GOP picks fight over states' rights in coronavirus relief

Republicans are aiming to stir up a legal battle over Biden's pandemic relief bill, targeting a provision in the American Rescue Plan they say is an unconstitutional infringement on states' ability to devise their own tax policies.

A provision in the bill that forbids states from using billions in aid to offset any tax cuts they might implement has sparked a backlash from Republican lawmakers and state attorneys general. Their criticisms could lay the groundwork for a court battle over states' rights and government overreach akin to the Supreme Court case over the fate of ObamaCare.

This time, the GOP appears to be framing the issue as the Biden administration getting in the way of state and local leaders cutting taxes for their own residents.

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On Tuesday, a group of 21 Republican state attorneys general sent a letter to the Treasury Department threatening legal action if the administration intends to prevent states from cutting taxes.

"This language could be read to deny States the ability to cut taxes in any manner whatsoever – even if they would have provided such tax relief with or without the prospect of COVID-19 relief funds," the letter reads.

"Absent a more sensible interpretation from your department, this provision would amount to an unprecedented and unconstitutional intrusion on the separate sovereignty of the State through federal usurpation of essentially one half of the State's fiscal ledgers. Indeed, such federal usurpation of state tax policy would represent the greatest attempted invasion of state sovereignty by Congress in the history of our Republic," they wrote.

Another Republican state attorney general, Dave Yost of Ohio, went a step further this week, filing a federal lawsuit against the administration and asking a judge to declare the provision unconstitutional, arguing that it would effectively prevent the state from implementing any tax cuts.

"The Tax Mandate thus gives the States a choice: they can have either the badly needed federal funds or their sovereign authority to set state tax policy," Yost's office said in the court filing. "But they cannot have both. In our current economic crisis, that is no choice at all." 

The moves could potentially set up one of the Biden administration's first major court battles over the new president's policy agenda.

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The Biden administration has so far stood by the provision, saying conditions on federal money to states is not unusual.

“The law does not say that states cannot cut taxes at all, and it does not say that if a state cut taxes, it must pay back all of the federal funding it received," a Treasury Department spokesperson said this week in response to the Republican attorneys general letter. "It simply instructed them not to use that money to offset net revenues lost if the state chooses to cut taxes. So if a state does cut taxes without replacing that revenue in some other way, then the state must pay back to the federal government pandemic relief funds up to the amount of the lost revenue."

“In other words, states are free to make policy decisions to cut taxes – they just cannot use the pandemic relief funds to pay for those tax cuts,” the spokesperson added.

The $1.9 trillion relief package has been hailed by progressives for delivering billions of dollars in aid to individuals, families, and state and local governments.

Josh Bivens, the research director at the left-leaning Economic Policy Institute, said he’s a fan of the bill’s provision against states using the aid for tax cuts, saying that he sees it as lawmakers hoping to avoid a similar situation to the drop in public investment across the country following the Great Recession.

“After 2010 we saw huge disinvestment at the state and local governmental level, just huge declines in spending,” Bivens said. “Education spending was kind of flat on a per-pupil basis for almost a decade. I think we really have sort of a decade of disinvestment to make up. So I would like to see in the next four to five years states use this federal aid and try to make up some of that investment deficit.”

But while the Republicans' rhetoric about invasions on state sovereignty has prompted some eye-rolling from experts, some legal scholars believe that there may be some merit behind their potential arguments in court.

Mitchell Berman, a professor at the University of Pennsylvania law school, says that because the law is open to interpretation, it could be read by the conservative Supreme Court in a way that would impose impermissible conditions or is not sufficiently clear about what is required of the states.

"Given that contracts in general have some vague and ambiguous terms, a court that wants to police federal conditions to the states in a very state-friendly way, will be able to conclude that conditions are insufficiently clear or unambiguous if it wants to," Berman said. "And will be able to conclude otherwise, if it wants to. There's enough wiggle room. Given the priors of a majority on this court, what one would be on the lookout for is that it would be hard to eliminate all uncertainty, or all ambiguity — really all vagueness."

Fights over conditions on federal money to the states are not unusual. In 1987, the Supreme Court established a legal test for such cases when it upheld a federal law that withheld highway funds from states that did not raise their drinking age to 21.

Among other things, the criteria the court laid out is that conditions on federal money must be unambiguous and not coercive. And the condition, the court ruled, cannot be unconstitutional itself.

In 2012, the Supreme Court expanded on what it considers to be coercive conditions when it struck down a portion of the Affordable Care Act that provided states with increased Medicaid funding if they expanded eligibility to meet new federal standards.

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Berman said that the decision, known as National Federation of Independent Business v. Sebelius, would put Republican states on “stronger footing” in a court challenge against the relief bill’s tax provision.

But Bivens said that the fight could also backfire against the right, arguing that the kind of public investment that the aid makes possible is popular on a local level, even if Republicans see political advantages in stirring up a fight over whether the administration is getting in the way of lower taxes.

Bivens pointed out that after the Supreme Court’s ruling that made Medicaid expansion optional, the number of states that have refused to opt in has steadily dwindled and provided local Democrats in red states with a formidable campaign issue.

"That seemed like a horrible disaster for people who wanted that law to come out of the gate running," Bivens said. "As a political issue, my sense is it's been a pretty good one for Democrats in the states. So I think the whole political fight to remind people that governors are trying to pass on free money just so they can give away tax cuts — that's one I don't think Democrats need to be that scared of."

“I feel like if we lose this fight, we're really bad at our jobs because I do think once you dig into the specifics, it's things that are generally popular and well thought of,” he added.