Brief, State of Ohio v. Yellen, No. 1:21-cv-00181 (S.D. Ohio), Doc. 51 (June 8, 2021)

Summary

Brief of amicus curiae Goldwater Institute in support of the State of Ohio, Doc #: 51 in Case No. 1:21-cv-181, filed 06/08/21, in the U.S. District Court for the Southern District of Ohio before Judge Douglas R. Cole. The brief states that Ohio has argued the Tax Mandate in the American Rescue Plan Act of 2021 is ambiguous and coercive, and adds that the condition is not reasonably related to the purpose of the Act's spending. It argues that the Tax Mandate is not reasonably related to ensuring that states use the funds for the Act's permitted purposes. It concludes that the Tax Mandate serves to coerce states to favor government spending over tax cuts and to stifle tax competition among the states. It is signed /s/ Jacob Huebert.

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“Brief, State of Ohio v. Yellen, No. 1:21-cv-00181 (S.D. Ohio), Doc. 51 (June 8, 2021).” Original at storage.courtlistener.com. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/brief-state-of-ohio-v-yellen-no-1-21-cv-00181-s-d-ohio-doc-51-june-8-2-cbc8bc3384/, SHA-256 df7639b81c3acfa6692132f7983e55ac83ef6193d69e9f1b93774e5731ba2d4a.

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Case: 1:21-cv-00181-DRC Doc #: 51 Filed: 06/08/21 Page: 1 of 13 PAGEID #: 826

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF OHIO

STATE OF OHIO, )
)
Plaintiff, ) Case No. 1:21-cv-181
)
v. ) Judge Douglas R. Cole
)
JANET YELLEN, in her official capacity as )
Secretary of the Treasury; RICHARD K. )
DELMAR, in his official capacity as acting )
inspector general of the Department of the )
Treasury; and the U.S. DEPARTMENT OF THE )
TREASURY, )
)
Defendants. )

BRIEF OF AMICUS CURIAE GOLDWATER INSTITUTE
IN SUPPORT OF THE STATE OF OHIO

Jacob Huebert (Atty. ID# 78562)
Scharf-Norton Center for Constitutional Litigation at the
GOLDWATER INSTITUTE
500 E. Coronado Road
Phoenix, Arizona 85004
Telephone: 602.462.5000
litigation@goldwaterinstitute.org
Case: 1:21-cv-00181-DRC Doc #: 51 Filed: 06/08/21 Page: 2 of 13 PAGEID #: 827

CORPORATE DISCLOSURE STATEMENT

The Goldwater Institute is a nonprofit corporation incorporated under the laws of the

State of Arizona. It has no parent corporation, and no publicly held corporation owns 10 percent

or more of its stock.

INTEREST OF AMICUS CURIAE

The Goldwater Institute was established in 1988 as a nonpartisan public policy and

research foundation devoted to advancing the principles of limited government, individual

freedom, and constitutional protections through litigation, research, policy briefings, and

advocacy. Through its Scharf-Norton Center for Constitutional Litigation, the Institute litigates

cases and files amicus briefs when its or its clients’ objectives are directly implicated.

The Goldwater Institute advances the idea that the U.S. Constitution provides a

guaranteed minimum of protection for individual rights, while leaving states free to enact laws

that protect those rights more broadly. That is why the Institute directs its efforts primarily

toward states—the “laboratories of democracy”—to introduce innovative ideas that expand

freedom. The Goldwater Institute takes interest this case because it concerns an important

constitutional limit on federal power, and the “Tax Mandate” that the State of Ohio challenges

threatens states’ ability to act as laboratories of democracy and to enact policies that better

respect individuals’ liberty to direct their income as they see fit. Further, as discussed below, the

Tax Mandate potentially threatens tax reform that the Institute advocates for its home state of

Arizona. See Victor Riches, Governor Ducey’s Chance to Make History, Nat’l Rev., June 2,

2021.1

1
https://www.nationalreview.com/2021/06/governor-duceys-chance-to-make-history/.
1
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ARGUMENT

The State of Ohio has argued that the “Tax Mandate” in the American Rescue Plan Act of

2021 (the “Act”) violates the Spending Clause of the U.S. Constitution because the condition it

imposes on a state’s acceptance of fiscal recovery funds (“Funds”)—effectively, a ban on state

tax cuts and credits through 2024—is ambiguous and coercive. That is correct, but there is an

additional reason why the Tax Mandate violates the Spending Clause: because the condition it

imposes is not reasonably related to the ostensible purpose of the Act’s spending.

When Congress places a condition on a federal grant to the states, the condition “must

(among other requirements) bear some relationship to the purpose of the federal spending.” New

York v. United States, 505 U.S. 144, 167 (1992); see also South Dakota v. Dole, 483 U.S. 203,

207-08 & n.3 (1987). The Tax Mandate fails that requirement.

I. The Tax Mandate is not reasonably related to ensuring that states use Funds for the
Act’s permitted purposes.

Defendants argue that the Tax Mandate ensures that states only use Funds for the Act’s

“identified purpose” rather than “employing federal funds to finance state tax cuts that decrease

tax revenue.” Doc. 45, Defs.’ Combined Mot. to Dismiss & Opp. to Ohio’s Mot. for Final

Judgment at 3, 14. But the Tax Mandate is not reasonably related to ensuring that states use

Funds for the Act’s stated purposes.

The Act’s stated purpose for providing Funds to states is “to mitigate the fiscal effects

stemming from the public health emergency with respect to the Coronavirus Disease (COVID-

19).” 42 U.S.C. § 802(a)(1). Specifically, the Act allows states to use Funds for four purposes:

(1) “to respond to the public health emergency … or its negative economic impacts,

including assistance to households, small businesses, and nonprofits, or aid to

impacted industries such as tourism, travel, and hospitality”;

2
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(2) “to respond to workers performing essential work … by providing premium pay to

eligible workers … or providing grants to eligible employers that have eligible

workers who perform essential work”;

(3) “for the provision of government services to the extent of the reduction in revenue …

due to the [pandemic] relative to revenues collected in the most recent full fiscal

year”; and

(4) “to make necessary investments in water, sewer, or broadband infrastructure.”

42 U.S.C. § 802(c)(1). The Act requires States, territories, and Tribal governments to report their

uses of Funds to the Secretary, and it allows the Secretary to recoup Funds that were used for a

purpose other than those the Act allows. 42 U.S.C. §§ 802(d)(2), (e).

These provisions give the Secretary all that she needs to ensure that states use Funds

only for purposes that Act authorizes. Under these provisions, if a state receives, say, $5.5 billion

in Funds (Ohio’s expected amount, Doc. 1, Compl. ¶ 6), the Secretary can confirm that the state

actually spent $5.5 billion on the four purposes the statute enumerates, and she can recoup any

funds out of the reported $5.5 billion that were used for unauthorized purposes.

The Tax Mandate, on the other hand, does not help ensure that states use Funds for their

intended purposes. A state can run afoul of the Tax Mandate even if it accurately reports

spending the entire Funds amount it received under the Act for purposes the Act allows.

By its terms, the Tax Mandate does not concern whether a state spends its full Funds

amount on the Act’s purposes. It concerns whether a state “directly or indirectly” uses Funds to

“offset” revenue lost from a tax cut. 42 U.S.C. § 802(c)(2)(A). That is, it seeks to ensure that

States do not use the Act’s Funds to “pay for” (subsidize) a tax cut, which supposedly would be

3
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unrelated to the Act’s purposes. See Alan Rappeport, A Last-Minute Add to Stimulus Bill Could

Restrict State Tax Cuts, N.Y. Times, Mar. 12, 2021.2

But the Act does not otherwise prohibit States from using Funds to indirectly subsidize

activities that are unrelated to the Act’s permissible uses of Funds. Instead, it arbitrarily singles

out and effectively prohibits just one thing a state might do if it finds itself with a windfall:

cutting taxes.

The Act does not prevent states from “indirectly” using Funds to subsidize spending on

things that are not among the Act’s permissible uses of Funds. The Tax Mandate might make

sense if the Act were otherwise designed to deny Funds to states that could afford to pay for their

own COVID relief without help (if they put other policy priorities aside). But the Act does not do

that; it leaves states free to spend money other than Funds on whatever they want, regardless of

how wasteful, frivolous, or otherwise unrelated to COVID relief that spending might be.

The Act does prohibit states from using Funds “for deposit into any pension fund.” 42

U.S.C. § 802(c)(2)(B). At first glance, that might appear to be a restriction on state spending—

and a restriction on “blue states” that face large unfunded pension liabilities, such as California

and Illinois, to “balance” the Tax Mandate, to which “red states” have objected.3 But the

pension-deposit restriction actually means little because, in contrast with the Tax Mandate, it

does not prohibit states from “indirectly” using Funds to subsidize pension deposits. The

pension-deposit restriction simply means that, when a state reports its uses of Funds to the

Secretary, it may not include pension deposits. The Act does not otherwise require states to

2
https://www.nytimes.com/2021/03/12/us/politics/biden-stimulus-state-tax-cuts.html.
3
See Jason Willick & Alexander Sholtz, Blue States Have Bigger Pension Debts Than Red
States, Am. Interest, Dec. 16, 2016, https://www.the-american-interest.com/2016/12/16/blue-
states-have-bigger-pension-debts-than-red-states/; Rappeport, supra (noting that Republican
attorneys general have been the Tax Mandate’s prominent critics).
4
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report pension deposits (as they must report “modifications to … tax revenue sources,” id. §

802(d)(2)(A)), and it does not allow the Secretary to recoup money spent on pension deposits if a

state does not include that expenditure among its reported uses of Funds (as she may recover

amounts equal to state tax revenues lost, id. § 802(e)).

Similarly, the interim final rule in which the Treasury Department has attempted to

clarify the Act states that the Act “precludes use of [Funds] to cover the costs of debt incurred

prior to March 3, 2021,” among other things. 86 Fed. Reg. 26786, 26796 (May 17, 2021). But

that rule and the Act lack any restriction on states “indirectly” using Funds to subsidize debt

payments or anything else. Thus, when the rule was announced, Illinois Governor J.B. Pritzker—

who previously stated his intention to use Funds to pay off debt that Illinois incurred during the

pandemic, as it increased spending by $2.4 billion—announced that the state would instead pay

the debt using tax revenues. Adam Schuster, Federal COVID-19 Relief Going to Illinois Debt

Rather Than Business Relief, Illinois Policy, May 27, 2021.4 Of course, because money is

fungible, that makes no practical difference, id.—but the Act and the rule do not prohibit

“indirectly” subsidizing debt payments (or spending of any kind), so it is permissible.

Thus, the Act and the Tax Mandate are not designed to protect against states “indirectly”

using Funds for unapproved purposes; they are designed only to stop states from cutting taxes.

II. The Tax Mandate’s true purposes are to force a pro-tax political philosophy on the
states and to stifle tax competition among the states.

In fact, the Tax Mandate’s true purposes are to impose a pro-tax political philosophy on

states that would otherwise reject it and to stifle tax competition among the states.

4
https://www.illinoispolicy.org/federal-covid-19-relief-going-to-illinois-debt-rather-than-
business-relief/.
5
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Indeed, the Tax Mandate was inserted into the Act, as a “last-minute change,” at the

behest of West Virginia Senator Joe Manchin, based on his view that “states should not be

cutting taxes.” Rappeport, supra. Moreover, Manchin reportedly insisted on the provision to

thwart a plan by the Governor of West Virginia (an office Manchin previously held) to phase out

the state’s income tax. See Patrick Gleason, How Senator Joe Manchin’s Move to Block Tax

Relief In His Own State Costs All U.S. Taxpayers, Forbes, Mar. 16, 2021.5 In other words, the

Tax Mandate apparently was inserted in the Act specifically to prevent a particular state from

pursuing its preferred tax policy.

And although some of its defenders suggest that the Tax Mandate exists to prevent states

from opportunistically taking advantage of the Act’s grant of Funds to subsidize new tax cuts,

see Rappeport, supra, the Tax Mandate also threatens state plans for tax reform that predate the

Act—and not just in West Virginia. In Arizona, for example, Governor Doug Ducey has signed

an income tax reduction each year since taking office, having promised to reduce that tax as

close to zero as possible. State of Arizona Executive Budget Summary, Fiscal Year 2022,

January 2021 (“Ariz. Exec. Budget Summary”) at 22.6 Consistent with that pattern, and facing a

budget surplus, Ducey called for further income tax reductions in his latest state budget proposal,

issued well before the Act’s passage. Id.; Jeremy Duda, Ducey Calls for $600 Million in

Permanent Income Tax Cuts, Ariz. Mirror, Jan. 15, 20217. Now, however, the Tax Mandate

threatens that plan. Similarly, before the Act’s passage, Idaho Governor Brad Little proposed to

partially return that state’s budget surplus to Idahoans through tax relief. Keith Ridler, Idaho

5
https://www.forbes.com/sites/patrickgleason/2021/03/16/how-senator-joe-manchins-move-to-
block-tax-relief-in-his-own-state-costs-all-us-taxpayers/?sh=13bd6cf56188.
6
https://www.azospb.gov/Documents/2021/FY%202022%20Summary%20Book.pdf.
7
https://www.azmirror.com/2021/01/15/ducey-calls-for-600-million-in-permanent-income-tax-
cuts/.
6
Case: 1:21-cv-00181-DRC Doc #: 51 Filed: 06/08/21 Page: 8 of 13 PAGEID #: 833

Lawmakers Propose Sweeping Cuts to Income, Sales Taxes, AP, Feb. 16, 2021.8 The state has

since enacted those tax cuts, see Press Release, Idaho Office of the Governor, Idaho Achieves

Single Largest Tax Cut in State History (May 12, 2021)9—and now the Tax Mandate threatens to

punish the state for that choice. A letter that 21 state attorneys general sent to the Secretary

regarding the Tax Mandate provides many more examples of proposed tax reforms in various

states that were pending before the Act’s passage, for which the Tax Mandate could punish the

states if they are enacted. Letter from Ariz. Att’y Gen. Mark Brnovich, et al., to U.S. Treasury

Sec’y Janet Yellen (Mar. 16, 2021) at 2-4.10

Further, the Tax Mandate serves to protect high-tax states from increasing competition

from lower-tax states for residents and businesses.

Decades before the current controversy arose, a legal scholar identified conditional

federal grants as a tool by which “a simple majority of states [can] harness the federal lawmaking

power to restrict the competition for residents and tax dollars that would otherwise exist among

them.” Lynn A. Baker, Conditional Federal Spending After Lopez, 95 Colum. L. Rev. 1911,

1948 (1995). Through conditional grants, states that already comply with a condition—i.e., states

that already pursue the policy that the condition mandates—can coerce other states into pursuing

that same policy and thus “divest the outlier state[s] of any competitive gains” they obtained

from their different policies. Id. at 1949. That of course undermines a key purpose of our

federalist system, which is to encourage a diversity of laws throughout the country and

competition among the states, which, combined with constitutional protections for individual

8
https://apnews.com/article/personal-taxes-brad-little-legislation-coronavirus-pandemic-sales-
taxes-283c8db434ccc0fe6c84a3b6167da907.
9
https://gov.idaho.gov/pressrelease/idaho-achieves-single-largest-tax-cut-in-state-history/.
10
https://www.azag.gov/sites/default/files/docs/press-releases/2021/letters/Letter_3_16.pdf.
7
Case: 1:21-cv-00181-DRC Doc #: 51 Filed: 06/08/21 Page: 9 of 13 PAGEID #: 834

rights, helps limit governments’ ability to abuse their citizens. See id. at 1950-54; Doc. 26, Br. of

Amicus Curiae Buckeye Inst. at 9-12.

The Tax Mandate is a quintessential example of one group of states using a conditional

grant to stifle competition from another group of states.

For years, Americans have been moving from higher-tax states to lower-tax states. See

Chris Edwards, Migration to Low-Tax States Continues, Cato at Liberty, Jan. 9, 2020 (reporting

that census and IRS data confirms “people are moving, on net, from tax‐punishing places such as

California, Connecticut, Illinois, New York, and New Jersey to tax‐friendly places such as

Florida, Idaho, Nevada, Tennessee, and South Carolina”).11 The pandemic—and the vastly

increased opportunities for remote work that have accompanied it—have accelerated that trend.

Andrew Osterland, Pandemic Heats Up State Competition to Attract Businesses and Residents,

CNBC, Feb. 8, 2021.12 “Last year, the five states with the biggest proportionate outbound

migration were California, Connecticut, Illinois, New Jersey and New York,” four of which

“were ranked in the bottom five for business tax climate in 2021 by the Tax Foundation” (the

other, Illinois, ranked 36th). Id. “Most experts expect more people and businesses will choose to

locate where they can pay lower taxes.” Id.

In light of these facts, the true motive of Senators and Representatives from high-tax

states to enact the Tax Mandate is obvious: to stem their states’ loss of residents and businesses

to lower-tax states while rescuing their states from the unfortunate consequences of their

11
https://www.cato.org/blog/migration-low-tax-states-continues.
12
https://www.cnbc.com/2021/02/08/pandemic-heats-up-state-tax-competition-to-attract-
businesses-residents-.html.
8
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governments’ fiscal policies. The Senate vote on the final version of the Act reflects this: all

Senators from the high-tax states with the most outmigration voted for it.13

III. The Tax Mandate contravenes the Act’s purpose of providing relief to people,
small businesses, and industries affected by COVID-19’s negative economic impacts.

Finally, the Tax Mandate is not reasonably related to the Act’s purpose because it

contravenes one of the Act’s stated purposes for grants of Funds: providing assistance to

households, small businesses, and industries affected by COVID-19’s negative economic

impacts. See 42 U.S.C. § 802(c)(1)(A). The Tax Mandate wrongly assumes that tax cuts or

credits cannot themselves serve as relief for economic harm caused by COVID-19, and enforcing

the Tax Mandate would prevent, rather than facilitate, the use of Funds for the Act’s approved

purposes.

The Tax Mandate effectively prohibits states from independently providing a form of

COVID-19 relief—tax relief—that the Act itself elsewhere recognizes as legitimate. In fact, the

Act provides billions of dollars in federal tax credits. See Garrett Watson & Erica York, The

American Rescue Plan Act Greatly Expands Benefits Through the Tax Code in 2021, Tax

Foundation, Mar. 12, 2021.14 And many states have, like Congress, deemed tax credits or tax

reductions to be an appropriate means of mitigating the economic harm caused by COVID-19.

For example, Arizona’s governor has proposed income tax reductions “to ensure that Arizonans

and small businesses that were hit hard by the COVID-19 pandemic, through no fault of their

own, are given true and meaningful tax relief.” Ariz. Exec. Budget Summary at 22.

13
Senate Roll Call Vote, H.R. 1319, 117th Cong. (Mar. 6, 2021),
https://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=117&se
ssion=1&vote=00110.
14
https://taxfoundation.org/american-rescue-plan-covid-relief/.
9
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The view that state tax cuts can help a state recover from the pandemic is not at odds with

the Act or its purposes (even apart from Congress’s implicit recognition that tax relief can be

COVID relief). As part of a comprehensive pandemic recovery plan, a state could use Funds as

the Act prescribes and also enact tax reforms to encourage business and job growth after a long

period of business closures and high unemployment due to the pandemic. Just as a state could

complement the Act’s COVID relief with additional state spending on COVID relief, beyond the

Funds the Act provides—which the Act does not discourage—it could also do so with tax relief.

There is no reason why the Act should force states that want to provide extra COVID

relief to choose spending over taxes. To allow a state to, for example, assist businesses by

sending them a check for $1,000, but not by giving them a tax credit for $1,000, is arbitrary. And

of course it is not Congress’s place to tell states that they should prefer state government

spending to state tax relief as a means of addressing the pandemic separately from the state’s use

of Funds. Congress’s only legitimate concern—which, again, the Act fully addresses separately

from the Tax Mandate, and the Tax Mandate does not address—is to ensure that Funds provided

by the federal government are spent on the purposes the Act prescribes.

Further, enforcing the Tax Mandate by forcing a state to return Funds based on decreased

tax revenue would contravene the Act’s purpose. If a state cuts taxes and its revenue declines as

a result, the Tax Mandate requires that the state repay Funds received, up to the amount of

revenue lost as a result of the tax cut. 42 U.S.C. § 802(e). In that situation, the state would lose

federal Funds that it otherwise would have spent on COVID-19 relief—which means that the

would-be beneficiaries of that relief would not receive it. In that situation, the Tax Mandate

would not serve the Act’s ostensible purposes but contravene them by denying people and

businesses assistance.

10
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In sum, a state’s compliance with the Tax Mandate’s condition—i.e., declining to reduce

taxes when it otherwise would do so—will not serve the Act’s purposes because it will only

prevent states from independently pursuing a form of COVID-19 relief that Congress itself has

recognized as legitimate. And a state’s rejection of the Tax Mandate’s condition—i.e., lowering

taxes in a manner that results in lower state tax revenue—will not serve the Act’s purposes

because it will cause people and businesses in a state to lose the federal COVID-19 relief that the

Act exists to provide.

CONCLUSION

The Act gives states Funds so they can, in turn, provide relief to their residents, small

businesses, and industries that have been affected by the COVID-19 pandemic, and take other

measures to address pandemic-related harm. The Tax Mandate does not serve that purpose; it

only serves to coerce states to favor government spending over tax cuts and to stifle tax

competition among the states. Because the Tax Mandate’s condition is not reasonably related to

the Act’s purpose for providing Funds—and for the reasons the State of Ohio has presented—the

Tax Mandate exceeds Congress’s powers under the Spending Clause.

The Court should deny Defendants’ motion to dismiss the State of Ohio’s constitutional

challenge to the Tax Mandate.

Respectfully submitted this 7th day of June, 2021,

/s/ Jacob Huebert
Jacob Huebert (Atty. ID# 78562)
Scharf-Norton Center for Constitutional Litigation
at the GOLDWATER INSTITUTE
500 E. Coronado Road
Phoenix, Arizona 85004
Telephone: 602.462.5000
litigation@goldwaterinstitute.org

11
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CERTIFICATE OF SERVICE

I, Jacob Huebert, an attorney, certify that on June 7, 2021, I caused to be electronically

filed a copy of BRIEF OF AMICUS CURIAE GOLDWATER INSTITUTE IN SUPPORT

OF THE STATE OF OHIO with the Clerk of the United States District Court for the Southern

District of Ohio using the CM/ECF system, which will send notification of the filing to the

counsel of record at their email addresses on file with the Court.

/s/ Jacob Huebert
Jacob Huebert

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