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Treasury’s Covid-19 Aid Restrictions Win Is Tested on Appeal

Jan. 13, 2022, 11:47 PM

A federal appeals court on Thursday explored whether to remand a state’s challenge of federal restrictions on how to spend $350 billion in Covid-19 aid back to the U.S District Court that dismissed it.

Last year, district Judge Diane Humetewa ruled Arizona could not show how its been harmed by the U.S. Treasury Department’s prohibition on states using American Rescue Plan Act funding to “directly or indirectly” offset revenue lost from a tax cut. Arizona is one of more than a dozen Republican-led states suing Treasury over guidance they say is ambiguous and violates anti-commandeering and spending clauses of the U.S. Constitution by attempting to coerce state tax policies.

Arizona’s appeal to the U.S. Court of Appeals for the Ninth Circuit seeks to undo the district court’s decision. A similar ruling against Missouri is currently pending with the Eighth Circuit Court of Appeals.

All three judges on the panel questioned whether to remand the case back to the district court.

“Money is a very fungible object, so if a state is not spending its money to fight Covid and using $4 billion of the federal government’s money to fight Covid, the $4 billion its saving could be used to cut taxes—that would arguably be an indirect use and contrary to the statute,” Judge Ryan Nelson said. “The problem is directly or indirectly. Indirectly in the statute has to mean something other than directly. I think Arizona has a better claim than you might be giving them credit for.”

Treasury’s attorney, Daniel L. Winik of the U.S. Department of Justice said that the term indirectly is merely meant to prevent states from working around the provision, not from making tax cuts, as explained final guidance released after Arizona’s challenge .

Drew Ensign, deputy solicitor general for Arizona, pushed back, saying that Treasury’s subsequent interpretations make the law even more ambiguous.

Nelson and Judge Mark Bennett each asked both parties, if they determined Arizona does have standing, if they would prefer the court decide the case or remand it back to the district court.

Winink said Treasury did not have a preference. Ensign said he did not believe a remand was appropriate.

Nelson asked if the court should remand the case, would Arizona have issue with Treasury suing to go after state-specific violations of the tax mandate. “Would you fight the federal government on their ability to obtain declaratory relief?” Nelson asked Ensign.

Ensign said that Treasury could indeed bring a declaratory judgment if it believed a specific action by a state violated its provision.

The case is State of Arizona v. Yellen, 9th Cir., No. 21-16227, oral arguments 1/13/22.

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; Yuri Nagano at ynagano@bloombergtax.com