MORGANTOWN – Attorney General Patrick Morrisey and two colleagues have followed through on their announced plan to sue the U.S. Treasury over what they allege is vague and unconstitutionally restrictive language in the American Rescue Plan regarding state tax cuts.
Morrisey, Alabama Attorney General Steve Marshall and Arkansas Attorney General Leslie Rutledge led a 13-state, bipartisan coalition in filing the suit Wednesday in the U.S. District Court for the Northern District of Alabama Western Division.
Part of the American Rescue Plan is devoted to various COVID-19 relief measures. The bill forbids states from using COVID-19 relief funds to “directly or indirectly offset a reduction in … net tax revenue,” whether by cutting rates, giving rebates, deductions, credits, “or otherwise.”
The 13 states take issue with the word “indirectly” because it could effectively bar any tax-cut legislation this year or for years to come, they said.
Morrisey said in a Wednesday announcement that the lawsuit argues federal treasury officials cannot force states to relinquish control of their taxing authority in return for much-needed economic aid related to COVID-19. The states take specific issue with a stimulus bill provision that the coalition refers to as one of the most egregious power grabs by the federal government in the nation’s history.
“Never before has the federal government attempted such a complete takeover of state finances,” Morrisey said. “We cannot stand for such overreach. The Constitution envisions co-sovereign states, not a federal government that forces state legislatures to forfeit one of their core constitutional functions in exchange for a large check equal to approximately 25 percent of their annual respective general budgets.”
Morrisey said the matter directly impacts whether the federal tax mandate will infringe upon the West Virginia Legislature’s consideration of three proposals proposal to eliminate the state’s income tax, specifically with regard to how U.S. Treasury officials interpret the word “indirectly” as contained in the provision.
Any money that Treasury regards as misspent on tax cuts is subject to recapture by Treasury.
The states wrote a letter earlier this month to Treasury Secretary Janet Yellen, who is named as a defendant along with Treasury itself, seeking clarification of the word “indirectly” and citing the problems they face with tax-cut plans.
Yellen wrote back and said it’s well established that Congress may place reasonable restrictions on the use of federal funds, and Congress does it routinely.
“Nothing in the act prevents states from enacting a broad variety of tax cuts,” she said. “It simply provides that funding received under the act may not be used to offset a reduction in net tax revenue resulting from certain changes in state law.” Replacing lost funds by other means isn’t part of the prohibition.
Any possible misuse wouldn’t affect a state’s entire COVID relief under the act, she said, just the portion used to cover tax-cut losses. Treasury is crafting further guidance on the topic.
The lawsuit argues that Yellen’s response did not place limits on the vague provision – uncertainty that she admits exists in referring to the ambiguity as a “thorny” issue in testimony to Congress.
Treasury Acting Inspector General Richard K. Delmar, who would be responsible for seeking any potential claw back of federal funds, is also a co-defendant.
The lawsuit sets forth charges of unconstitutional exercise of federal power, specifically violations of the 10th Amendment, the conditional spending doctrine and the anti-commandeering doctrine, Morrisey said. They seek a court order that prohibits enforcement of the federal tax mandate and declares it unconstitutional.
The other states joining the bipartisan suit are Alaska, Florida, Iowa, Kansas, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota and Utah.
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