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Law360 (June 29, 2021, 4:30 PM EDT ) Kentucky and Tennessee asked a Kentucky federal court to undo a provision in a coronavirus aid law that prohibits states from using federal funds for state tax cuts, arguing that they are being forced to accept funds under unconstitutional conditions.
In a motion for summary judgment submitted June 23, Kentucky Attorney General Daniel Cameron and Tennessee Attorney General Herbert H. Slatery III sought to enjoin Treasury and its secretary, Janet Yellen, from enforcing the restrictions on federal dollars stemming from the American Rescue Plan Act
.The attorneys general told the District Court for the Eastern District of Kentucky that the provision violated the U.S. Constitution by coercing states to effectively cede their taxing power to the federal government and that the provision was impermissibly broad and ambiguous even after Treasury guidance.
"Accepting the funds and the accompanying conditions will limit the range of permissible tax policies the states may enact in the coming years, likely prohibiting them from enacting tax relief that would benefit their citizens," the attorneys general said.
The states said that declining funds would immediately harm state fiscal outlooks and their residents. The states added that Kentucky submitted certification to receive funds and Tennessee intends to submit certification in the coming weeks despite their challenge because "declining the funds is not a realistic option."
Kentucky and Tennessee filed suit in April seeking to challenge the act's so-called tax mandate, which prohibits states from using federal aid to offset net revenue reductions or risk having to return the funds.
The Treasury Department issued an interim final rule on the provision, laying out how states should determine whether a net revenue reduction would prompt a clawback and the procedures for tracking and reporting their tax changes to the federal government through 2024, when funds must be spent.
The attorneys general, however, said that the interim rule set "confusing limits" and appeared to interpret the tax mandate as a broad prohibition on state tax cuts. The rule could be changed, and states can't know how the Treasury would interpret the rule in the future, the attorneys general said.
"Thus, even after the interim rule, the states are still stuck between a rock and a hard place," they said. "The interim rule cannot resuscitate the fatally ambiguous tax mandate."
The motion reiterates many similar claims presented in the complaint by the attorneys general, including those that the provision violated Congress' spending power under the Constitution, was unrelated to the goal of providing pandemic relief and commandeered the states' taxing authority.
Kentucky and Tennessee's case is one of several that mostly Republican attorneys general from around the country have filed against the clawback provision. The litigation is at various stages. A federal judge dismissed a complaint from Missouri, although the state appealed that ruling. District court rulings in the other cases are pending.
Treasury has argued in a similar challenge brought by Ohio's attorney general that states that certify and agree to abide by the conditions of the federal funds — including the offset provision and any related regulations or guidance — lack standing to challenge the provision in court.
Cameron asserted in a news release June 24 that "the federal government's actions are a gross intrusion on the General Assembly's lawmaking authority, and could threaten not only COVID relief funding but future economic growth in the commonwealth resulting from favorable tax policies."
Elizabeth Kuhn, a spokesperson for Cameron, said in an email to Law360 on Tuesday that the Attorney General's Office is confident in its position in this case and that it would be premature to comment on any arguments the Treasury may or may not make.
Samantha Fisher, a spokesperson for Slatery, referred Law360 to the brief in response to questions on certification and standing.
Representatives of the U.S. Department of Justice, which is representing Treasury, did not immediately respond to requests for comment on Tuesday.
Kentucky is represented by Attorney General Daniel Cameron and by Brett R. Nolan, Barry L. Dunn, Victor B. Maddox and Matthew F. Kuhn of the Kentucky Attorney General's Office.
Tennessee is represented by Attorney General Herbert H. Slatery III and by Andrée S. Blumstein, Brandon J. Smith and Sarah K. Campbell of the Tennessee Attorney General's Office.
Treasury is represented by Brian M. Boynton and Charles E.T. Roberts of the U.S. Department of Justice.
The case is Commonwealth of Kentucky et al. v. Janet Yellen et al., case number 3:21-cv-00017, in the U.S. District Court for the Eastern District of Kentucky, Central Division.
--Additional reporting by James Nani and Paul Williams. Editing by Vincent Sherry.
For a reprint of this article, please contact reprints@law360.com.
