Arizona Sues to Stop Federal Ban on Tax Cuts

Arizona filed suit in federal court against the U.S. Treasury Department on March 25, the latest in a series of recent developments relating to the new federal law that bans states from using ARPA stimulus funds “directly or indirectly offset a reduction in…net tax revenue” or delay a tax increase until after 2024. The lawsuit, brought by Arizona Attorney General Mark Brnovich, is a declaratory judgment action, a type of pre-emptive challenge before any enforcement action can be brought by the feds against a state that cuts taxes.

The Arizona lawsuit first discusses contradictory readings of the law’s language. The lawsuit notes that the New York Times described the motivation of Senator Joe Manchin (D-WV), the main proponent of the provision, as being “states should not be cutting taxes at a time when they need more money to combat the virus” and that states should “postpone their plans to cut taxes.” By contrast, the lawsuit notes, the Treasury Department recently stated that the provision “is not implicated” if “states lower certain taxes but do not use the funds under the Act to offset those cuts.” How does one reconcile those statements?

One conclusion is that multiple readings are possible because the language is so vague that it’s unconstitutional. (While not mentioned in this initial complaint, a law that is so unclear that it leaves extensive discretion to administrators to decide what it means is “void for vagueness” under the Due Process Clause.) The lawsuit points out that the law does not define “indirectly offset,” “reduction in net tax revenue,” or explain what policies would lead to the feds reclaiming relief funds. In a 1981 case, the U.S. Supreme Court held that “if Congress intends to impose a condition on the grant of federal moneys, it must do so unambiguously.” The conflicting statements by Senator Manchin and the Treasury Department evidence widely conflicting interpretations of the same language, showing the provision is not unambiguous.

The lawsuit secondarily argues that if the law in fact curtails the ability of states to cut taxes, the law unconstitutionally deprives states of their ability to set tax policy. Requiring states to let Congress direct state tax policy from now until 2024 cuts against the “two sovereigns” federal structure underlying the Constitution and embodied in the Tenth Amendment. Further, the lawsuit argues, this onerous condition “attaches unconstitutional strings” to the receipt of federal funds, essentially coercing the states to comply. Finally, the condition will last years after the ostensible purpose of the ARPA law – pandemic response – will have eased, showing that it is unrelated and too far.

The lawsuit is a strong and direct one, seeking to get the court to focus squarely on the legal issues. We will monitor the case as it proceeds. The case is State of Arizona v. Yellen, No. 2:21-cv-00514, filed in the U.S. District Court for the District of Arizona.