The U.S. Treasury's interim final rule on the tax mandate provision of the American Rescue Plan Act doesn't cure its constitutional problems, Ohio told a federal court. (AP Photo/Patrick Semansky)
doesn't cure the constitutional problems of the provision.The provision in question bars states, territories and localities that accept 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.
The Treasury affirmed in the interim guidance that states and localities can't spend American Rescue Plan funds to indirectly offset net tax cuts, while adding various guidelines and some key exceptions such as a de minimis rule. The Department of Justice, in representing the Treasury, notified the court Monday of the interim final rule.
Yost has claimed the clawback provision infringes on Ohio's sovereignty by barring it from cutting taxes and coerces Ohio to accept the restrictions in violation of the U.S. Constitution's spending clause. The measure also violates states' rights under the 10th Amendment of the U.S. Constitution and is ambiguous because it doesn't give clear notice of the meaning of "indirectly offset a reduction in the net tax revenue," Yost has argued.
The Treasury has said that the provision is well within Congress' power to set limits on its spending and that Ohio lacks standing in the case. The case is one of several that attorneys general across the country have lodged against the provision. A similar case brought by Missouri was dismissed by a different federal court Tuesday.
Ohio told the court Monday that under the Constitution's spending clause the provision must be clear and can't be clarified later with regulations. Therefore, the rule is irrelevant to Ohio's arguments that the provision is ambiguous, the state said.
"If the tax mandate is unconstitutionally ambiguous, the interim final rule cannot cure the constitutional problem," the brief said.
In addition, Ohio argues the interim rule doesn't resemble an interpretation the Department of Justice has offered in court in defending the Treasury. The interim rule adopts a broad reading of the provision where states must report all actions reducing tax revenue, subjecting them to Treasury review, even though the DOJ has "declined to defend a broad version of the tax mandate," Ohio argued.
The interpretation means the Treasury sees money as fungible and, in subjecting all state spending to review, contradicts DOJ arguments the provision only pertains to "volitional" and "active" use of federal funds to finance tax cuts, Ohio said. The rule provides no meaningful clarity, doesn't truly interpret the provision and therefore the court should support Ohio's motion for injunctive relief, the state said.
"To call the rule an 'interpretation' is rather like saying that van Gogh 'interpreted' his blank canvas to portray 'The Starry Night' or that Van Halen 'interpreted' his guitar to play 'Eruption,'" Ohio said. "Treasury's invoking the tax mandate in hopes of implementing a scheme that runs contrary to the interpretation that the Department of Justice offered this court proves the vacuous nature of the statutory language."
The interim rule also proves the provision is coercive because it creates a program in which states must measure and show spending cuts and revenue raisers, and then agree to conduct state budgeting in a way the federal government prefers, Ohio said. That runs afoul of the U.S. Supreme Court precedent set in National Federation of Independent Business v. Sebelius
, Ohio said. The case dealt with the loss of preexisting Medicaid funding unless states agreed to expand Medicaid coverage.In the DOJ's filing Monday, it told the court the interim final rule is a "comprehensive framework" for implementing the offset provision.
"Under the act, and now the rule, a state is free to modify its taxes as it believes appropriate, as long as the changes — taken together over the reporting period — do not result in a reduction to the state's net tax revenue," the DOJ said.
Even if Rescue Plan funds lowered net tax revenue, the funds would only be clawed back as much as they were offset, the DOJ noted.
"While the act itself provided more than clear notice of the funding condition at issue, Treasury's comprehensive framework has now implemented the plain language of the offset provision by establishing a 'step-by-step process for determining whether, and the extent to which, fiscal recovery funds have been used to offset a reduction in net tax revenue,'" the DOJ said.
Representatives of Yost didn't immediately respond to requests for comment Tuesday.
The Department of Justice declined to comment Tuesday.
The state of 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 Robert Rudinger.
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