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Covid-19 Aid Rules Unlikely to Sway State Suits, Attorneys Say (1)

Nov. 12, 2021, 8:53 PMUpdated: Nov. 12, 2021, 10:38 PM

States may receive final details soon on how they can spend the $350 billion the federal government sent to them under the latest pandemic relief law.

But Treasury Department final rules may not sway states or judges one way or another when it comes to the 13 states suing the department over a provision in the law that prevents them from using the funds to offset revenue lost from tax cuts. Those disputes have “morphed into something bigger,” as one attorney put it.

“Even if the final guidance gives states a lot of flexibility, which I expect it will, the states will continue to pursue their cases,” said Chris Moran, a lawyer at Venable LLP in Baltimore who has been following the litigation.“I think these lawsuits are more about states vs. federal regulatory authority than the actual issue of how the states can spend the ARPA funds.”

Final rules tied to the American Rescue Plan Act (Pub. L. No. 117-2) provision were undergoing review by the White House Office of Management and Budget as of late this week, one of the last steps before rules are released. In five different legal challenges, states allege an interim final rule released in May, which mandates they report to Treasury how they will pay for tax cuts, is too ambiguous and infringes on their sovereign right to make their own policy.

“The government has been arguing the regulations resolve some of the ambiguity,” said Joe Bishop-Henchman, vice president of tax policy and litigation at the National Taxpayers Union Foundation, which has filed briefs siding with the states in all five cases.“But it doesn’t—and can’t—change their argument that the statute is unconstitutional.”

Robert Alt of the Buckeye Institute, which has filed briefs supporting the states in three cases, said whatever is in the final rules shouldn’t matter to the courts.

“ARPA’s tax mandate is unclear, and that error cannot be cured by subsequent Treasury Department guidance,” Alt said. “It is up to Congress to speak clearly if it is going to set a spending condition in an area of traditional state authority—and in ARPA’s tax mandate, Congress did not.”

Federal judges in Kentucky and Ohio have ruled against Treasury and enjoined it from enforcing the restrictions, on grounds that they violate state sovereignty. Federal courts in Missouri and Arizona have done the opposite, ruling that states can’t yet demonstrate harm because Treasury has yet to enforce its rules, let alone finalize them.

Each of those cases is on appeal with federal circuit courts, while challenges in West Virginia and Texas are still at the trial level with district courts.

Treasury will likely ask judges for additional briefing when the final rules comes out, though they won’t remedy the issue of coercing state policy, said Peggy Little, an attorney with the New Civil Liberties Alliance, which has filed briefs supporting the states in three suits. “The Kentucky court didn’t even look at whether regulations were ambiguous or not, they just said it would be coercive. Even if you think it could cure things, its much too late.”

Each lawsuit has become more about state sovereignty than about how states can actually spend the funds, said Bruce Ely, a state and local tax partner with Bradley, Arant, Boult, Cummings LLP in Alabama,adding that he “sees a strong parallel” to recently filed state challenges against the Biden administration over Covid-19 vaccination mandates.

“These lawsuits have morphed into something bigger,” Ely said.

(Updated with comments from NCLA attorney in 10th paragraph.)

To contact the reporter on this story: Sam McQuillan in Washington at smcquillan@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergindustry.com; Kathy Larsen at klarsen@bloombergtax.com

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