By Abraham Gross

Law360 (July 13, 2021, 3:51 PM EDT ) The U.S. Chamber of Commerce asked a federal court to side with Kentucky and Tennessee's attempt to block a coronavirus relief law's provision that would allow the federal government to withhold funds from states that lower their taxes.

The U.S. Chamber of Commerce and the National Federation of Independent Business' Small Business Legal Center argued in a brief Monday that the states correctly claimed the so-called tax mandate portion of the American Rescue Plan Act threatens the states' sovereignty to enact their own tax policies.

Kentucky Attorney General Daniel Cameron and Tennessee Attorney General Herbert H. Slatery III are seeking to enjoin the U.S. Department of the Treasury and Treasury Secretary Janet Yellen from enforcing the restrictions on federal dollars stemming from ARPA, arguing that the provision was unconstitutionally vague and coercive.

Kentucky and Tennessee's case is one of several that mostly Republican attorneys general from around the country have filed against the clawback provision, which prohibits states from using federal aid to offset net revenue reductions or risk having to return the funds. The suits are at various stages.

"Some matters are simply too close to the core of state sovereignty for the federal government to dictate their terms, even if those terms are framed as conditions," the Chamber said. "That is clearly true of this unprecedented effort to dictate state tax policy."

The Chamber supported the states' arguments against the provision, including that the law violated Congress' spending power under the U.S. Constitution and commandeered the states' taxing authority. The brief reiterated many of the Chamber's claims put forward for other states challenging the provision.

Treasury 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 guidance also sets the baseline to measure reductions in net tax revenue to 2019 fiscal year tax revenue, indexed for inflation in each year of the covered period. The guidance notes that year was chosen because it was the last full fiscal year before the pandemic.

However, the Chamber said that "the interim rule ultimately creates more problems than it solves." The rule micromanages state accounting practices and imposes limits on the clawback provision that appear to contradict the text of the law itself, the group said.

The accounting system ties state policy priorities to the past rather than the future and improperly puts Treasury in a supervisory role, the Chamber said, adding that the rule did not clarify the ambiguities of the provision and its scope.

"But even setting aside the ambiguity problem — which, far from curing, the interim rule compounds — states do not have time to wait for Treasury to engage in trial and error over the meaning of the statute," the Chamber said. "States are confronted with pressing public policy issues now."

In a statement to Law360, Slatery's office said that it appreciated the support for their challenge, adding that "The amicus brief gives the court invaluable perspective on how the provision undercuts state sovereignty and hurts Tennessee businesses. 

Spokespersons for Cameron and the U.S. Department of Justice, which is representing Treasury, declined to comment. 

Counsel for the Chamber and the NFIB did not immediately respond to requests for comment 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 U.S. Chamber of Commerce and National Federation of Independent Business are represented by Paul D. Clement and Erin E. Murphy of Kirkland & Ellis LLP.

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 Neil Cohen.

Update: This story has been updated with comment from Cameron and Slatery. 

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