconstitutional conditions claim.
Two judges have now invalidated the provision: Kentucky's case joins an Ohio case that struck it for being too ambiguous. A judge in Arizona upheld the provision, while a judge in Missouri found the state had no standing to challenge it; both those are being appealed.
The judge here is absolutely correct. The term 'indirectly' in the statute converts this from a condition on supplemental aid into a takeover of state tax policy, and that's unconstitutional. Stay tuned as these cases continue to develop!
The case is Commonwealth of Kentucky, et al. v. Yellen, No. 3:21-cv-00017 (E.D. Ky. Sep. 24, 2021).