By James Nani

Law360 (July 1, 2021, 7:26 PM EDT ) A federal judge granted Ohio a permanent injunction Thursday against part of the American Rescue Plan that prohibits states from using pandemic aid to offset tax cuts, banning the U.S. Treasury from enforcing the provision against the state.

U.S. District Judge Douglas R. Cole issued the permanent injunction against the so-called tax mandate provision of the American Rescue Plan , finding Ohio's attorney general proved ongoing harm arises from the provision's ambiguity. The provision "falls short of the clarity" U.S. Supreme Court precedent requires for legislation that concerns the U.S. Constitution's spending clause when it comes to conditional grants to states, the court said.

"The court finds that the tax mandate exceeds Congress' power under the Constitution," the court said. "The court further finds that Ohio has met the conditions for injunctive relief to prevent the ongoing harm that this constitutional violation is causing."

The court also rejected arguments from U.S. Treasury Secretary Janet Yellen that regulations the agency released cure that ambiguity. While the court stopped short of finding Congress can never authorize an agency to supply such clarity, it said under the American Rescue Plan, Congress failed to do so.

The tax mandate provision in question bars states, territories and localities that accept funds from the roughly $350 billion pot of cash from "directly or indirectly" using the coronavirus aid to offset a reduction in net revenue. Otherwise, they risk having to return the amount that is used to offset a tax cut.

Ohio Republican Attorney General Dave Yost in March challenged the provision in the Southern District of Ohio's Western Division court, contending it violates the spending clause of the Constitution by being coercive and ambiguous. The provision also violates states' rights under the 10th Amendment by commandeering state taxing authority, Yost has argued.

In May, the court declined Treasury's request to toss Ohio's challenge but denied Ohio's request for a preliminary injunction, finding that the court has jurisdiction over the issue and Ohio had shown it "established a substantial likelihood of success" on its claims. 

While Yellen argued the case is moot because Ohio has accepted the funds, the court said standing is measured when a suit is filed and therefore mootness was irrelevant. The court said it wasn't appropriate to wait and see what tax changes Ohio may adopt before deciding if the tax mandate is ambiguous. It's not just the threat of recoupment that harms Ohio but the ambiguity it raises, the court said.

"The uncertainty itself, uncertainty that exists now that Ohio has tendered its certification, will continue to exert pressure on state legislators not to consider any tax change, or set of tax changes, as to which the tax mandate implications cannot be assessed," the court said.

The decision came on the same day Ohio Gov. Mike DeWine, a Republican, signed a state budget that includes $1.6 billion in income tax cuts and a host of tax breaks for businesses.

The court noted that even though it previously identified the source of ambiguity to be what an "indirect offset" is, the Treasury secretary still has struggled to distinguish it from a direct offset based on the text of the statute. Examples Yellen used didn't distinguish the two but were "substantively identical," the court said.

"In short, it appears that even now the secretary lacks a coherent theory as to what an 'indirect offset' may be, as distinct from a 'direct offset,' further confirming the court's suspicion that the phrase is unintelligible as used in the context of the tax mandate," the court said.

The court said it didn't need to determine whether the spending clause allows Congress to delegate to an agency the power to create clarity to a statute because it didn't do so expressly in this case. A general provision allowing the secretary to issue regulations to carry out the section "does not suffice," it said.

"When Congress seeks to alter the constitutional design by delegating its powers to agencies on topics of such importance, Congress must do so clearly, especially when federalism concerns are at issue," the court said.

In an online post Thursday afternoon, Yost said he had just learned about the decision.

"Huge win for our federalist system of government — and though the [progressives] will howl today, they will one day cite the case to a GOP president," Yost said.

A different federal court in May tossed a similar case brought by Missouri after finding it lacked standing and the case wasn't ripe for review. Four other courts are considering similar cases, according to Joseph Bishop-Henchman, vice president of litigation for the National Taxpayers Union Foundation.

The U.S. Department of Justice declined to comment. The U.S. Treasury's office didn't immediately respond to requests for comment.

The office of Ohio's attorney general didn't immediately respond to requests for comment.

Ohio is represented by Attorney General Dave Yost and by Benjamin M. Flowers, Zachery P. Keller and Sylvia May Davis of the Ohio Attorney General's Office.

Treasury is represented by Brian M. Boynton, Alexander K. Haas, Brigham J. Bowen, Stephen Ehrlich and Charles E.T. Roberts of the U.S. Department of Justice.

The case is Ohio v. Janet Yellen et al., case number 1:21-cv-00181, in the U.S. District Court for the Southern District of Ohio.

--Additional reporting by Abraham Gross, Dylan Moroses, Paul Williams and Maria Koklanaris. Editing by Roy LeBlanc.

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