States Challenge the Constitutionality of the American Rescue Plan
Edward Plaut
The American Rescue Plan Act (ARPA) is a major legislative accomplishment of the Biden Administration. The $1.9 trillion bill provides an array of policies responding to the coronavirus pandemic and subsequent economic downturn, including carve outs for stimulus checks, funding vaccination distribution, and child tax credits.[1] Included is the Coronavirus State Fiscal Recovery Fund (CSFRF), a nearly $190 billion fund meant to assist State governments to “mitigate the fiscal effects” of the pandemic.[2] The CSFRF gives recipients broad discretion in how to use the money, allowing states to apply the aid toward public health measures, business aid, government services, infrastructure and more.[3]
However, the funding comes with strings attached. States must certify that they will comply with the spending rules outlined in subsection (c) of the act, which notably requires that states not use their funding “to either directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation, or administrative interpretation… that reduces any tax….”[4] This limitation, referred to as the Tax Mandate, was designed to ensure that States would not use the funding to fund tax cuts, but rather make meaningful public health and infrastructural investments to respond to the pandemic. The Tax Mandate has been the source of recent litigation by sixteen States in four federal district courts.[5]
The States in these cases contend that the Tax Mandate is an unconstitutional overreach of Congress’ Spending Power and have sued the Department of the Treasury to prevent the Mandate’s enforcement.[6] The district courts in three of the cases have agreed, although the cases all remain at different points of the appeals process. Although the courts have varied in the reasoning for their final holdings, with the Arizona court even finding the Tax Mandate constitutional, the States’ challenges threaten to undermine a key spending rule in the Biden administration’s foremost COVID recovery bill.
Congress’ spending authority is the first of the enumerated powers delegated under Article I, section 8 of the Constitution, allowing Congress to raise revenue and provide for the “general Welfare of the United States.”[7] Because Congress can’t commandeer a state government directly to implement policies, Congress can use the Spending Power as an incentive to encourage states to adopt federal regulations.[8] The spending rules are essentially contractual: states may accept Congress’ funds so long as they follow Congress’ express conditions. The power, both in its ability to give money and set constraints, is defined largely by the Supreme Court’s holdings in South Dakota v. Dole and National Federation of Independent Business v. Sebelius.[9] Particularly in the cases challenging the Tax Mandate, two key rules from Dole and Sebelius limit Congress: the proposed funding must motivate the states, not coerce them, and the spending rules must be imposed on the States unambiguously.[10]
Spending Rules Cannot Be Coercive
The Supreme Court has recognized that to some extent, any form of funding from Congress is a temptation, and to call all motivating rebates “coercive” would paralyze policymaking.[11] In the precedential Spending Power case South Dakota v. Dole, the Supreme Court held that Congress could condition five percent of federal highway funding on States raising their drinking age to 21.[12] The Court found that the amount of federal funding withheld was not coercive, as it made up less than one percent of South Dakota’s annual budget.[13] The Court’s decision did not hinge on the sheer amount of money in question, though. Instead, it established a four factor test for determining the coerciveness of federal spending rules: the money must be spent in pursuit of the general welfare, the conditions must be imposed unambiguously, there must be a federal interest in the particular program, and there conditions or regulations cannot violate other constitutional standards.[14]
In the landmark Affordable Care Act (ACA) case National Federation of Independent Business v. Sebelius, the Supreme Court for the first and only time found a spending rule unconstitutionally coercive.[15] The ACA provision in question was an increase in Medicaid funding conditioned on states expanding Medicaid coverage to more citizens. Chief Justice Roberts’ plurality opinion found that because States that opted to not expand existing Medicaid programs would lose their existing Medicaid funding (which constituted up to 20 percent of some state budgets), the rule was coercive to the States akin to a “gun to the head” in which the States could not realistically say no to the new funding.[16] Roberts’ plurality opinion effectively extends the four part test in Dole to also include spending rules that are unfairly coercive on the states. The Court alludes to another seminal spending clause case in Steward Machine v. Davis, where the Court found that Congress would violate their spending power if, in setting its spending rules in some extreme circumstances, “pressure [turned] to compulsion.”[17] However, both the majority in Steward Machine and the plurality opinion of Sebelius don’t draw a line specifically where this coercive turning point is.[18]
Unlike the spending rule in Sebelius, the Tax Mandate does not put any existing State funding in jeopardy.[19] Nonetheless, a Kentucky District Court in Kentucky and Tennessee’s challenge to the Tax Mandate decided the case based on this coercion standard.[20] The court held that the States had no choice but to claim the extensive CSFRF money given the condition of State budgets nationwide.[21] The court argued that the money offered in the CSFRF would provide a desperately needed boon to local economies devastated by the pandemic such that they could not turn it down.[22] Further, the court argued that the Tax Mandate undermined the principles of dual sovereignty of the Constitution, with Congress unduly influencing a State’s ability to set local tax policies.[23] The court concluded that because the Tax Mandate is a “federal overreach” and States have no choice but to accept the money, it is coercive.[24]
If upheld by the Supreme Court, this would be a dramatic expansion of the holding in Sebelius. Even totally new federal funding could have “coercive” spending rules if the sheer amount of funding and state need are great enough.
Spending Rules Cannot Be Ambiguous
As with any contract, the conditions to federal funding must be knowingly and voluntarily accepted. In Pennhurst State School and Hospital v. Halderman, the Supreme Court held that the State must actually be able to make an “informed choice” to accept Congress’ conditions.[25] Precisely what constitutes an informed choice is open to interpretation. Realistically, and particularly for complex spending programs such as the ARPA, Congress cannot possibly sort out every ambiguity within the requirements of a statute.[26] The Supreme Court held in Bennett v. Kentucky Board of Education that so long as the State had sufficient notice of a condition, even if Congress did not delineate every possible spending infraction, the condition was not excessively ambiguous.[27]
The States in each of the current cases contend that the language of the Tax Mandate itself is too ambiguous to be realistically complied with. In particular, the States claim that the Mandate does not adequately define how the States might “indirectly” use CSFRF funds to reduce taxes.[28] The States argue that if they were to reduce a state tax after receiving the funds and report a net revenue reduction to the Treasury, they could potentially lose CSFRF funding even if the CSFRF funds weren’t explicitly used to cover the budget shortfall.[29] Although the Treasury clarified in March of last year that states can still enact a broad variety of tax cuts so long as they don’t use CSFRF funding to make up the difference, the States argue that money in a state budget is fungible and that certain tax cuts might still fall under “indirect” use.[30]
Citing this ambiguity in the meaning of “indirect,” District Courts in the Northern District of Alabama and the Southern District of Ohio agreed with the States.[31] The courts point to the holding of Pennhurst and find that the Tax Mandate “provides no guidance on critical interpretive questions” on the definition of indirect.[32] Despite the Treasury’s issuance of the ARPA Final Rule this past January, the court held that the statute still failed to define what “indirectly” means sufficiently for the States to competently accept the condition.[33]
Arizona v. Yellen
In contrast to the other decisions, the Ninth Circuit district court for the District of Arizona in Arizona v. Yellen held that Congress had not exceeded its authority under the Spending Clause.[34] The court held that the tax mandate was not ambiguous, at least for Arizona specifically, as the State failed to show any impact on policymakers even if the provision is ambiguous in the abstract.[35] Furthermore, the court found that the CSFRF and the Tax Mandate are not coercive. Unlike Sebelius, the States don’t stand to lose existing federal funding. If the States decide to decline the new funds, they don’t receive the new funds.
The court pointed out that Arizona had already approved $2 billion in tax cuts for their 2021 budget, and offered no facts suggesting that, like the court argued in Kentucky v. Yellen, the state was under any financial strain coercing them to take the funding.[36] The court notes that Arizona even waited two months before accepting the funding, indicating that it hardly came under coercive pressure.[37]
Implications for the ARPA and the Spending Clause
The ongoing challenges to the American Rescue Plan could dramatically limit Congress’ authority under the Spending Clause. ARPA funds are available through the end of 2024, making it possible for the states to ignore the Tax Mandate for potentially a full two years of funding, depending on the expediency of the ongoing appeals.[38] The states involved have the opportunity not only to score a political victory against the Biden Administration, but to reduce Congress’ ability to set spending rules in the future. A finding that the Tax Mandate itself is too ambiguous would likely not have major consequences for the spending power as it is a fact specific inquiry from statute to statute. However, if the Tax Mandate is found to be too coercive, the Sebelius test for coercion would expand to include some set of Congressional conditions on “large” spending packages that are either too large or too needed for a state to turn down. Precisely how a court would determine what sorts of conditions would be unacceptable and how much money is too much is unclear, but such a finding could potentially discourage Congress from passing pricey spending bills in the future.
Edward Plaut is a Junior Editor with MJEAL. Edward can be reached at eplaut@umich.edu.
[1] Giovanni Russonello, What Does $1.9 Trillion Buy?, N.Y. Times (Mar. 10, 2021), https://www.nytimes.com/2021/03/10/us/politics/whats-in-covid-bill.html.
[2] 42 U.S.C.A. § 802(a)(1).
[3] 42 U.S.C.A. § 802(c)(1).
[4] 42 U.S.C.A. § 802(c)(2)(A)
[5] West Virginia v. United States Dep’t of Treasury, No. 7:21-CV-00465-LSC, 2021 WL 5300944 (N.D. Ala. Nov. 15, 2021); Kentucky v. Yellen, No. 321CV00017GFVTEBA, 2021 WL 4394249 (E.D. Ky. Sept. 24, 2021); Arizona v. Yellen, 550 F. Supp. 3d 791 (D. Ariz. 2021); Ohio v. Yellen, 547 F. Supp. 3d 713 (S.D. Ohio 2021).
[6] Sean M. Stiff, Cong. Rsch. Serv., LSB10588, Spending Clause Conditions and the Coronavirus State Fiscal Recovery Fund (2021).
[7] U.S. Const. art. I, § 8, cl. 1.
[8] See New York v. United States, 505 U.S. 144 (1992).
[9] See Dole, 483 U.S. 203 (1987); Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519 (2012).
[10] Stiff, supra note 6 at 2.
[11] Charles C. Steward Mach. Co. v. Davis, 301 U.S. 548, 589-590 (1937) (worrying that “to hold that motive or temptation is equivalent to coercion [would] plunge the law in endless difficulties”).
[12] Dole, 483 U.S. at 206.
[13] Id. at 211.
[14] Id. at 207-208.
[15] Sebelius, 567 U.S. at 581.
[16] Id.
[17] Steward Mach., 301 U.S. at 590.
[18] Id. (holding that the determination of coerciveness is specific to the case, that it “would be a question of degree, at times, perhaps, of fact”).
[19] 42 U.S.C.A. § 802(e)(1) (states only have to pay back “the amount of the applicable reduction to net tax revenue”).
[20] Kentucky, supra note 5 at *7 (holding that because they found the Tax Mandate a coercive grant of federal money, they need not look into other constitutional challenges).
[21] Id. at *4.
[22] Id.
[23] Id. at *6
[24] Id.
[25] Pennhurst State Sch. & Hosp. v. Halderman, 451 U.S. 1, 25 (1981).
[26] Bennett v. Ky. Dep’t of Educ., 470 U.S. 656, 657 (1985).
[27] Id. at 663.
[28] 42 U.S.C.A. § 802(c)(2)(A).
[29] Stiff, supra note 6 at 4.
[30] Id.
[31] West Virginia, supra note 5 at *13; Ohio, 547 F. Supp. 3d at 727.
[32] West Virginia, supra note 5 at *17.
[33] Id. at *18.
[34] Arizona, 550 F. Supp. 3d 791.
[35] Id. at 797.
[36] Id. at 799
[37] Id.
[38] 42 U.S.C.A. § 802(a)(1).
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