In a Wednesday amicus brief, the nonprofit New Civil Liberties Alliance said the U.S. Department of the Treasury's interim final rule on the American Rescue Plan Act
's provision barring states from using federal aid to offset net revenue reductions failed to cure the law's ambiguities and erected an administratively complex system for states to follow. The NCLA asked the court to declare the law unconstitutional and enjoin its enforcement, saying it violates state sovereignty.Ohio has sought a permanent injunction against the provision, which requires states to return federal aid used to offset tax cuts, claiming that it violates the 10th Amendment and the spending clause
, which allows Congress to attach certain conditions for use of federal funds, for being unclear and coercive. The NCLA's arguments closely matched Ohio's position, including that the law was unclear from the start and only lawmakers, not Treasury, could fix it."Because the Constitution requires Congress to provide the requisite clarity regarding any spending clause condition, Treasury's [interim final rule] cannot cure statutory ambiguity as a matter of law," the NCLA said. "Indeed, the [interim final rule] injects further ambiguity into the scheme and thus fails to provide clarity."
Treasury's rule said if net tax revenue hasn't been cut, states fall under a safe harbor and the clawback provision doesn't apply. The rule also set up a de minimis standard when the total value of revenue reductions by a government is below 1% of the reporting year's baseline. If below that amount, the clawback would not be triggered, according to the rule.
Additionally, the rule 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. It also outlines how states should track and report their tax changes to Treasury through 2024, when funds must be spent.
The NCLA, however, claimed that Treasury took it upon itself to fashion a system that the underlying statute didn't contemplate for states to report their tax policy changes and revenue collections and that the agency gave itself broad power to determine whether funds should be recouped. The NCLA also questioned whether Treasury had authority to create the 1% de minimis threshold and stipulate that states should use a fiscal year 2019 baseline for their calculations.
"These onerous and intrusive requirements were just invented by Treasury out of whole cloth to enforce its own, rather than Congress', spending clause conditions," the NCLA said.
Peggy Little, an NCLA attorney, told Law360 on Thursday that the organization believes that the clawback provision is too unclear for any rule to render it constitutional. She said U.S. Supreme Court precedent has held that Congress can't delegate its legislative powers to agencies to have them define terms or legislative intent.
"Treasury can't fix this law through regulation," Little said.
The U.S. Department of Justice, which is representing Treasury in the case, didn't respond to a request for comment.
But David Schleicher, a Yale Law School professor, told Law360 on Thursday that he believes Treasury's rule does clarify the statute's ambiguity, and that not attaching conditions to state aid could create a "moral hazard" because states may expect future federal bailouts if they experience revenue reductions.
Schleicher said one of the case's cruxes is whether Supreme Court precedent stating that Congress must clearly spell out the conditions on federal money also encompasses regulations that carry out federal law.
"Whether that means Congress plus agencies interpreting what Congress said, the Supreme Court has never ruled," he said.
Schleicher said he believes that federal regulations should be permitted to clarify an ambiguous statute regarding spending clause conditions and that Treasury's rule "is extraordinarily clear."
Ohio's case, brought by Republican Attorney General Dave Yost, is one of several that attorneys general from around the country have filed against the clawback provision. Most of the challenges have been lodged by Republicans, although Iowa's Democratic Attorney General Tom Miller signed onto a lawsuit with 12 other states at the behest of Republican Gov. Kim Reynolds.
Treasury has argued that states lack standing to bring the challenges because the harm they allege is speculative and Congress was acting within its authority to block states from using federal aid to pay for tax cuts. Treasury has also said that the law isn't coercive because states can decline the federal funds if they wish to cut taxes that would trigger the clawback.
The litigation is at various stages. A federal judge dismissed a complaint from Missouri, although the state appealed that ruling, and district court rulings in the other cases are pending.
U.S. District Judge Douglas R. Cole previously denied Ohio's bid for a preliminary injunction on May 12, but said the state "established a substantial likelihood of success" on the merits because it is suffering irreparable harm. Ohio has suggested this meant that a permanent injunction would provide more adequate relief.
A representative of Yost's office did not respond to a request for comment.
The NCLA is represented by Angela M. Lavin of Wegman Hessler LPA and by its own Peggy A. Little, Richard A. Samp, Sheng Li and Mark Chenoweth.
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 David Netter, 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 James Nani and Maria Koklanaris. Editing by Vincent Sherry.
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