Opening brief of appellant State of Arizona, State of Arizona v. Yellen, No. 21-16227 (9th Cir.), Doc. 8 (August 20, 2021)
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Arizona's Opening Brief, dated August 20, 2021, in State of Arizona v. Yellen, No. 21-16227, United States Court of Appeals for the Ninth Circuit, on appeal from the District of Arizona, Case No. 2:21-cv-00514-DJH. The table of contents lists arguments that the State has Article III standing to challenge the Tax Mandate and that the Tax Mandate is unconstitutional, including as ambiguous, not related to ARPA's purposes and coercive of states. The statement of jurisdiction states that the district court denied injunctive relief and entered final judgment in favor of Defendants on July 22, 2021. The certificate of compliance states that the brief contains 13,993 words, and the signature line reads s/ Drew C. Ensign.
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“Opening brief of appellant State of Arizona, State of Arizona v. Yellen, No. 21-16227 (9th Cir.), Doc. 8 (August 20, 2021).”
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No. 21-16227
______________________
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
______________________
STATE OF ARIZONA,
Plaintiff-Appellant,
v.
JANET YELLEN, in her official capacity as
Secretary of the Treasury, et al.,
Defendant-Appellees.
______________________
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF ARIZONA
Case No. 2:21-cv-00514-DJH
______________________
ARIZONA’S OPENING BRIEF
______________________
MARK BRNOVICH
ATTORNEY GENERAL
Joseph A. Kanefield Drew C. Ensign
Chief Deputy & Chief of Staff Deputy Solicitor General
Wilson C. Freeman
Brunn (“Beau”) W. Roysden III Senior Litigation Counsel
Solicitor General Robert J. Makar
Assistant Attorney General
2005 N. Central Avenue
Phoenix, Arizona 85004
Telephone: (802) 542-5025
Drew.Ensign@azag.gov
Counsel for the State of Arizona
Dated: August 20, 2021
TABLE OF CONTENTS
PAGE
Table Of Authorities ................................................................................. 31
Introduction .............................................................................................. 31
Statement Of Jurisdiction .......................................................................... 6
Issues Presented For Review ..................................................................... 7
Statement Of The Case .............................................................................. 7
Legal Background ............................................................................. 7
Factual And Procedural Background ............................................. 11
Proceedings Below ........................................................................... 18
Treasury's Interim Final Rule ........................................................ 20
Consolidation Under Rule 65(a)(2) ................................................. 22
District Court's Decision ................................................................. 23
Summary Of The Argument .................................................................... 26
Standards Of Review ................................................................................ 31
Argument .................................................................................................. 31
I. The State Has Article III Standing To Challenge The Tax
Mandate ........................................................................................... 31
A. Standing Must Be Evaluated Separately From The
Merits...................................................................................... 33
B. The Compliance Costs Imposed By The Tax Mandate
Confer Standing ..................................................................... 34
ii
1. The Compliance Costs Are Cognizable Injury ............ 34
2. The State Will Incur Compliance Costs ...................... 35
3. The District Court’s Contrary Holding Conflated
The Standing And Merits Inquiries ............................. 35
C. The Alleged Ambiguity Of The Tax Mandate Inflicts
Cognizable Sovereign Injury On The State .......................... 39
1. Arizona Had A Right To An Offer It Could
“Voluntarily And Knowingly Accept”........................... 39
2. The District Court Wrongly Conflated The Merits
In Judging the States’ Interest .................................... 41
D. Arizona Suffers An Injury Because The ARPA Coerced
The State And Effectively Commandeered State Taxing
Authority ................................................................................ 43
E. Arizona Suffers A Realistic Danger Of Enforcement Of
The Tax Mandate ................................................................... 45
II. The Tax Mandate Is Unconstitutional ........................................... 48
A. The Tax Mandate’s Palpable Ambiguity Violates The
Constitution ............................................................................ 49
1. The Tax Mandate Is Patently Ambiguous................... 49
2. The Tax Mandate’s Ambiguity Is Apparent From
DOJ’s And Treasury’s Conflicting Interpretations
Of It ............................................................................... 54
3. The Supreme Court’s Precedents Demand Clarity
As To What The Conditions Imposed Actually
Are—Not Their Mere Existence ................................... 56
4. Treasury’s Rule Cannot Cure The Tax Mandate’s
Ambiguity ...................................................................... 61
5. Treasury’s Rule Does Not Offer Sufficient Clarity
To Give The States Clear Notice .................................. 64
B. The Tax Mandate Is Not Related To ARPA’s Purposes ....... 67
iii
C. ARPA Unconstitutionally Coerces States Into
Accepting The Tax Mandate .................................................. 69
Conclusion ................................................................................................. 74
iv
TABLE OF AUTHORITIES
PAGE
CASES
Arizona State Legislature v. Arizona Indep. Redistricting Comm’n,
576 U.S. 787 (2015) .......................................................................... 34, 43
Arlington Cent. Sch. Dist. Bd. of Educ. v. Murphy,
548 U.S. 291 (2006) .......................................... 3, 9, 29, 50, 51, 58, 59, 60
Babbitt v. Farm Workers,
442 U.S. 289 (1979) .......................................................................... 45, 47
Bennett v. Kentucky Dep’t of Educ.,
470 U.S. 656 (1985) ................................................................................ 64
Brackeen v. Haaland,
994 F.3d 249 (5th Cir. 2021) .................................................................. 35
California Trucking Ass'n v. Bonta,
996 F.3d 644 (9th Cir. 2021) ............................................................ 45, 46
California v. Texas,
141 S. Ct. 2104 (2021) ............................................................................ 36
Cath. League for Religious & C.R. v. City & Cty. of San Francisco,
624 F.3d 1043 (9th Cir. 2010) ................................................................ 33
Charles C. Steward Mach. Co. v. Davis,
301 U.S. 548 (1937) .................................................................................. 8
City of Philadelphia v. Sessions,
280 F. Supp. 3d 579 (E.D. Pa. 2017) ..................................................... 68
Clark v. City of Lakewood,
259 F.3d 996 (9th Cir. 2001) .................................................................. 34
Clinton v. City of New York,
524 U.S. 417 (1998) ................................................................................ 34
v
Contender Farms, L.L.P. v. USDA,
779 F.3d 258 (5th Cir. 2015) .................................................................. 35
Coyle v. Smith,
221 U.S. 559 (1911) ................................................................................ 43
D.C. v. Heller,
554 U.S. 570 (2008) .................................................................................. 3
Free Enter. Fund v. Pub. Accounting Oversight Bd.,
561 U.S. 477 (2010) ................................................................................ 47
Gregory v. Ashcroft,
501 U.S. 452 (1991) ............................................................................ 7, 62
Kentucky v. Yellen,
21-cv-00017 (filed E.D. Ky. Apr. 6, 2021) ............................................. 17
King v. Burwell,
576 U.S. 473 (2015) ................................................................................ 63
Lujan v. Defs. of Wildlife,
504 U.S. 555 (1992) .......................................................................... 32, 41
Lutheran Church-Missouri Synod v. FCC.,
141 F.3d 344 (D.C. Cir. 1998) ................................................................ 35
Massachusetts v. EPA,
549 U.S. 497 (2007) ................................................................................ 32
Mayfield v. United States,
599 F.3d 964 (9th Cir. 2010) .................................................................. 31
Mayweathers v. Newland,
314 F.3d 1062 (9th Cir. 2002) .............................. 4, 24, 42, 56, 57, 58, 67
MedImmune, Inc. v. Genentech,
549 U.S. 118 (2007) ................................................................................ 47
Miller v. Gammie,
335 F.3d 889 (9th Cir. 2003) .................................................................. 61
vi
Missouri v. Yellen,
21-cv-00376 (filed E.D. Mo. Mar. 29, 2021) .......................................... 17
Murphy v. NCAA,
138 S. Ct. 1461 (2018) ............................................................................ 43
National Fed’n of Indep. Bus. v. Sebelius,
567 U.S. 519 (2012) .................. 8, 9, 10, 25, 39, 44, 51, 60, 62, 69, 70, 73
New State Ice Co. v. Liebmann,
285 U.S. 262 (1932) ................................................................................ 71
New York v. United States,
505 U.S. 144 (1992) .............................................. 8, 43, 44, 67, 70, 71, 72
Ohio v. Secretary, Dep’t of Treasury,
21-cv-00181 No. 1. (filed S.D. Ohio Mar. 17, 2021) .............................. 17
Ohio v. Yellen,
No. 1:21-CV-181 (S.D. Ohio July 1, 2021) .......................... 40, 53, 62, 63
Oregon v. Trump,
406 F. Supp. 3d 940 (D. Or. 2019) ......................................................... 44
Parker v. D.C.,
478 F.3d 370 (D.C. Cir. 2007) ................................................ 3, 28, 33, 44
Pennhurst State School and Hospital v. Halderman,
451 U.S. 1 (1981) ................................................................ 8, 9, 10, 17, 49
Printz v. United States,
521 U.S. 898 (1997) ................................................................................ 70
Rumsfeld v. Forum for Acad. & Institutional Rights, Inc.,
547 U.S. 47 (2006) .................................................................................. 40
South Dakota v. Dole,
483 U.S. 203 (1987) ...................................................................... 9, 10, 73
Spokeo, Inc. v. Robins,
136 S. Ct. 1540 (2016) ...................................................................... 32, 42
vii
State v. Yellen,
No. 1:21-CV-181, 2021 WL 1903908 (S.D. Ohio May 12, 2021) .......... 59
Steel Co. v. Citizens for a Better Env't,
523 U.S. 83 (1998) .................................................................................. 32
Susan B. Anthony List v. Driehaus,
573 U.S. 149 (2014) .......................................................................... 18, 45
Texas v. EEOC,
933 F.3d 433 (5th Cir. 2019) .................................................................. 35
Texas v. Yellen,
21-cv-00079 (filed N.D. Tex. May 3, 2021)............................................ 17
Thomas v. Anchorage Equal Rights Comm’n,
220 F.3d 1134 (9th Cir. 2000) ................................................................ 45
United States v. Butler,
297 U.S. 1 (1936) ...................................................................................... 8
United States v. Younger,
398 F.3d 1179 (9th Cir. 2005) ................................................................ 31
Va. Dep’t of Educ. v. Riley,
106 F.3d 559 (4th Cir. 1997) (en banc) ........................................... 61, 62
Van v. LLR, Inc.,
962 F.3d 1160 (9th Cir. 2020) ................................................................ 35
Warth v. Seldin,
422 U.S. 490 (1975) ...................................................................... 3, 28, 32
West Virginia v. Dep’t of the Treasury,
21-cv-00465, 2021 WL 2952863 (N.D. Ala. Jul. 14, 2021) ................... 40
West Virginia v. Yellen,
21-cv-00465 No. 1 (filed N.D. Ala. Mar. 31, 2021)................................ 17
STATUTES
42 U.S.C. §2000cc-1(b)(1) ......................................................................... 57
viii
42 U.S.C. §802(b)(3) .................................................................................. 12
42 U.S.C. §802(c)(1) .................................................................................. 13
42 U.S.C. §802(c)(2) .................................................................................. 13
42 U.S.C. §802(c)(2)(A) ............................................................. 2, 14, 37, 67
42 U.S.C. §802(d) ...................................................................................... 37
42 U.S.C. §802(d)(2)(B) ............................................................................. 24
42 U.S.C. §802(e) ...................................................................................... 14
42 U.S.C. §802(f) ....................................................................................... 14
42 U.S.C. §802(g)(1) ............................................................................ 14, 41
Pub. L. No. 117-2 §9901 (2021) ................................................................ 11
OTHER AUTHORITIES
Coronavirus State and Local Fiscal Recovery Funds, U.S. Dept. of the
Treasury, https://home.treasury.gov/policy-
issues/coronavirus/assistance-for-state-local-and-tribal-
governments/state-and-local-fiscal-recovery-funds (last visited Aug.
18, 2021) ................................................................................................. 11
FACT SHEET: The American Rescue Plan Will Deliver Immediate
Economic Relief to Families, U.S. Dept. of Treasury (Mar. 18, 2021),
https://home.treasury.gov/news/featured-stories/fact-sheet-the-
american-rescue-plan-will-deliver-immediate-economic-relief-to-
families ................................................................................................... 12
Final Engross Budget Bills, Arizona Joint Legislative Budget
Committee (June 30, 2021),
https://www.azleg.gov/jlbc/FY22budgetbillsfinal063021.pdf ............... 12
The Quarterly CARES Act Report to Congress, U.S. Senate Committee
on Banking, Housing and Urban Affairs (2021),
https://www.banking.senate.gov/hearings/03/17/2021/the-quarterly-
cares-act-report-to-congress (approx. 1:10:00 – 1:15:00) ..................... 16
ix
U.S. Dep’t of the Treasury, Coronavirus State and Local Fiscal Recovery
Funds, https://home.treasury.gov/policy-issues/coronavirus/assistance-
for-state-local-and-tribal-governments/state-and-local-fiscal-recovery-
funds ....................................................................................................... 12
RULES
Fed. R. Civ. P. 65(a)(2) ............................................................................. 22
REGULATIONS
86 Fed. Reg. 26,786 (May 17, 2021) ... 20, 21, 22, 35, 36, 37, 46, 55, 65, 66
CONSTITUTIONAL PROVISIONS
U.S. Const. amend. X ................................................................................. 7
U.S. Const. Art. I. §8 cl. 1 ........................................................................... 7
x
INTRODUCTION
The district court below committed a fundamental and patent error:
it failed to evaluate standing/jurisdiction separately from the
constitutional merits, instead blending them together into one muddled
mess. The district court skipped past jurisdiction to resolve the merits
and, having done so, then jumped back to jurisdiction to hold the State of
Arizona (“State”) lacked Article III standing because, in its view, the
State’s constitutional claims failed. And it did so while simultaneously
professing there was a “lack of subject matter jurisdiction” to resolve the
very issues it had just decided. 1-ER-11. In doing so, the district court
erred in both its explicit standing and merits holdings. This Court should
reverse both errors.
This case involves potentially one of the most aggressive
encroachments upon state sovereignty ever enacted by Congress in the
history of the Republic. The provision at issue is part of the American
Rescue Plan Act of 2021 (“ARPA,” or the “Act”). Specifically, Section 9901
of the Act (hereinafter, the “Tax Mandate”) prohibits the States from
using ARPA moneys “to either directly or indirectly offset” any reduction
1
in net tax revenue as a result of a tax policy change. 42 U.S.C.
§802(c)(2)(A) (emphasis added).
The Tax Mandate’s principal sponsor was perfectly clear that the
provision was intended to supplant the system of separate sovereigns
fundamental to the Constitution, in which both the federal and state
governments have independent taxing power. In its place, Congress alone
would dictate taxing policy to the States by imposing a one-way ratchet—
i.e., Congress would henceforth only permit States to raise taxes, rather
than cut them, until 2025.
Or the provision alternatively might be a simple and inoffensive
restriction on how the States spend particular federal funds directly and
nothing more. The statutory text is not only hopelessly ambiguous as to
what it actually means, but the Federal Defendants (the “Secretary”) and
the Department of Justice remarkably have given it mutually exclusive
readings during the pendency of this litigation.
That is the principal rub here. Those dueling potential readings
demonstrate the Tax Mandate’s patent ambiguity. And such ambiguity
violates the Constitution, which demands that spending conditions give
States “clear notice” so they can make a knowing and voluntary choice on
2
whether to accept. Arlington Cent. Sch. Dist. Bd. of Educ. v. Murphy, 548
U.S. 291, 296 (2006).
The district court’s conflation of merits and standing is perhaps
best seen in its rejection of the State’s assertion of standing based on
compliance costs imposed by the Tax Mandate. The district court held
that such costs do not support Article III standing not because they don’t
exist—they plainly do. The long pages of dense, complex regulations
imposing extensive and repeating reporting requirements are an
accountant’s dream and a budgeter’s nightmare. Instead, the district
court reasoned that the compliance costs could not be “declared injurious
for purposes of standing” because they were “within the Secretary’s
power” to impose—i.e., they did not violate the Constitution. 1-ER-9. But
this squarely violates the Supreme Court’s repeated recognition that
“standing in no way depends on the merits,” and the two should not be
conflated. Warth v. Seldin, 422 U.S. 490, 500 (1975). The district court
was thus supposed to “assume arguendo the merits of [the State’s] legal
claim” when evaluating standing. See Parker v. D.C., 478 F.3d 370, 377
(D.C. Cir. 2007), aff’d sub nom. D.C. v. Heller, 554 U.S. 570 (2008). It
failed to do so.
3
The district court similarly rejected the State’s standing based on
sovereign injury resulting from the Tax Mandate’s ambiguity by
effectively holding that the Tax Mandate was constitutional. 1-ER-6-8. It
tellingly distinguished a decision of the Southern District of Ohio which
held that Ohio had Article III standing to bring a virtually identical
challenge solely by relying (wrongly) on this Court’s decision in
Mayweathers v. Newland, 314 F.3d 1062 (9th Cir. 2002). 1-ER-8 n.2. But
Mayweathers is purely a constitutional merits decision. It does not use
the word “standing” even once. The district court’s reliance on
Mayweathers to resolve the standing inquiry again underscores the
district court’s pervasive conflation of standing and merits.
Moreover, the district court’s merits analysis is as clearly flawed as
its improper intermingling of jurisdiction and merits issues. The district
court simply read out of existence the Supreme Court’s explicit and
repeatedly expressed requirement that any conditions Congress imposes
under the Spending Clause be unambiguous. In the district court’s view,
the Supreme Court’s entire requirement of clarity in conditions was mere
“dicta,” which was readily cast aside, and the Supreme Court had in fact
explicated no binding Spending Clause requirements “beyond the issue
4
of whether a condition existed.” 1-ER-7. The district court thus accepted
the Secretary’s explicit argument (2-ER-85; 2-ER-57 at 36:10-20) that it
was constitutionally sufficient that Congress “mak[es] the existence of a
condition known,” 1-ER-8 (emphasis in original)—i.e., the States need
only know the condition exists, not what it actually does. In Let’s-Make-
A-Deal terms, Congress need not reveal anything about what is behind
Door Number 2, as long as it makes clear that the States get that door
and not Door Number 1 or 3. But that cannot possibly be the law, and
indeed the Supreme Court’s decision in Arlington is directly contrary to
the district court’s radical rewriting of it.
Moreover, while Mayweathers (which predates Arlington and
NFIB) may establish that Congress need not answer every conceivable
question about the contours of Congress’s conditions, the ambiguity here
is so profound that it flunks any requirement of clarity as to what the
conditions actually do. At issue here is whether Congress has provided
the states with sufficiently clear notice such that they can knowingly and
voluntarily agree to the conditions. This limitation is critical to protect
federalism and to protect states’ interests.
5
Indeed, the profound ambiguity of the Tax Mandate is obvious just
by looking only to the Secretary’s/DOJ’s shifting positions and
admissions. Secretary Yellen, for example, admitted to Congress that the
Tax Mandate created a “a host of thorny questions.” 3-ER-362-65. But
unambiguous language should raise no “thorny questions”—let alone a
full-blown “host of” them—since the answers are supposed to be clear
from the text itself. Secretary Yellen similarly told Congress that “given
the fungibility of money, it’s a hard question to answer” what the effect
of the Tax Mandate would be. 3-ER-362-65. But it could only be a “hard
question” for the Treasury Department to answer —or the States for that
matter—if the statutory text were ambiguous. Because it is, the State
both has Article III standing and is entitled to judgment on the
constitutional merits.
STATEMENT OF JURISDICTION
The district court denied injunctive relief and entered final
judgment in favor of Defendants on July 22, 2021. 1-ER-2-12. The State
filed a timely notice of appeal the next day. 3-ER-375-77. This Court has
jurisdiction under 28 U.S.C. §§1291 and 1292(a).
6
ISSUES PRESENTED FOR REVIEW
This appeal presents two overarching issues:
(1) Whether the State has Article III standing to challenge the Tax
Mandate as exceeding Congress’s constitutional authority.
(2) Whether the Tax Mandate exceeds Congress’s constitutional
authority.
STATEMENT OF THE CASE
Legal Background
“As every schoolchild learns, our Constitution establishes a system
of dual sovereignty between the States and the Federal Government.”
Gregory v. Ashcroft, 501 U.S. 452, 457 (1991). The “Federal Government”
is one of “limited powers” that are enumerated in the Constitution. Id. at
457. And the powers not delegated to that government are “reserved to
the States respectively, or to the people.” U.S. Const. amend. X.
Among the powers delegated to Congress is “to pay the Debts and
provide for the common Defence and general Welfare of the United
States.” U.S. Const. Art. I. §8 cl. 1. Known as the “spending clause,” this
language—particularly the meaning of “general Welfare”—has been the
subject of continual debate since the founding. See, e.g., United States v.
7
Butler, 297 U.S. 1, 65 (1936) (discussing “sharp differences of opinion”
since the founding).
Today it is well-established that while Congress’s Spending Clause
power is “broad,” it is subject to important limitations. See, e.g., National
Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519, 584 (2012) (Roberts, C.J.)
(“NFIB”). Exercising this power, Congress may grant funds to the States.
And Congress may “condition such a grant upon the States’ ‘taking
certain actions that Congress could not [directly] require them to take.’”
Id. at 576 (quotation marks omitted). Those conditions even “may
influence a State’s legislative choices.” New York v. United States, 505
U.S. 144, 167 (1992).
This arrangement rests in substantial nature upon the recognition
that States are sovereigns, and “[e]ven sovereigns may contract without
derogating from their sovereignty.” Charles C. Steward Mach. Co. v.
Davis, 301 U.S. 548, 597 (1937). Accordingly, “[t]he legitimacy of
Congress’s exercise of the spending power thus rests on whether the
State voluntarily and knowingly accepts the terms of the ‘contract.’”
NFIB, 567 U.S. at 577 (quoting Pennhurst State School and Hospital v.
Halderman, 451 U.S. 1, 17 (1981)) (cleaned up). Accordingly, the
8
Supreme Court has repeatedly reaffirmed that the legitimacy of the
exercise of the Spending Power depends on the States being able to
knowingly and voluntarily agree to the conditions imposed.
Conditional grants under the Spending Clause are thus “in the
nature of a contract,” and the States, as separate sovereigns, cannot be
held to conditions they do not “voluntarily and knowingly” agree to.
Pennhurst, 451 U.S. at 17. The Supreme Court has gone so far as to
explain that conditions in federal grants to states must be viewed “from
the perspective of a state official who is engaged in the process” of
deciding whether to accept the funds. Murphy, 548 U.S. at 296. “And just
as a contract is voidable if coerced,” a provision which obtains State
consent that is not “voluntar[y] and knowing[]” is invalid. See NFIB, 567
U.S. at 676 (Scalia, J., dissenting) (emphasis omitted).
In 1987, in South Dakota v. Dole, the Supreme Court surveyed its
own case law and summarized the “general restrictions” on the exercise
of the Spending Power that it had recognized in the context of conditional
grants. 483 U.S. 203, 207-08 (1987). There are five main limitations.
9
• General Welfare. First, as Article I says, the expenditures
must be in pursuit of “the general welfare,” as opposed to local
interests. Id.
• Unambiguous Clarity. Second, to respect the role of States
as separate sovereigns, any condition imposed must be
“unambiguous[,] ... enabl[ing] the States to exercise their
choice knowingly, cognizant of the consequences of their
participation.” Id. (quoting Pennhurst, 451 U.S. at 17).
• Relatedness. Third, conditions on federal grants must be
related to the federal interest in the national program. Id.
• Comports with Other Constitutional Requirements.
Fourth, other constitutional provisions may provide an
independent bar to the conditional grant of federal funds. Id.
In addition to these restrictions, Dole also acknowledged that the
principle of knowing and voluntary agreement meant that “financial
inducement offered by Congress might be so coercive as to pass the point
at which ‘pressure turns into compulsion.’” Id. at 211; see also NFIB, 567
U.S. at 580-82 (“The threatened loss of over 10 percent of a State's overall
10
budget, in contrast, is economic dragooning that leaves the States with
no real option but to acquiesce.”).
This appeal presents the questions of (1) whether States have
Article III standing to bring challenges to Spending Clause-imposed
conditions alleged to violate these constitutional requirements and
(2) whether the Tax Mandate does so.
Factual And Procedural Background
The American Rescue Plan Act (“ARPA”)
The COVID-19 pandemic caused a major economic downturn. In
response to this downturn, Congress passed the American Rescue Plan
Act (“ARPA” or “Act”). See Pub. L. No. 117-2 §9901 (2021) (amending 42
U.S.C. §802). Among many other provisions, the Act provides for a $195.3
billion aid program, payable directly to the States.1 ARPA also provides
$45.6 billion to cities and another $65.1 billion to counties.2
1 See 42 U.S.C. §802. See also Coronavirus State and Local Fiscal
Recovery Funds, U.S. Dept. of the Treasury,
https://home.treasury.gov/policy-issues/coronavirus/assistance-for-state-
local-and-tribal-governments/state-and-local-fiscal-recovery-funds (last
visited Aug. 18, 2021).
2 Id.
11
Alongside these grants to States, ARPA provides substantial direct
payments to taxpayers and other tax relief. For example, the ARPA
provides for an expansion in the Child Tax Credit, giving an additional
$1000-$1600 per child to certain taxpayers.3
Arizona expects to receive approximately $4.2 billion from the state
and local aid program under the Act. 42 U.S.C. §802(b)(3).4 This figure
represents approximately 33% of Arizona’s total budget for fiscal year
2022.5
ARPA provides that these aid funds may only be used to cover
certain expenditures:
3 See FACT SHEET: The American Rescue Plan Will Deliver Immediate
Economic Relief to Families, U.S. Dept. of Treasury (Mar. 18, 2021),
https://home.treasury.gov/news/featured-stories/fact-sheet-the-
american-rescue-plan-will-deliver-immediate-economic-relief-to-
families. It also provides billions in rental and homeowner assistance
and waives federal income taxes on unemployment benefits. Id.
4 See also U.S. Dep’t of the Treasury, Coronavirus State and Local Fiscal
Recovery Funds, https://home.treasury.gov/policy-
issues/coronavirus/assistance-for-state-local-and-tribal-
governments/state-and-local-fiscal-recovery-funds.
5 See Final Engrossed Budget Bills, Arizona Joint Legislative Budget
Committee (June 30, 2021),
https://www.azleg.gov/jlbc/FY22budgetbillsfinal063021.pdf.
12
“(A) to respond to the public health emergency with
respect to the Coronavirus Disease 2019 (COVID-19) or
its negative economic impacts…;
“(B) to respond to workers performing essential work
during the COVID-19 public health emergency by
providing premium pay…;
“(C) for the provision of government services to the
extent of the reduction in revenue of such State,
territory, or Tribal government due to the COVID-19
public health emergency…; or
“(D) to make necessary investments in water, sewer, or
broadband infrastructure.
42 U.S.C. §802(c)(1) to the SSA). ARPA also provides that no state or
territory may “use the funds under this section for deposit into any
pension fund.” Id. §802(c)(2). These foregoing conditions/limitations are
not at issue here.
In addition to these limitations, ARPA contains a provision,
referred to generally as the Tax Mandate, which states in full:
“A State or territory shall not use the funds provided
under this section or transferred pursuant to section
603(c)(4) of this title 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 during the covered period
that reduces any tax (by providing for a reduction in a
rate, a rebate, a deduction, a credit, or otherwise) or
delays the imposition of any tax or tax increase.”
13
Id. §802(c)(2)(A). The provision does not affect the ability of local
governments (or Congress) to cut taxes. Id.
Nothing in the statute or committee reports lends additional clarity
to the meaning of this limitation. Reporting indicates that the provision
was added at the insistence of Senator Manchin, who provided the
decisive vote in favor of ARPA. 3-ER-337-42. Senator Manchin made his
intent clear in statements: “states should not be cutting taxes at [this]
time.” 3-ER-288-98.
The Tax Mandate covers the period from March 3, 2021 through the
“last day of the fiscal year” in which a State spends or returns all its
ARPA money. 42 U.S.C. §802(g)(1). The ARPA further provides that a
state that violates the Tax Mandate must repay to the Treasury the
lesser of the amount of the tax reduction or the total amount of funds
received. Id. §802(e). The Act does not provide the states with any specific
process to challenge recoupments by the Treasury Department.
Lastly, the Secretary may “issue such regulations as may be
necessary or appropriate to carry out this section.” Id. §802(f).
14
Pre-Suit Activities
Following the Tax Mandate’s eleventh-hour insertion into ARPA,
numerous commentators began to take note of the Tax Mandate and to
question its scope. See, e.g., 3-ER-256-61, 268-81, 288-98. Several
commentators raised concerns as to the ambiguity of this provision.
Commentators especially questioned what the Tax Mandate means when
it prohibits states from “either directly or indirectly offset[ting] a
reduction” in net tax revenue. See, e.g. 3-ER-268-81, 282-87. (“As Daniel
Hemel, a law professor at the University of Chicago and an expert on tax
law, told me, ‘money is fungible, so I’m not quite sure what it means for
the funds to indirectly offset a reduction in net tax revenue resulting from
a tax cut.’”).
To help answer some of these uncertainties, on March 16, 2021, the
State’s attorney general, joined by 21 of his peers, wrote to Secretary
Yellen asking for clarification on the Tax Mandate’s scope. 3-ER-313-20.
That letter set forth specific examples for the Treasury to provide
guidance as to whether the Tax Mandate would apply. 3-ER-313-20.
Secretary Yellen subsequently sent the state attorneys general a
short response, declining to address any of the specific examples. 3-ER-
15
334-36. The letter appeared to suggest that the States could cut taxes if
they did not specifically claim that ARPA funds are the basis of the
offsetting funds: “Nothing in the Act prevents States from enacting a
broad variety of tax cuts.” 3-ER-334-36. But at the same time, Secretary
Yellen stated “the limitations of the Act [would] not [be] implicated” if
States cut taxes and “replac[ed] the lost revenue through other means.”
3-ER-334-36.
On March 24, 2021, Secretary Yellen testified at a hearing of the
U.S. Senate Committee on Banking, Housing, and Urban Affairs. There,
she was asked how she intended to approach the Tax Mandate.6 In
response to questions about the scope of the Tax Mandate’s “indirectly
offset” language, the Secretary conceded that the Tax Mandate raises “a
host of thorny questions,” and “given the fungibility of money, it’s a hard
question to answer.” 3-ER-362-65.
6 See The Quarterly CARES Act Report to Congress, U.S. Senate
Committee on Banking, Housing and Urban Affairs (2021),
https://www.banking.senate.gov/hearings/03/17/2021/the-quarterly-
cares-act-report-to-congress (approx. 1:10:00-1:15:00). See also 3-ER-362-
65 (discussing testimony).
16
Tax Mandate Litigation
This suit is one of at least six brought by a total of 21 states
challenging the Tax Mandate,7 and was filed on March 25, 2021. 3-ER-
371-74.
Arizona’s complaint asserts two constitutional claims: The first
alleges that the Tax Mandate is “ambiguous and fails to give the State
clear notice of what it means.” 3-ER-372 ¶56. As a result, the State
cannot “voluntarily and knowingly accept” the condition. See Pennhurst,
451 U.S. at 17. The second count alleges that, to the extent the provision
unambiguously prohibits the States from cutting taxes in any manner
without forfeiting ARPA funds, it is (1) unrelated to the federal interest
as set forth in the ARPA; it (2) unconstitutionally subverts the federal
nature of the constitution; and (3) effectively coerced the State into
surrendering its sovereign taxing authority. 3-ER-374 ¶¶66-68.
7 See Texas v. Yellen, 21-cv-00079 (filed N.D. Tex. May 3, 2021) (on behalf
of three states); Kentucky v. Yellen, 21-cv-00017 (filed E.D. Ky. Apr. 6,
2021) (on behalf of two states); Missouri v. Yellen, 21-cv-00376 (filed E.D.
Mo. Mar. 29, 2021); West Virginia v. Yellen, 21-cv-00465 No. 1 (filed N.D.
Ala. Mar. 31, 2021) (on behalf of 14 states); Ohio v. Secretary, Dep’t of
Treasury, 21-cv-00181 No. 1. (filed S.D. Ohio Mar. 17, 2021).
17
Proceedings Below
The State moved for a preliminary injunction, and briefing was
complete on that motion on May 11, 2021.
In opposing the State’s request, Defendants contended that Arizona
lacked standing, largely relying on its contention that the State’s
“asserted injuries are hypothetical and speculative” and because Arizona
had not alleged an “intention to engage in a course of conduct arguably
affected with a constitutional interest, but proscribed by a statute, and
… a credible threat of [enforcement] thereunder.” 2-ER-81 (citing Susan
B. Anthony List v. Driehaus, 573 U.S. 149, 159 (2014) (quotation
omitted)).
Defendants did not contest that Arizona’s Legislature was
considering, at the time, numerous tax cutting plans. Instead,
Defendants’ standing argument rested, in large part, on DOJ’s then-
prevailing construction of the Tax Mandate. Under that interpretation,
Defendants contended that Arizona had failed to allege any specific plans
for a tax cut which “offsetted” a particular use of Rescue Plan Funds. 2-
ER-81-82. In particular, Defendants contended at that time that “[t]he
offset provision only restricts using Rescue Plan funds to offset a
18
reduction in net tax revenue resulting from a change in law, not any tax
change on its own.” 2-ER-82.
Along the same lines, DOJ argued that that the Tax Mandate was
not ambiguous because the term ‘use’ in the statute limited its
application to “volitional” or “active employment” of federal funds. 2-ER-
83. Under this “unambiguous” reading, “[the Tax Mandate’s] language
simply ensures that the federal funds are not employed to finance state
tax cuts that decrease net tax revenue.” 2-ER-83.
Finally, Defendants contended that Tax Mandate did not prevent
the State from cutting taxes provided it did not directly use ARPA funds
to do so. In DOJ’s April-2021 view, that was so because both “directly”
and “indirectly” were mere “adverbs that can-not alter the meaning of the
word that they modify (here, ‘offset’).” 2-ER-83 (quotion marks omitted).
As a result, Defendants argued that the State lacked a reasonable fear of
enforcement given that “indirectly” was incapable of modifying “offset”
and thus was incapable of broadly encumbering the State’s fiscal
sovereignty. 2-ER-83
19
Treasury’s Interim Final Rule
While Arizona’s motion was pending, the Treasury Department
issued the Interim Final Rule, implementing provisions of ARPA,
including the Tax Mandate. See Coronavirus State and Local Fiscal
Recovery Funds, 86 Fed. Reg. 26,786 (May 17, 2021) (“IFR”). The IFR was
notable for advancing an interpretation of the Tax Mandate plainly at
odds with its briefs below (as well as those in other district courts across
the country).
Specifically, the IFR states that a State will “be considered to have
used [ARPA funds] to offset a reduction in net tax revenue resulting from
changes in law, regulation, or interpretation if, and to the extent that,
the recipient government could not identify sufficient funds from sources
other than the Fiscal Recovery Funds to offset the reduction in net tax
revenue.” Id. at 26,807.
The IFR then goes on to lay out a complex, four-step process for
identifying direct and indirect offsets, which makes plain that, in
Treasury’s view, “indirectly” does indeed modify “offset.” First, States
must “identify and value” any actions which could reduce tax revenue.
Id. at 26,807. Second, States must determine the total projected revenue
20
loss and, if that figure is less than a “de minimis level,” there is no need
to identify any way to pay for the changes. Id. Third, at the end of the
fiscal year, if a state’s annual tax revenue exceeds than the amount
received for fiscal year ending in 2019 (adjusted annually for inflation),
they are in a “safe harbor” and do not violate the tax mandate. Id. Fourth,
if the loss is not de minimis or the State is not within the safe harbor,
then the State must “identify any sources of funds” that have been used
to offset the total value of the tax changes. Id.
Under the IFR (and contrary to the brief filed below), a state need
not “volitionally” employ ARPA funds to pay for a tax cut to violate the
“indirectly … offset” condition. Instead, the IFR recognizes that “money
is fungible” and specifically states that “even if Fiscal Recovery Funds
are not explicitly or directly used to cover the cost of changes that reduce
net tax revenue, those funds may be used in a manner inconsistent with
the statute by indirectly being used to substitute for” a tax revenue
reduction in a manner amounting to an indirect offset. Id. at 26,807.
Finally, the IFR puts States effectively under a monitoring regime
until the end of the covered period (2024). The IFR requires States to
report “[a]ctual net tax revenue,” “[e]ach revenue-reducing change made”
21
in a year and the value of that change, “[e]ach revenue-raising change”
and its value, and each spending cut used to pay for a revenue reduction
plus its value plus “documentation demonstrating that” the cut can pay
for the revenue reduction under the rule. Id. at 26,810.
The IFR expressly states that it “will generate administrative costs
relative to a pre-statutory baseline … includ[ing], chiefly, costs required
to … file periodic reports with Treasury.” Id. at 26,817. “Treasury
lack[ed] data to estimate the precise extent to which this interim final
rule generates administrative burden for State, local, and Tribal
governments,” but did not doubt that it was non-zero, and accordingly
sought “comment[s] to better estimate and account for these costs, as well
as on ways to lessen administrative burdens.” Id.
Consolidation Under Rule 65(a)(2)
Rule 65(a)(2) provides that “[b]efore or after beginning the hearing
on a motion for a preliminary injunction, the court may advance the trial
on the merits and consolidate it with the hearing.” Fed. R. Civ. P. 65(a)(2).
After the district court filed an order inquiring whether a preliminary
injunction would provide effective relief, the State moved for
consolidation on June 15, 2021. Without waiting for Defendants to file a
22
response, the district court sua sponte denied the State’s request as
“untimely.” 1-ER-15. That order did not identify any prejudice.
After the State pointed out that Rule 65(a)(2) provides that requests
for consolidation are expressly permitted to be made even “after
beginning the hearing,” 2-ER-78, n.1, the district court granted
consolidation and permitted the parties to provide a final round of
briefing. 1-ER-13.
District Court’s Decision
The district court issued its decision on July 22, dismissing the case
for want of jurisdiction. The Court determined that Arizona had failed to
show an injury-in-fact, and so lacked standing. In doing so, it did not
distinguish jurisdictional and merits issues, and appeared to rest its
standing conclusions largely on merits-based reasoning. In holding the
State lacked Article III standing, the district court discussed five
potential injuries and rejected each in turn.
First, the district court concluded that Arizona had not suffered any
sovereign injury because Arizona had no sovereign right to know the
content of the conditions attached to federal grants at all. 1-ER-6-7. In its
view, Pennhurst and Arlington stood only for the proposition that States
23
had a sovereign interest to know about the existence of conditions, not
their content. 1-ER-6. Because Congress made “the existence of the
condition” obvious in the Tax Mandate, it did not matter whether a State
could discern what it actually did. 1-ER-7-8 (quoting Mayweathers, 314
F.3d at 1067).
Second, the district court determined that Arizona’s policymakers
had suffered no harm from any ambiguity because “Arizona had offered
no concrete facts showing” how the Tax Mandate had impacted
policymakers. 1-ER-9. Furthermore, relying on its conclusion regarding
Arizona’s sovereign rights (or lack thereof), Arizona was not entitled to
any greater certainty than it received. 1-ER-9.
Third, the Court held that any compliance costs which Arizona
faced under the IFR and the ARPA were not cognizable injury. 1-ER-9. It
did not doubt that such costs existed, but reasoned that they could not be
“declared injurious for purposes of standing” because “it is within the
Secretary’s power, under ARPA, to request” the information needed to
administer the Tax Mandate. 1-ER-9. (citing 42 U.S.C. §802(d)(2)(B)
(requiring States to produce “such other information as the Secretary
may require)). The district court did not consider whether the Secretary
24
would have power to request information to enforce an unconstitutional
provision, but instead assumed that the Secretary’s exercise of her power
pursuant to the IFR was constitutional.
Fourth, the court held that Arizona had not shown a realistic
danger of enforcement of the Tax Mandate against it because Arizona
failed to show that it “used ARPA funds to supplement a reduction in its
net income.” 1-ER-10. Notwithstanding the $1.9 billion dollar tax cuts
passed by the Arizona Legislature in June, the Court held there was no
danger of enforcement because Arizona could not show specifically “how
the Restriction could apply” to its multi-billion-dollar tax cuts. 1-ER-10;
see also 2-ER-21.
Lastly, the Court held that any coercive force of the Tax Mandate
did not injure Arizona because “ARPA will not revoke any federal funding
Arizona enjoyed prior to accepting” ARPA funds. 1-ER-11. Furthermore,
Arizona had not shown that it had undergone financial strain as a result
of the COVID-19 pandemic, as opposed to the States generally. 1-ER-11.
Accordingly, the billions of dollars at stake in the ARPA did not amount
to “economic dragooning” under NFIB. 1-ER-11. (quoting NFIB, 567 U.S.
at 582 (Roberts, C.J.)). In doing so, the district court apparently
25
considered the issue of whether the level of coercion presented was
constitutional (or not) to be a jurisdictional rather than merits question.
This appeal followed.
SUMMARY OF THE ARGUMENT
The district court’s opinion hopelessly conflated standing and
merits issues and erred in its resolution of both. In rejecting most of the
State’s bases for Article III standing, the district court expressly worked
backwards from an (erroneous) merits conclusion to hold that the State
lacked standing—even while disclaiming that it had jurisdiction to reach
the very issues it had obviously just decided. Moreover, its merits-based
decisions were plainly wrong and squarely violated controlling Supreme
Court precedent, which the district court blithely dismissed as mere
dicta. This Court should reverse.
One clear example of the district court’s merits-first approach came
in analyzing whether the State’s compliance costs conferred Article III
standing to challenge the Tax Mandate. 1-ER-9. The district court did not
doubt that such compliance costs existed. 1-ER-9. That alone mandated
a conclusion that the State had standing to challenge the law imposing
those costs, which the district court could then—and only after resolving
26
standing—decide whether that law was constitutional. Instead, the
district court flipped the script: it reasoned that the State’s compliance
costs could not be “declared injurious for purposes of standing” because
“it is within the Secretary’s power” to impose them. 1-ER-9. But it is
axiomatic that the Secretary has no power to enforce an unconstitutional
law, and the district court’s opinion cannot be understood as anything
other than an implicit (and inescapable) determination that the Tax
Mandate was constitutional—thereby resolving an issue it explicitly
disclaimed jurisdiction to reach.
Similarly, as to the State’s argument that the Tax Mandate’s
alleged ambiguity inflicts sovereign injury, the district court inverted the
proper mode of analysis. It began with this Court’s decision in
Mayweathers—which is not even arguably a standing case. 1-ER-7.
Relying on Mayweathers, it then held, wrongly, that Congress need not
inform the States of what the content of conditions attached to federal
grants is, as long as it informs the States of the existence of the condition.
1-ER-8. And from that substantive holding about what the Constitution
requires, it then worked backwards to hold that the State lacked
standing. 1-ER-8.
27
None of this analysis is tenable. Because “standing in no way
depends on the merits,” Warth, 422 U.S. at 500, the district court for
standing purposes should have “assume[d] arguendo the merits of [the
State’s] legal claim.” Parker, 478 F.3d at 377. Thus, because the State
had validly alleged that the Tax Mandate was unconstitutionally
ambiguous and thereby violated a constitutional requirement created for
its benefit and protection, the district court should have assumed for
standing purposes that the Tax Mandate was unconstitutionally
ambiguous. It did not. Instead, it started with its own merits-based
determination of what the Constitution means—i.e., only requiring that
Congress disclosure of the existence of conditions, not what they actually
are—and worked backwards from there.
These are only the most obvious standing errors. As explained
below, the State also has standing based on the application of ARPA’s
coercive force against the State, the impact on the State’s ability to
budget, and the reasonable danger of enforcement of the Tax Mandate
against the State. The district court erred in rejecting all of these bases,
frequently doing so by again conflating merits and standing issues.
28
It is entirely unclear how the district court thought it had
jurisdiction to declare what the Constitution means in light of its holding
that it lacked subject matter jurisdiction. But it is perfectly clear that
this merits holding is plainly wrong. The Supreme Court in Arlington
addressed whether a condition was sufficiently clear to require the States
to pay experts fees to prevailing parties. 548 U.S. at 295. The existence
of a condition was indisputable (and undisputed). If the district court’s
existence-only theory were correct, the Supreme Court should have
stopped there and affirmed. But it instead held that condition was
insufficiently clear as a constitutional matter to mandate that the States
pay expert fees, thus making plain that the Constitution demands clarity
in what the conditions are, not merely that they exist. The district court
patently erred by dismissing Arlington’s core holding and case-
dispositive reasoning as mere “dicta.”
Because the State has standing and the district court necessarily
decided the merits of the State’s claim already, this Court should reach
the merits of the State’s constitutional claims after determining it has
Article III standing. Indeed, a remand to decide the merits would be futile
29
here because the district court has already pronounced dispositive
holdings on the constitutional issues, and gravely erred in doing so.
Here, the constitutionality of the Tax Mandate is straightforward
given its hopeless ambiguity. Indeed, the Departments of Justice and the
Treasury cannot even agree in this case about what the Tax Mandate
means and how it operates. And if two components of a unified executive
cannot even settle on what the Tax Mandate means, the proposition that
it presents clear, unambiguous conditions to the States is fanciful.
The Tax Mandate’s unconstitutional ambiguity stems largely from
two elements: (1) its unprecedented use of the impenetrable term
“indirect offset;” and (2) its innumerable, unfillable textual gaps. Indirect
or indirectly offset are not terms used elsewhere in the U.S. Code, and
for good reason—they are woefully unclear. Literally any use of ARPA
funds could be set to “indirectly offset” a broad tax cut. Beyond this vague
term, the Tax Mandate leaves critical gaps unfilled; for example, the Tax
Mandate does not specify what counts as a “reduction” in net tax revenue
because there is no clear baseline. Nor does it make clear what counts as
a “change” in State tax law. These and other gaps leave the States with
no clear understanding of what it is accepting in taking on ARPA funds.
30
Nor can the Treasury Department’s subsequent interim final rule
cure the ambiguity in the Tax Mandate. That is so for several reasons:
(1) only Congress can provide the requisite clarity under the
Constitution; (2) even if Congress could delegate its Spending Clause
authority to the Treasury Department, it has not done so here; and
(3) even if it had, the rule itself does not actually eliminate the Tax
Mandate’s pervasive ambiguity, and the rule even adds yet more
impenetrable conditions for the States to comply with.
STANDARDS OF REVIEW
This Court reviews dismissal for lack of standing de novo. See
Mayfield v. United States, 599 F.3d 964, 970 (9th Cir. 2010). Similarly,
“[t]he constitutionality of a statute is a legal question of law that [this
Court] review[s] de novo.” See United States v. Younger, 398 F.3d 1179,
1192 (9th Cir. 2005).
ARGUMENT
I. THE STATE HAS ARTICLE III STANDING TO CHALLENGE
THE TAX MANDATE
To have standing, the plaintiff must have “(1) suffered
an injury in fact, (2) that is fairly traceable to the challenged conduct of
the defendant, and (3) that is likely to be redressed by a favorable judicial
31
decision.” Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1547 (2016). This case
primarily concerns the district court’s determination that Arizona had
failed to demonstrate an injury in fact. It did not appear to doubt
traceability or redressability.
To establish injury-in-fact, a plaintiff must show that he or she
suffered “an invasion of a legally protected interest” that is both “concrete
and particularized” and “actual or imminent.” Id. at 1548.
The essence of the standing question is “the case-or-controversy
requirement of Article III.” Lujan v. Defs. of Wildlife, 504 U.S. 555, 560
(1992). The issue is not whether Arizona is entitled to relief as “standing
in no way depends on the merits.” Warth, 422 U.S. at 500. Instead, the
standing inquiry considers merely whether Tax Mandate imposes some
injury on Arizona, such that there exists a question which is
“traditionally amenable to” the judicial process. Steel Co. v. Citizens for a
Better Env't, 523 U.S. 83, 102 (1998). In addition, States are entitled to
“special solicitude” in the standing analysis. Massachusetts v. EPA, 549
U.S. 497, 518-20 (2007).
32
A. Standing Must Be Evaluated Separately From The
Merits
An elementary principle of standing is that analysis of the merits
is distinct and separate from the question of whether there is standing.
But the district court’s analysis pervasively conflated these two inquiries.
Throughout its analysis of Arizona’s standing, the court made two
fundamental errors: it disguised merits questions as questions of
standing and repeatedly assumed the constitutionality of the challenged
provision. Each of these errors alone would merit reversal.
As this Court has explained en banc, “standing analysis, which
prevents a claim from being adjudicated for lack of jurisdiction, [cannot]
be used to disguise merits analysis, which determines whether a claim is
one for which relief can be granted if factually true.” Cath. League for
Religious & C.R. v. City & Cty. of San Francisco, 624 F.3d 1043, 1049
(9th Cir. 2010) (en banc).
Furthermore, a Court “must assume arguendo the merits of [the
State’s] legal claim” when evaluating its standing. See Parker, 478 F.3d
at 377. Even if the Court ultimately disagrees with the merits of a legal
claim, the Supreme Court has cautioned against “confus[ing] weakness
on the merits with absence of Article III standing.” Arizona State
33
Legislature v. Arizona Indep. Redistricting Comm'n, 576 U.S. 787, 800
(2015).
If the district court had properly separated the jurisdictional
analysis from its merits’ conclusions, it would have seen the numerous
injuries that the Tax Mandate inflicts on the State. Any of the injuries
set forth below alone suffices to present a justiciable controversy. The
district court’s contrary conclusion necessary rests on its unstated
conclusion that the Tax Mandate was constitutional—largely because it
doubted that any of the requirements set forth by Supreme Court
precedent actually existed. But they do. And the Tax Mandate squarely
violates them.
B. The Compliance Costs Imposed By The Tax Mandate
Confer Standing
1. The Compliance Costs Are Cognizable Injury
Numerous courts have concluded that a regulatory burden typically
satisfies the injury-in-fact requirement. See, e.g., Clark v. City of
Lakewood, 259 F.3d 996, 1007 (9th Cir. 2001) (“The Court routinely
recognizes ... economic injury resulting from governmental actions ... as
sufficient to satisfy the Article III ‘injury in fact’ requirement”)
(quoting Clinton v. City of New York, 524 U.S. 417, 432-33 (1998));
34
Brackeen v. Haaland, 994 F.3d 249, 297 (5th Cir. 2021) (“The imposition
of regulatory burdens on State Plaintiffs is sufficient to demonstrate an
injury...”); Texas v. EEOC, 933 F.3d 433, 446-47 (5th Cir. 2019) (“An
increased regulatory burden typically satisfies the injury in fact
requirement.” (citation omitted)); Lutheran Church-Missouri Synod v.
FCC., 141 F.3d 344, 349 (D.C. Cir. 1998) (requirement to keep “detailed
employment records” is sufficient injury in fact).
The severity of the regulatory burden is irrelevant:
“For standing purposes, a loss of even a small amount of money is
ordinarily an ‘injury.’” See Van v. LLR, Inc., 962 F.3d 1160, 1162 (9th Cir.
2020).
2. The State Will Incur Compliance Costs
Accordingly, all Arizona need show is that it suffers some additional
costs as a result of the Tax Mandate. As stated above, the IFR requires
States to report actual net tax revenue, the value of changes in tax policy,
and spending cuts with documentation showing that the cuts can cover a
tax revenue decrease under the rule. 86 Fed. Reg. at 26,810. The IFR also
explicitly requires the States to break out and “identify any sources of
funds that have been used to permissibly offset” tax changes. Id. at
35
26,807, 26,809 (requiring the States to “identify and calculate the total
value of changes that could pay for revenue reduction due to covered
changes and sum these items” and describing the procedures for doing
so).
These mandates plainly impose some burden on the State. Indeed,
the Treasury Department has expressly stated in its own rule that the
reporting requirements “will generate administrative costs …
includ[ing], chiefly, costs required to … file periodic reports with
Treasury.” 86 Fed. Reg. at 26,817. Indeed, it went so far as to “comment[s]
to better estimate and account for these costs, as well as on ways to lessen
administrative burdens.” Id. Put simply, neither the Treasury
Department nor the district court ever doubted that the Tax Mandate
imposes compliance costs through the IFR.
These costs are the monitoring regime put in place to ensure the
State complies with the unconstitutional provision. Compare with
California v. Texas, 141 S. Ct. 2104, 2119-20 (2021) (“[T]he problem for
the state plaintiffs is that these other provisions also operate
independently [from the challenged provision].”). Although the ARPA
does independently require States to make a “detailed accounting” of “all
36
modifications to the State’s … tax revenue sources,” see 42 U.S.C.
§802(d), that requirement is far less broad and burdensome than what
the IFR imposes specifically to enforce the Tax Mandate’s “directly or
indirectly offset” provision, and the statutorily required accounting
makes no mention of spending cuts or offsets. Id. §802(c)(2)(A).
It would be incredible if this IFR provision—which is a significant
constraint on the States and is complex enough to have an explanation
covering several pages of the Federal Register, see 86 Fed. Reg. at 26,807-
26,811—did not impose any costs on the States. Because it does impose
significant costs, there is a justiciable controversy over the validity of the
provision.
3. The District Court’s Contrary Holding Conflated
The Standing And Merits Inquiries.
The district court did not seriously dispute that ARPA imposed
these compliance costs on the State. Instead, the court concluded that “it
is within the Secretary’s power, under ARPA, to request that Arizona
identify funds used to offset tax changes…. These compliance costs are
part and parcel of a clearly-stated ARPA condition.” 1-ER-9.
This conclusion patently conflates standing with the merits. The
questions of whether the condition is lawful and whether it is “clearly
37
stated” are the precise merits-based issues presented by Arizona’s
lawsuit. Here, Arizona alleged that the Tax Mandate was
unconstitutional specifically because it failed to give the States
sufficiently clear notice to allow them to knowingly or voluntarily agree
to it. The district court’s reasoning stands for the proposition that these
costs are properly—i.e. constitutionally—imposed. But that is precisely
the question that the district court held it lacked jurisdiction to reach.
The Secretary has no power whatsoever to enforce an
unconstitutional provision. The district court thus necessarily worked
backwards from its unstated—but unmistakable—conclusion that the
Tax Mandate was constitutional to hold that any compliance costs
resulting from it were not “injurious”—all while purporting to lack
jurisdiction to reach the question of the Tax Mandate’s constitutionality.
That is a hopeless muddle that mangles both the standing and
constitutional issues simultaneously. Those fundamental errors warrant
decisive rejection by this Court.
38
C. The Alleged Ambiguity Of The Tax Mandate Inflicts
Cognizable Sovereign Injury On The State
1. Arizona Had A Right To An Offer It Could
“Voluntarily And Knowingly Accept”
Spending Clause legislation is “in the nature of” contract between
sovereigns. NFIB, 567 U.S. at 519, 576-77 (“We have
repeatedly characterized ... Spending Clause legislation as ‘much in the
nature of a contract.” (citing cases)). Respecting States’ right to
voluntarily and knowingly accept the terms of this contract “is critical to
ensuring that Spending Clause legislation does not undermine the status
of the States as independent sovereigns in our federal system.” Id. at 577.
As a result, a State has a judicially enforceable interest in the offer
of conditional funding from the Federal Government. This makes perfect
sense—the State needs to know what the actual conditions are to
knowingly accept them.
Indeed, it would be truly bizarre if the Constitution created
requirements for the specific protection of particular parties but those
very same parties lacked standing to challenge alleged violation of them.
But under the district court’s reasoning, an individual imprisoned by an
alleged bill of attainder by Congress could lack standing to challenge that
legislation if a district court implicitly disagreed with that individual’s
39
merits-based characterization (while purporting to lack jurisdiction to
pronounce a holding on that very subject). That cannot be the law.
This injury is also necessarily ripe as soon as the offer is available:
at that time, the content of a spending condition is critical to the State’s
sovereign interest in knowingly accepting or rejecting that condition.
Arizona’s injury from the federal government’s failure to make a
constitutionally acceptable offer is the same injury that gives plaintiffs
standing in every unconstitutional-conditions case: being forced to choose
between exercising its constitutional rights and receiving a government
benefit. See, e.g., Rumsfeld v. Forum for Acad. & Institutional Rights,
Inc., 547 U.S. 47, 52-53 & n.2 (2006). In challenges brought by other
states to the Tax Mandate, district courts in both Alabama and Ohio
recognized this as justiciable injury. See West Virginia v. Dep’t of the
Treasury, 21-cv-00465, 2021 WL 2952863 at *7 (N.D. Ala. Jul. 14, 2021)
(“Their injury in fact is having to choose between forgoing a benefit
(federal funds) or accepting that benefit on unconstitutional terms.”);
Ohio v. Yellen, No. 1:21-CV-181, 2021 WL 2712220, at *6 (S.D. Ohio July
1, 2021) (concluding that the relevant harm for standing is “the harm
that arises when a State must ponder accepting an ambiguous deal”).
40
Under ARPA, States could certify compliance and accept the funds
as early as March 11, 2021, the date President Biden signed the Act into
law. 42 U.S.C. §802(g)(1). From that date, Arizona was effectively
considering the offer from the federal government of funds and the
condition of the Tax Mandate. Arizona filed this lawsuit on March 25,
2021. The existence of an injury for purposes of standing depends on “the
facts as they exist when the complaint is filed.” Lujan, 504 U.S. 555 at
569 n.4. Accepting Arizona’s characterization of the Tax Mandate as
unconstitutional, at the moment of filing the State was choosing between
accepting the unconstitutional and indecipherable Tax Mandate or
foregoing a benefit. This is an amply sufficient injury-in-fact.
2. The District Court Wrongly Conflated The Merits
In Judging the States’ Interest
The district court rejected this injury, instead concluding that
Arizona had no legally protected interest because Pennhurst and
Arlington were “not tasked with determining what conditions would
trigger such an obligation—the question was whether such an obligation
existed at all. Anything in those two cases beyond the issue of whether a
condition existed, then, is dicta.” 1-ER-7 (quotation marks omitted).
According to the district court, because Congress made “the existence of
41
the condition upon which Arizona could accept funds explicitly obvious”
Arizona had not “suffered a cognizable injury.” 1-ER-7. (internal
quotations omitted).
This was a quintessential merits determination, disguised as a
jurisdiction one. This was evident in the court’s ostensible reliance on
Mayweathers, 314 F.3d at 1062, since that case was itself a decision on
the merits and not jurisdictional at all.
The district court’s explicit acknowledgment and discussion of the
core question in the case—whether the government’s condition was
sufficiently clear for Arizona to knowingly and voluntarily accept the
terms offered—demonstrates that this was effectively a merits decision.
Instead of engaging with the merits in the guise of standing, the district
court should have assumed arguendo the correctness of Arizona’s claim,
meaning the only question for the court was whether the Tax Mandate’s
assumed failure to permit the State to voluntarily and knowingly accept
the terms of the condition inflicted a sufficiently “concrete and
particularized” and “actual or imminent” injury. See Spokeo, 136 S. Ct.
at 1548.
42
Compare the district court’s decision with Arizona State
Legislature, 576 U.S. at 800. In that case, the Supreme Court disagreed
with the Arizona Legislature on the merits of their claim that they had
an exclusive role in redistricting. But that merits holding did not prevent
the Court from concluding that Arizona’s “alleged prerogative” was
sufficient to establish cognizable injury. Id. Similarly here, Arizona’s
allegation that it was denied the right to knowingly and voluntarily
accept the terms of the Tax Mandate was sufficient to establish the
State’s standing.
D. Arizona Suffers An Injury Because The ARPA Coerced
The State And Effectively Commandeered State Taxing
Authority
Congress’s enumerated powers do not include the power to issue
orders to, or “commandeer,” state governments. See Murphy v. NCAA,
138 S. Ct. 1461, 1476 (2018). The Supreme Court has repeatedly stated
that Congress lacks “the ability to require States to govern according to
Congress’ instructions.” New York, 505 U.S. at 162 (citing Coyle v. Smith,
221 U.S. 559, 565 (1911)). “[E]conomic dragooning that leaves the States
with no real option but to acquiesce” crosses the line from permissible
43
persuasion to impermissible coercion and effectively amounts to
commandeering. NFIB, 567 U.S. at 582.
Courts have recognized such commandeering as an injury to a
States’ sovereign constitutional rights. See, e.g., New York, 505 U.S. at
154. (permitting State to proceed with declaratory challenge to the
constitutionality of the Low-Level Radioactive Waste Policy
Amendments Act of 1985); Oregon v. Trump, 406 F. Supp. 3d 940, 958 (D.
Or. 2019) (“A state or locality has standing to challenge interference with
its operational and governance decisions.”) (citing cases). It similarly
injures Arizona here.
The district court disagreed with this solely based on its analysis of
the facts, again conflating the merits with standing. 1-ER-11 (“Arizona
has not alleged facts showing that it has undergone financial strain….
Arizona has not alleged facts showing it had no real option but to
acquiesce.”). This analysis is simply irrelevant, as explained in more
detail below. But more importantly, the district court, for purposes of
standing at least, should have accepted Arizona’s arguments as true. See
Parker, 478 F.3d at 377. Its failure to do so underscores its conflation of
standing with the merits.
44
E. Arizona Suffers A Realistic Danger Of Enforcement Of
The Tax Mandate
Even if this Court were to conclude none of the above injuries
established standing, the threat of potential enforcement of the Tax
Mandate would also suffice here.
To establish standing based on threatened enforcement, the State
needed to show “an intention to engage in a course of conduct arguably
affected with a constitutional interest, but proscribed by a statute, and
there exists a credible threat of prosecution thereunder.” See Susan B.
Anthony List, 573 U.S. at 159 (quoting Babbitt v. Farm Workers, 442 U.S.
289, 298 (1979)). This Court considers three factors for evaluating the
genuineness of a threat of prosecution: “[1] whether the plaintiffs have
articulated a ‘concrete plan’ to violate the law in question, [2] whether
the prosecuting authorities have communicated a specific warning or
threat to initiate proceedings, and [3] the history of past prosecution or
enforcement under the challenged statute.” See California Trucking
Ass’n v. Bonta, 996 F.3d 644, 652 (9th Cir. 2021) (quoting Thomas v.
Anchorage Equal Rights Comm’n, 220 F.3d 1134 (9th Cir. 2000) (en
banc). Here, all three of these factors are met.
45
First, Arizona has done more than articulate a “concrete plan”—
Arizona has passed a $1.9 billion tax cut and accepted billions in ARPA
funding. 2-ER-21. While Arizona certified (prior to passing the tax cut)
that it would not violate the Tax Mandate, the Tax Mandate’s sweep is
so broad and uncertain, Arizona could reasonably certify under its own
reasonable reading of the language and yet still face an enforcement
action by the Treasury Department. The IFR itself contemplates
Treasury’s review of inadvertent decreases in tax revenue and oversight
of past conduct for “indirect offsets”—in Treasury’s sole judgment. See
IFR, 86 Fed. Reg. at 26,810.
On the second factor, the IFR itself is an explicit threat of
enforcement. Furthermore, the federal government has not “disavow[ed]
enforcement” of the Tax Mandate, which is “strong evidence that the
[government] intends to enforce the law.” Bonta, 996 F.3d at 653. Finally,
on the third factor, “this factor has ‘little weight’ when the challenged law
is relatively new and the record contains little information as to
enforcement or interpretation.” Id. (internal quotations omitted).
Ultimately, then, this case is like Babbitt: there, the statute also
had never been applied, and governmental body charged with
46
enforcement had not disavowed its intent to enforce it. Babbitt, 442 U.S.
at 302. As the Court explained, standing existed there because “Appellees
[we]re thus not without some reason in fearing prosecution.” Id. So too
here: Arizona has passed a large tax cut which would seem to “indirectly
offset” at least some of its ARPA spending. And the Treasury has not
disavowed enforcement—it has actively pursued rulemaking to put the
framework into place to bring future recoupment actions and implicitly
disavowed DOJ’s more narrow interpretation that might have given the
States comfort that enforcement actions were not forthcoming.
Accordingly, Arizona has standing.
The district court’s disagreement was founded on its assertion that
Arizona had not “claim[ed] to have directly or indirectly used ARPA funds
to supplement a reduction in its net income.” 1-ER-10. But this is
tantamount to requiring Arizona to admit to violating the statute as a
prerequisite to suit. Article III does not “require plaintiffs to ‘bet the farm
by taking violative action’ before ‘testing the validity of the law.’” Free
Enter. Fund v. Pub. Accounting Oversight Bd., 561 U.S. 477, 490 (2010)
(quoting MedImmune, Inc. v. Genentech, 549 U.S. 118, 129 (2007))
(alteration omitted). Arizona was entitled to protect itself by claiming
47
funds while acting consistent with its understanding of the law. Under
MedImmune, this does not preclude the State from challenging the
statute based on Treasury’s interpretation of the extremely vague
language, as set forth in the IFR.
For all these reasons, Arizona has standing to challenge the Tax
Mandate.
II. THE TAX MANDATE IS UNCONSTITUTIONAL
The State not only has Article III standing, but its constitutional
claims are also meritorious. Indeed, the district court’s opinion
implicitly—but unmistakably—rejected the State’s merits arguments in
the course of dismissing the State’s suit.
This Court therefore cannot meaningfully review the district court’s
reasoning without considering (or at least disentangling) the merits
issues that pervade the opinion below. Indeed, a remand to decide the
constitutional issue would be futile because the district court has already
decided them (holding, for example, that the Tax Mandate was not
unconstitutionally ambiguous because Congress need only give notice of
the existence of the conditions, not its actual content, supra at 23-24.
48
Moreover, this appeal presents purely legal issues that would not benefit
from any further development below.
This Court accordingly should (and effectively must) resolve the
constitutional challenges presented here. And because the Tax Mandate
is unconstitutional, this Court should direct entry of judgment in favor of
the State on remand.
On the merits, the Tax Mandate violates the Constitution
principally because it is ambiguous, and thus does not supply the
requisite clarity that the Constitution demands. But even if the statute
was clear, under Treasury’s interpretation it remains a grave
encroachment upon the States’ sovereign taxing powers and a
transgression upon the limitations recognized in Dole and other cases.
A. The Tax Mandate’s Palpable Ambiguity Violates The
Constitution
1. The Tax Mandate Is Patently Ambiguous
As explained above, conditional grants under the Spending Clause
are “in the nature of a contract” and their constitutional “legitimacy”
rests on whether States can both voluntarily and knowingly accept the
terms. Pennhurst, 451 U.S. at 17. The condition in question must be
viewed “from the perspective of a state official who is engaged in the
49
process” of deciding whether to accept the funds. Arlington, 548 U.S. at
296.
Thus, unlike a traditional statutory interpretation case, the
question under the Pennhurst inquiry is not what the “best” reading of
the statutory language is. Instead, the court only need determine
whether the statute allows state officials to “clearly understand” the
obligations that go with the funds, and whether the condition furnishes
“clear notice” regarding the potential liability the State would face. Id.
Absent such unambiguous clarity, Congress’s attempt to impose a
condition upon the States through its Spending Clause power is
unconstitutional because no state can voluntarily or knowingly agree to
the condition.
This limitation is not solely about protecting a State’s contractual
integrity. Rather, this is a limitation on Congress’s Spending Clause
powers to protect the fundamental federal, dual-sovereign character of
our Republic. Justice Scalia’s dissent for four justices in NFIB explained
the potential reach of the Spending Power, if unchecked: “[T]he Spending
Clause power, if wielded without concern for the federal balance, has the
potential to obliterate distinctions between national and local spheres of
50
interest and power by permitting the Federal Government to set policy
in the most sensitive areas of traditional state concern, areas which
otherwise would lie outside its reach.” NFIB, 567 U.S. at 675-76 (Scalia,
J., dissenting) (citation omitted). To maintain this balance, federal
spending clause legislation must be unambiguous and must allow the
States to make an “informed choice.” Id. at 676-77.
In this context, ambiguity functions much like coercion. In both
cases, the States’ ability to make an “informed choice” is destroyed, with
ambiguity vitiating the “informed” part and coercion precluding a true
“choice.” Without this limitation, Congress effectively could impose its
will on the States through the power of these conditions, undermining
the federal-state balance.
The question then is whether the Tax Mandate is so ambiguous as
to deprive the States of voluntary and knowing choice. While the
Supreme Court stated in Arlington that a court evaluating ambiguity
should “begin with the text,” 548 U.S. at 296, the text of the Tax Mandate
begs more questions than it answers. Consider a few of the questions its
language leaves unresolved: First, the Tax Mandate does not explain the
limits (if any) on when ARPA funds “indirectly offset” a reduction in net
51
tax revenue. For example, if a state uses the federal funds from the Act
to supplement the pay of its essential government employees, as
expressly permitted by the ARPA, thereby reducing its own budgetary
obligations to pay such workers, and then proceeds with a pre-existing
plan to cut income taxes, has any tax reduction been indirectly offset?
Does it matter if the money comes out of a different fund than where the
ARPA grant is directly utilized?
Second, the Tax Mandate does not explain what the baseline is for
when a “reduction” in in the “net tax revenue” has taken place. For
example, if the State revenues were projected to increase in 2022 by $500
million, and the state instituted an income tax reduction reducing this
revenue increase to be only $450 million, would that be a “reduction in
net tax revenue?”
Third, can an indirect offset be diminished or eliminated over time?
If a state uses funds from the Act in 2021, is it bound until 2024 from any
policy change which reduces net tax revenue? The text is largely silent
on these questions.
The only district court to reach these merits questions had little
difficulty in holding that Tax Mandate is unconstitutionally ambiguous.
52
As explained by the Ohio court, “the Tax Mandate, even when read in
context, fails to put the State on ‘clear notice’ of its obligations, under any
reasonable definition of ‘clear.’” Ohio, 2021 WL 2712220, at *12 (citations
omitted). The court noted a series of ambiguities; for example, “the
statutory language itself provides no mechanism for determining
whether a State’s net tax revenues are ‘reduced’ or not;” “the statutory
language does not explain whether the prohibition applies to expected tax
revenues, or actual tax revenues;” “the Court … could not ascertain what
an indirect offset may (or may not) be.” Id. at *13 - *14. Furthermore, the
Ohio court observed that these definitions are so broad that “the
Secretary could deem essentially any reduction in the rate of any one or
more state taxes” to be a change in tax laws resulting in an indirect offset.
Id. at *15.
With these uncertainties, the States are not presented with an
“informed choice.” They can accept the funds, but they cannot know what
they are signing on for. Accordingly, the Tax Mandate is an illegitimate
exercise of the Spending Power.
53
2. The Tax Mandate’s Ambiguity Is Apparent From
DOJ’s And Treasury’s Conflicting Interpretations
Of It
The Tax Mandate has been subject to shifting interpretations
throughout its short lifetime. The Secretary—an economics professor and
former Federal Reserve Chairwoman—acknowledged in her testimony to
the Senate Banking Committee that the Tax Mandate raises a “host of
thorny questions” and “given the fungibility of money, it’s a hard question
to answer.”8 Despite this, she (i.e., DOJ) contended before the district
court that the statute was completely unambiguous, and that its meaning
was clear: its application was limited to “volitional” or “active
employment” of federal funds. 2-ER-83.
Finally, the IFR, which was published during the pendency of this
litigation, announced a new interpretation, contradicting
Treasury’s/DOJ’s litigation position. In fact, the IFR recognizes (as the
Secretary did) that “money is fungible” and specifically states that “even
if Fiscal Recovery Funds are not explicitly or directly used to cover the
cost of changes that reduce net tax revenue, those funds may be used in
8 See supra note 6.
54
a manner inconsistent with the statute by indirectly being used to
substitute for” a tax revenue reduction in a manner amounting to an
indirect offset. 86 Fed. Reg. at 26,807.
These interpretations are set forth below:
Table 1: Defendants’ Shifting Interpretations
Defendants’ Response (April Interim Final Rule (May 17,
30, 2021) 2021)
“The term ‘use’ connotes “[E]ven if Fiscal Recovery Funds
‘volitional’ ‘active are not explicitly or directly
employment’ of federal used to cover the cost of changes
funds…. [T]he Act’s reference to that reduce net tax revenue, those
States ‘directly or indirectly’ funds may be used in a manner
offsetting a reduction in net tax inconsistent with the statute by
revenue does not alter the indirectly being used to
statutory meaning. Both substitute for the State's or
‘directly’ and ‘indirectly’ are territory’s funds that would
adverbs that cannot ‘alter otherwise have been needed to cover
the meaning of the word’ that the costs of the reduction.”
they modify (here, ‘offset’).”
Put simply, depending on when DOJ and the Treasury Department
were asked: (1) the Tax Mandate either does or does not require “active
employment” of ARPA funds to offset revenue reductions, and
(2) “indirectly” either does—or does not—modify “offset.” (One might also
fairly wonder what linguistic function DOJ thinks adverbs serve other
55
than “alter[ing] the meaning of the word’ that they modify” 2-ER-83.
Indeed, the sole purpose of adverbs is modifying verbs, adjectives, and
other adverbs.)
These shifting interpretations demonstrate by themselves the
dilemma placed on the States by the Tax Mandate. How could the State
knowingly and voluntarily agree to this language when the Secretary
cannot convincingly articulate its meaning even during litigation? They
cannot: the States can “accept” these terms, but they cannot know what
they actually mean. If Congress could present States with conditions of
this type, it would violate fundamental tenets of federalism.
3. The Supreme Court’s Precedents Demand Clarity
As To What The Conditions Imposed Actually
Are—Not Their Mere Existence
The district court, in the guise of evaluating Arizona’s standing,
decided that Arizona did not have a constitutional right to unambiguous
conditions at all. Instead, declaring itself bound by Mayweathers, 314
F.3d at 1062, the district court held that as long as Congress makes the
existence of a condition known, Congress has satisfied its duty. But
gravely misreads Mayweathers and squarely violates controlling
Supreme Court precedent.
56
Mayweathers involved a facial challenge to the constitutionality of
the Religious Land Use and Institutionalized Persons Act of 2000, 42
U.S.C. §2000cc et seq. (2000) (“RLUIPA”), on various grounds. 314 F.3d
at 1065. RLUIPA states that it applies to any “program or activity that
receives Federal financial assistance” and requires that governments not
impose a substantial burden on the religious exercise of prisoners unless
the government can demonstrate that the burden both serves a
compelling government interest and is the least restrictive means of
advancing that interest. Id. at 1067 (quoting (42 U.S.C. §2000cc-1(b)(1)).
Plaintiffs challenged this aspect of RLUIPA as ambiguous under
Dole and Pennhurst. This Court disagreed, explaining that “[t]he fact
that the least restrictive means standard is perhaps unpredictable
because it has resulted in different determinations in different courts
does not weaken the express conditional language.” Id. at 1067.
The district court wrongly understood Mayweathers as standing for
the proposition that the State has no right to know the content of a
condition whatsoever; it was enough for Congress to make clear that there
is a condition, regardless of whether any of its contours are knowable. 1-
ER-8.
57
This was a wild overreading of Mayweathers, which simply stated
a principle that the State agrees with—Congress is not required to “list
every factual instance” in order to promulgate a non-ambiguous
condition. This is what this Court meant when it said Congress must
“make the condition itself explicitly obvious.” Mayweathers, 314 F.3d at
1067.
As discussed above, Arizona does not suggest that the Tax Mandate
need to set forth “every factual instance” to be unambiguous. Rather, the
dispositive threshold is whether the condition gives the States “clear
notice” about what is required, so they can knowingly and voluntarily
accept the conditions. Arlington, 548 U.S. at 296. Put simply, the States
need not know how every conceivable factual permutation would be
treated by Congress’s condition. But they are entitled to clear notice of
the fundamental contours of the proposed deal. The Tax Mandate, with
its innumerable, critical gaps and the indecipherable use of “indirect
offset,” cannot satisfy this threshold.
The district court’s reading—that this substantive uncertainty does
not matter—cannot be squared with the Supreme Court’s decisions in
NFIB and Arlington, both of which post-dated Mayweather. As the Ohio
58
court explained, the Supreme Court in these cases “directly reject[ed]”
the view that the substance of conditions is irrelevant. Ohio v. Yellen, No.
1:21-CV-181, 2021 WL 1903908, at *12 (S.D. Ohio May 12, 2021) (“First,
the federal government claimed that the Spending Clause does not
require that the substance of the conditions be clear, but merely that the
statute make clear that conditions exist. Wrong. As noted above,
Supreme Court and Sixth Circuit precedent directly reject that view.”).
In Arlington, the Court was clear that it was the content of the
condition which mattered. That case dealt explicitly with a provision in
the Individuals with Disabilities Education Act (“IDEA”), which provides
that a court in an IDEA case may award “reasonable attorneys’ fees as
part of the costs.” 548 U.S. at 293-94 (citation omitted). The question
presented there was whether IDEA permitted prevailing parents to
recover expert fees as a part of “costs,” as seemed to be suggested by
legislative history. Id.
In resolving that question, the Court made clear that “[i]n a
Spending Clause case, the key is not what a majority of the Members of
both Houses intend but what the States are clearly told regarding the
conditions that go along with the acceptance of those funds.” Id. at 304.
59
Applying that logic, the Court held that States could only be bound to the
narrow understanding of the condition, since obligating States to cover
attorneys’ fees would go beyond what States were “clearly told.” Id.
But if the existence of the condition was all that mattered, there
would have been no need to apply this narrowing principle on the
meaning of “costs”—the Supreme Court could simply have observed that
the existence of the IDEA’s requirement to pay “costs” was obvious and
affirmed on that ground alone. But the Court actually reversed the
judgment below, and its holding was expressly premised on the need for
clarity as to the content of the IDEA’s condition, not merely its existence.
That distinction was case dispositive in Arlington and not, as the district
court held, irrelevant “dicta.” 1-ER-7. It was the core holding.
Similarly, as explained above in NFIB, seven Justices struck down
a condition in the Affordable Care Act that imposed additional Medicaid
requirements on the States. NFIB, 567 U.S. at 575-76 (Roberts, C.J.).
Both opinions reaching this conclusion in the case explained the
importance of the State being able to both “knowingly” and “voluntarily”
accept the conditions offered for the exercise Spending Clause power to
be “legitima[te].” Id. at 577. See also NFIB, 567 U.S. at 676-77 (Scalia, J.,
60
dissenting). But a State cannot knowingly accept a condition without
knowing what it does. The district court’s contrary conclusion is a
contradiction in terms that contorts the Supreme Court’s holdings
beyond recognition.
The district court simply misread Mayweathers to reach a contrary
conclusion. But even if Mayweathers did actually hold that nothing more
than disclosure of the existence of a condition was required, it is directly
contrary to Arlington, which is intervening authority that necessarily
overrules it. See Miller v. Gammie, 335 F.3d 889, 893 (9th Cir. 2003) (en
banc).
4. Treasury’s Rule Cannot Cure The Tax Mandate’s
Ambiguity
The IFR cannot cure the problems caused by Congress’s failure to
give the States clear notice on the Tax Mandate’s meaning. As the Fourth
Circuit held in an en banc decision, “statutory ambiguity defeats
altogether a claim by the Federal Government that Congress has
unambiguously conditioned the States’ receipt of federal monies”
notwithstanding any subsequent regulation. Va. Dep’t of Educ. v. Riley,
106 F.3d 559, 567 (4th Cir. 1997) (en banc) (adopting opinion of Luttig,
61
J., dissenting below). This Court would have to create a square and
unwarranted circuit split to hold otherwise.
This limitation stems from the nature of the Spending Clause
restriction requiring ambiguity. As recognized by the Ohio decision, the
Spending Clause jurisprudence reflects “structural concerns about
protecting federalism” as well as protecting the States’ “contractual
autonomy.” See Ohio, 2021 WL 2712220, at *17. Those structural
concerns would be undermined if “mere congressional ambiguity would
evade the [political process] on which Garcia relied to protect states'
interests.” See Riley, 106 F.3d at 567 (adopting opinion of Luttig, J.,
dissenting below) (quoting Gregory, 501 U.S. at 464). The Supreme Court
has required knowing and voluntary acceptance not simply to protect
states from exploitation, but to ensure that Congress’s Spending Clause
power does not, as Justice Scalia wrote in NFIB, “‘obliterate distinctions
between national and local spheres of interest and power by permitting
the Federal Government to set policy in the most sensitive areas of
traditional state concern.’” See NFIB, 567 U.S. at 675-76 (Scalia, J.,
dissenting) (citation omitted)). This purpose would be destroyed if
Congress could simply delegate its responsibility to make clear conditions
62
to an executive agency, leaving those conditions both subject to change
and subject to the whims of the Executive Branch.
Furthermore, as the Ohio court recognized, even if Congress could
delegate the responsibility to issue clear conditions, “Congress must
provide for such delegation in clear and unambiguous terms. And
Congress did not do so here.” Ohio, 2021 WL 2712220, at *15. Following
the logic of the Supreme Court’s decision in King v. Burwell, 576 U.S. 473,
485-86 (2015), the district court observed that the Tax Mandate involves
“question[s] of deep ‘economic and political significance.’” Ohio, 2021 WL
2712220, at *19 (quoting King, 576 U.S. at 486). Accordingly, if Congress
had wished to assign that question to the Secretary, “it surely would have
done so expressly.” Id.
Furthermore, the structure and context of the statute provide
strong evidence that “Congress considered the terms of the deal to be
complete” without Treasury’s interpretation. Id. at *20. Notably, the
States were permitted to accept ARPA funds immediately—before
Treasury could even conceivably have issued any regulations. Id. That is
strong evidence that Congress intended no such delegation. Ultimately,
the Tax Mandate must “sink or swim on its own.” Id.
63
The government below argued that Bennett v. Kentucky Dep’t of
Educ., 470 U.S. 656 (1985) permits the Treasury to clarify an ambiguous
condition. 2-ER-85. In Bennett, the Court considered an effort by the
Federal Government to recover Title I funds that were allegedly misused
by a State, in part because the conditions for obtaining those funds was
too ambiguous. Bennett, 470 U.S. at 658. There, the conditions in
question were generally set out in regulations. But as the Supreme Court
explained, “[t]he requisite clarity in this case is provided by” the statute.
See id. at 666. The Court went on to say that every improper expenditure
need not be “specifically identified and proscribed in advance” for a
condition to be constitutional. Id. But that reasoning was conditioned
upon the statute itself first providing the “requisite clarity.”
Arizona agrees that regulations can be used to clarify and set out
ancillary details if the text of a Spending Clause condition clears the
initial constitutional “requisite clarity” threshold. But if it fails to do so,
no regulation can rescue it.
5. Treasury’s Rule Does Not Offer Sufficient Clarity
To Give The States Clear Notice
Even if a regulation theoretically could “cure” a lack of sufficient
clarity in the statutory text, however, the IFR here does not do so. Indeed,
64
the ultimate takeaway from the IFR is that, even in a rulemaking, the
Federal Government is still unable to articulate coherent guidelines on
what violates the Tax Mandate. Although the IFR does fill some of the
gaps in the statute—such as the relevant baseline and the meaning of
tax reduction—in critical areas the IFR either ducks critical issues or
actually makes the ambiguity worse. Indeed, rather than clarifying the
Tax Mandate’s meaning, the IFR often simply parrots the statute or
actually exacerbates the ambiguity by adding yet-more vague
requirements for the States to navigate. That compounds—rather than
cures—the Tax Mandate’s ambiguity.
For example, the Interim Rule says that a loss in tax revenue
counterbalanced by a “spending cut” is not “indirectly offset” by Revenue
Plan funds. 86 Fed. Reg. at 26,808. But this includes “only spending
reductions in areas where the recipient government has not spent Fiscal
Recovery Funds.” Id. at 26,810 (emphasis added). And the Interim Rule
does not define “areas” at all, creating yet another ambiguity.
But given the broad scope of the permissible uses to which Rescue
Plan funds can be put, many spending cuts could be linked to an “area”
supported with Rescue Plan funds by the Treasury. And since money is
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“fungible,” id. at 26,807, a State can never really know—and it will be up
to the unilateral discretion of the Treasury to determine—whether a
spending cut is in the same “area” as ARPA spending. And so the IFR
simply lands the State back where it was before the rulemaking—in
ignorance about when an “indirect offset” takes place. Even if a
regulation could remedy unconstitutional ambiguity, this IFR does not.
In some ways, the IFR actually starkly illustrates the ambiguity
inherent in the Tax Mandate by its ham-handed efforts to fill its gaps.
For example, the IFR states that “income tax changes—even those made
during the covered period—that simply conform with recent changes in
Federal law (including those to conform to recent changes in Federal
taxation of unemployment insurance benefits and taxation of loan
forgiveness under the Paycheck Protection Program) are permissible
under the offset provision.” 86 Fed. Reg. at 26,808.
Nowhere is this exception justified with reference to the statutory
text—because it simply cannot be. The plain text of the Tax Mandate
states that it applies to any “change in law, regulation, or administrative
interpretation during the covered period.” There is no textual
justification for exempting a change which conforms state law to federal
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taxation. Indeed, conforming to the federal exemption of this income from
taxation fits quite easily within “a reduction in the net tax revenue.” 42
U.S.C. §802(c)(2)(A).
Treasury’s decision to pluck this exemption purely out of the ether
demonstrates the ambiguity and incompleteness of the Tax Mandate.
Furthermore, if Treasury can craft this exemption without reference to
the ARPA’s text, how can the IFR be treated as the final settlement of all
these unsettled questions? A challenger with standing could unravel this
and other parts of the IFR that are without a firm footing in the statutory
language. This further illustrates how a regulation cannot resolve
constitutional defects.
B. The Tax Mandate Is Not Related To ARPA’s Purposes
While the relatedness requirement is generally a “low-threshold”
test, see Mayweathers, 314 F.3d at 1067, there must still be “some
relationship” between the condition imposed and the purpose of the
federal spending. See New York, 505 U.S. at 167. The Tax Mandate fails
to surmount this requirement for two reasons.
First, the Tax Mandate is far too sweeping. The ostensible purpose
of the Act is to assist states in responding to the economic impact of the
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COVID-19 pandemic. But in prohibiting states from making any tax
reduction, no matter the justification or causal relationship to the aid
funds, possibly years after the impact of the pandemic has dissipated,
even this low threshold test is stretched to the breaking point. See City
of Philadelphia v. Sessions, 280 F. Supp. 3d 579, 640-43 (E.D. Pa. 2017)
(concluding that the interest of “enhancing local criminal justice” which
motivated the Byrne JAG grant statute was not sufficiently related to
national interest in immigration enforcement).
Second, the Tax Mandate is not only lacking a rational relationship
to the purpose of the State aid—it affirmatively violates the Act’s express
(and actual) purposes. Notably, the Act expends a truly enormous
amount of money as stimulus through tax cuts and direct payments to
taxpayers: approximately $593 billion in all. See 3-ER-250-55, 366-70.
Congress thus made its own determination through the Act that
substantial tax relief (as well as spending) was appropriate to stimulate
the U.S. economy. Barring the States from engaging in any form of
stimulus through tax relief is shown as irrational by Congress’s own
actions. In essence, Congress’s message to the States is “Tax cuts for me,
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but not for thee.” But this flagrant hypocrisy does not satisfy the
relatedness requirement.
Similarly, Congress’s decision to apply the Tax Mandate only to the
States and not local governments, underscores the lack of any rational
relationship between ARPA’s purposes and the Tax Mandate. Either
macroeconomic stimulus through tax relief serves ARPA’s purposes or it
does not. But Congress’s decision to hamstring States—but not local
governments or itself—in enacting such stimulus has no legitimate
connection to ARPA’s purposes.
C. ARPA Unconstitutionally Coerces States Into
Accepting The Tax Mandate
ARPA provides Arizona with $4.9 billion in a time of unparalleled
economic contraction. This is nearly 10% of Arizona’s projected FY2022
budget. See 2-ER-102-72, 3-ER-250-55. In the current economic situation,
Arizona cannot turn down this “financial inducement.” NFIB, 567 U.S.
at 580 (Roberts, C.J.). In NFIB, the Court addressed Medicaid spending
which “account[ed] for over 20 percent of the average State's total budget,
with federal funds covering 50 to 83 percent of those costs.” Id. at 581.
The amount of funds at stake in this case is similar to that at issue
in NFIB, leaving the states with “no real option” but to take the funds
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and the strings attached to them. Id. at 582. As the Joint Dissent in NFIB
explained (largely in agreement with the Chief Justice): “Even if a State
believes that the federal program is ineffective and inefficient,
withdrawal would likely force the State to impose a huge tax increase on
its residents, and this new state tax would come on top of the federal
taxes already paid by residents to support subsidies to participating
States.” Id. at 680 (joint dissent). In the situation presented by the
COVID-19 economic crisis, it is coercion to impose policy conditions to
such vast funding.
The threat of the Tax Mandate to the constitutional balance of
power is evident in its irreconcilability with the justifications of
anticommandeering doctrine, which serves two main purposes. First,
anticommandeering enshrines the “structural protections of liberty”
inherent in the federal system. Printz v. United States, 521 U.S. 898, 921
(1997). By dividing power among multiple sovereigns, the Constitution
reduces the risk of tyranny. See New York, 505 U.S. at 187. Second, the
anticommandeering doctrine protects lines of political accountability. By
preventing the federal government from ordering the state governments
into adopting federal policy, anticommandeering ensures that
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accountability resides directly in the source of a particular policy, rather
than allowing federal policy to be concealed through a state government
intermediary. Id. at 169.
The Tax Mandate, however, runs contrary to these purposes. First,
it undermines structural protections of liberty. The state’s independence
in broad tax policy is an important value. Congress is, of course, perfectly
within its rights to disfavor tax cuts as a matter of federal policy.
However, if Congress could use coercive grants to buy the state’s
compliance with federal tax policy, the nation would be limited to a single
sovereign governing overarching tax policy in both the federal and state
governments. In addition to threatening liberty, this would undermine
the states’ role as “laboratories of democracy.” Cf. New State Ice Co. v.
Liebmann, 285 U.S. 262, 311 (1932) (Brandeis, J., dissenting).
Second, the Tax Mandate undermines political accountability. With
the Tax Mandate, the federal government takes the power to lower taxes
away from state governments—but not the responsibility for their tax
rates. It will be state and local legislators who are stuck with the tax
rates the federal government has imposed on them through 2024. Those
officials will “bear the brunt of public disapproval” while Congress
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“remain[s] insulated from the electoral ramifications of their decision.”
New York, 505 U.S. at 169. Congress cannot blur responsibility in this
fashion, even by using the expedience of the Spending Clause.
The Tax Mandate also undermines democratic accountability at the
state level as well. Take, for example, candidates for state legislatures
that categorically oppose all tax cuts. That unpopular position might
easily cost them votes. But the Tax Mandate lets them duck
accountability and claim that their opposition to tax cuts is based on their
illegality under federal law. Similarly, candidates that favor tax cuts may
not be able to run effectively on that platform as voters may correctly
recognize that electing such candidates is unlikely to delivery any actual
state tax relief, since the Tax Mandate may simply invalidate them or
make them too costly to enact.
The district court rejected the State’s standing to bring this claim
because, as the court claimed, Arizona had failed to allege facts showing
that it had undergone financial strain. This misunderstands the legal
inquiry presented by the coercion standard. In NFIB, neither of the
opinions applying the coercion analysis asked whether the plaintiff states
had, themselves, experienced special financial strain. Rather, as
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explained previously, the inquiry was focused on the offer prevented the
States from engaging in knowing and voluntary choice. The federal
government is permitted, under the Spending Clause, to engage in
“relatively mild encouragement” to induce states to adopt specific policies
Congress would not be able to force them to adopt. NFIB, 567 U.S. at 581
(op. of Roberts, C.J.) (quoting Dole, 483 U.S. at 211). But Congress may
not put a “gun to the head” to force this adoption. Here, the gun is evident.
Irrespective of Arizona’s particular financial strain, no State can afford
to turn down this money. Moreover, NFIB is utterly bereft of any
suggestion that the Affordable Care Act could have been
unconstitutionally coercive for some states and not others. Instead,
federal courts have always looked to whether the choice presented was
coercive to the States generally as a whole.
Given its scope, its purpose, and the vast amount of funding being
used to buy these key elements of state sovereignty, the Tax Mandate is
unconstitutionally coercive.
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CONCLUSION
For the foregoing reasons, this Court should reverse the district
court’s dismissal on standing grounds and direct that court to enter
judgment in favor of the State on remand.
Respectfully submitted,
MARK BRNOVICH
ATTORNEY GENERAL
s/ Drew C. Ensign
Joseph A. Kanefield Drew C. Ensign
Chief Deputy & Chief of Staff Deputy Solicitor General
Wilson C. Freeman
Brunn (“Beau”) W. Roysden III Senior Litigation Counsel
Solicitor General Robert J. Makar
Assistant Attorney General
2005 N. Central Avenue
Phoenix, Arizona 85004
Telephone: (802) 542-5025
Drew.Ensign@azag.gov
Counsel for the State of Arizona
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CERTIFICATE OF COMPLIANCE
9th Cir. Case Number(s) 21-16227
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