Order on Motion to Dismiss for Failure to State a Claim, State of Texas et al. v. Yellen, No. 2:21-cv-00079 (N.D. Tex.), Doc. 50 (March 4, 2022)

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Order in The State of Texas et al. v. Janet Yellen et al., No. 2:21-CV-079-Z, Doc. 50, Northern District of Texas, Amarillo Division, filed March 4, 2022. The Court finds Defendants' Motion to Dismiss (ECF No. 19) should be and is denied. The Order states that the American Rescue Plan Act of 2021 ("ARPA") establishes a "Coronavirus State Fiscal Recovery Fund" that allocates $220 billion, and that Section 802(c)(2)(A), which Plaintiffs refer to as the "Tax Mandate", prohibits States from using the funds to directly or indirectly offset a reduction in net tax revenue. Plaintiffs, the States of Texas, Mississippi, and Louisiana, allege the Tax Mandate is unconstitutional. The Court finds Plaintiffs' pleadings assert a facially plausible Equal Sovereignty claim under the Tenth Amendment.

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Case 2:21-cv-00079-Z Document 50 Filed 03/04/22 Pagei1of22 PagelD 1051

U.S. DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
IN THE UNITED STATES DISTRICT COURT ILE
FOR THE NORTHERN DISTRICT OF TEXAS MAR _ _—
AMARILLO DIVISION HAR 4 2022 |
CLERK, U.S. DISTRICT COURT
THE STATE OF TEXAS ef al., § By. _=
§ ——— Sy
Plaintiffs, §
§
V. § 2:21-CV-079-Z
§
JANET YELLEN et al., §
§
Defendants. §
ORDER

Before the Court is Defendants’ Motion to Dismiss Pursuant to Federal Rules of Civil Procedure
12(b)(1) and 12(b)(6) (“Motion”) (ECF No. 19). Having reviewed the Motion, related pleadings, and
applicable law, the Court finds Defendants’ Motion should be and is hereby DENIED.

BACKGROUND

On March 11, 2021, Congress enacted the American Rescue Plan Act of 2021 (“ARPA”),
Pub. L. No. 117-2, § 9901(a), 135 Stat. 4 (2021), codified as 42 U.S.C. §§ 801 et seg. ARPA
establishes a “Coronavirus State Fiscal Recovery Fund,” which allocates $220 billion to mitigate
the fiscal effects of the COVID-19 pandemic on States, territories, and tribal governments through
2024. ECF No. 19 at 11. ARPA allocates nearly $200 billion to the States and District of Columbia.
42 U.S.C. § 802(b)(2)(A). ARPA allows States to use allocated funds in a wide range of areas to

respond to the public health emergency caused by COVID-19.
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For example, through 2024, a State may use ARPA funds to “cover costs incurred”:

(A) _ to respond to the public health emergency with respect to the Coronavirus
Disease 2019 (COVID-19) or its negative economic impacts, including
assistance to households, small businesses, and nonprofits, or aid to
impacted industries such as tourism, travel, and hospitality;

(B) to respond to workers performing essential work during the COVID-19
public health emergency by providing premium pay to eligible workers of
the State, territory, or Tribal government that are performing such essential
work, or by providing grants to eligible employers that have eligible
workers who perform essential work;

(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 relative to revenues collected in the most recent
full fiscal year of the State, territory, or Tribal government prior to the
emergency; or
(D) to make necessary investments in water, sewer, or broadband infrastructure.
Id. § 802(c)(1)(A)-(D).
Despite the considerable discretion ARPA affords States in using allocated funds, the
statute imposes a limitation. Section 802(c)(2)(A) — referred to by Plaintiffs as the “Tax Mandate”

and by Defendants as the “offset provision” — prohibits States from:

us[ing] the funds provided under [§ 802] . . . 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.

Id. § 802(c)(2)(A). Defendants argue this funding condition only applies to reductions in nef tax
revenue. ECF No. 19 at 13. Defendants aver, if a State uses ARPA funds to reduce its net tax
revenue, the State must repay the amount used to offset the lesser of “the reduction to net tax

revenue” or “the amount of funds received.” 42 U.S.C. § 802(e); ECF No. 19 at 13.
Case 2:21-cv-00079-Z Document 50 Filed 03/04/22 Page 3of22 PagelD 1053

ARPA authorizes the Secretary of the Treasury “to issue such regulations as may be
necessary or appropriate to carry out” the applicable statutory provisions. 42 U.S.C. § 802(f). On
May 10, 2021, the Secretary of the Treasury posted an Interim Final Rule (“IFR”) setting forth a
framework to determine when a State has used ARPA funds to “directly or indirectly offset” net
tax revenue. ECF No. 19 at 13. The IFR was published in the Federal Register the following week.
See Coronavirus State and Local Fiscal Recovery Funds, 86 Fed. Reg. 26,786 (May 17, 2021).

On May 3, 2021, the States of Texas, Mississippi, and Louisiana (“Plaintiffs”) filed a
Complaint for Declaratory and Injunctive Relief (ECF No. 1) against Janet Yellen, in her official
capacity as Secretary of the Treasury, Richard K. Delmar, in his official capacity as acting
inspector general of the Department of Treasury, the Department of the Treasury, and the United
States of America (“Defendants”). Plaintiffs allege the “Tax Mandate” is unconstitutional. ECF
No. | at 2.

Plaintiffs present several claims in support of their request for declaratory and injunctive
relief. First, Plaintiffs argue the Tax Mandate violates the Spending Clause of the Constitution,
U.S. Const. art. I, § 8, cl. 1, because it “condition[s] billions of dollars of pandemic-recovery
funding ...on maintaining Congress’s favored tax policies.” ECF No. 1 at 11-12. Second,
Plaintiffs allege the provision “is ambiguous as to its scope and not reasonably related to
encouraging the States’ economic recovery following the COVID-19 pandemic.” Jd. at 12. They
also maintain the provision “ is far too overinclusive and underinclusive to bear any reasonable
relationship to any legitimate purpose underlying the Act’s funding provisions.” /d. Plaintiffs
therefore conclude the “Tax Mandate” again violates the Spending Clause, U.S. CoNsT. art. I, § 8,
cl. 1. ECF No. 1 12-13. Third, Plaintiffs aver the provision “commandeer[s] the States’ sovereign

authority over their own tax policy ... in violation of the Tenth Amendment.” ECF No. 1 at 14;
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see also U.S. CONST. amend. X. Fourth, Plaintiffs contend the provision “violates [the Tenth
Amendment and] the principle of equal sovereignty by targeting and invading the sovereignty only
of those States that, as a matter of history and present fact, are likely to decrease taxes and other
government revenues.” /d. at 15. Plaintiffs have signed certifications and received ARPA funds —
which they contend was the “inevitable result of Congress’s coercive offer.” ECF No. 28 at 15.
Plaintiffs argue they continue to be harmed by Section 802(c)(2)(A), as it is an “unprecedented
attempt to intrude upon their sovereign authority to set state tax policy.” Jd.

On July 12, 2021, Defendants filed a Motion to Dismiss Plaintiffs’ Complaint under
Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). See generally ECF No. 27.

LEGAL STANDARD

A. Dismissal Under Rule 12(b)(1)

Federal courts are courts of limited jurisdiction: they possess only power authorized by the
U.S. Constitution and federal statutes. Xitronix Corp. vy. KLA-Tencor Corp., 916 F.3d 429, 435
(Sth Cir. 2019). “The requirement that jurisdiction be established as a threshold matter spring[s]
from the nature and limits of the judicial power of the United States and is inflexible and without
exception.” Jd. (quoting Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 94-95 (1998)).

When a motion to dismiss for lack of subject-matter jurisdiction “is filed in conjunction
with other Rule 12 motions, the court should consider the Rule 12(b)(1) jurisdictional attack before
addressing any attack on the merits.” Ramming vy. United States, 281 F.3d 158, 161 (Sth Cir. 2001).
Furthermore, where a complaint could be dismissed under Rule 12(b)(1) or 12(b)(6), “the court
should dismiss only on the jurisdictional ground . . . without reaching the question of failure to

state a claim.” Hitt v. City of Pasadena, 561 F.2d 606, 608 (Sth Cir. 1977). Doing so avoids the
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issuance of an advisory opinion, Steel Co., 523 U.S. at 101, and prevents courts without jurisdiction
“from prematurely dismissing a case with prejudice,” Ramming, 281 F.3d at 161.

A Rule 12(b)(1) motion can mount either a facial or factual challenge. See, e.g., Hunter v.
Branch Banking & Tr. Co., No. 3:12-CV-2437-D, 2013 WL 607151, at *2 (N.D. Tex. Feb. 19,
2013). When a party makes a Rule 12(b)(1) motion without evidence, the challenge to subject-
matter jurisdiction is facial. Jd. The court assesses a facial challenge like a Rule 12(b)(6) motion
by “look[ing] only at the sufficiency of the allegations in the pleading and assumes them to be true.
If the allegations are sufficient to allege jurisdiction, the court must deny the motion.” Jd.

B. Dismissal Under Rule 12(b)(6)

“To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must plead ‘enough facts to
state a claim to relief that is plausible on its face.’” In re Katrina Canal Breaches Litig., 495 F.3d
191, 205 (Sth Cir. 2007) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “While
a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual
allegations, a plaintiffs obligation to provide the grounds of his entitlement to relief requires more
than labels and conclusions, and a formulaic recitation of the elements of the cause of action will
not do.” Twombly, 550 U.S. at 555 (internal marks and citation omitted).

“Factual allegations must be enough to raise a right to relief above the speculative level,
on the assumption that all the allegations in the complaint are true (even if doubtful in fact).” Jn re
Katrina, 495 F.3d at 205 (quoting Tiwombly, 550 U.S. at 555) (internal marks and citation
omitted)). “The court accepts ‘all well-pleaded facts as true, viewing them in the light most
favorable to the plaintiff.’” Jd. (quoting Martin K. Eby Constr. Co., Inc. vy. Dall. Area Rapid

Transit, 369 F.3d 464, 467 (Sth Cir. 2004).
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The Court must “begin by identifying the pleadings that, because they are no more than
conclusions, are not entitled to the assumption of truth.” Ashcroft v. Iqbal, 556 U.S. 662, 679
(2009). After assuming the veracity of any well-pleaded allegations, the Court should then
“determine whether they plausibly give rise to an entitlement to relief.” Jd. “A claim has facial
plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.” Jd. at 678.

This standard of “plausibility” is not necessarily a “probability requirement,” but it requires
“more than a sheer possibility that a defendant has acted unlawfully.” Jd. “Where a complaint
pleads facts that are ‘merely consistent with’ a defendant’s liability, it stops short of the line
between possibility and plausibility of ‘entitlement to relief.’” Jd. “Determining whether a
complaint states a plausible claim for relief [is] . . . a context-specific: task that requires the
reviewing court to draw on its judicial experience and common sense.” Jd. at 679.

ANALYSIS

A. Rule 12(b)(1): Standing

The Court begins by determining whether this dispute can be “appropriately resolved
through the judicial process.” Lujan v. Defs. of Wildlife, 504 U.S. 555, 560 (1992) (quoting
Whitmore vy. Arkansas, 494 U.S. 149, 155 (1990)). The judicial power of federal courts is limited
to certain “cases” and “controversies.” U.S. Const. art. III, § 2. Standing is “an essential and
unchanging part of the case-or-controversy requirement of Article III.” Lujan, 504 U.S. at 560
(quoting Allen v. Wright, 468 U.S. 737, 751 (1984)). To have standing, the party invoking federal
jurisdiction must establish he suffered: (1) an “injury in fact” that is “concrete and particularized”

and “actual or imminent”; (2) an injury that is “fairly ... trace[able] to the challenged action of
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the defendant”; and (3) an injury that is “likely” rather than “speculative[ly]” to be “redressed by
a favorable decision.” /d. at 560-61.

1. Injury in Fact

The Court first determines whether Plaintiffs suffered an injury in fact. To establish injury
in fact, Plaintiffs must show they endured “an invasion of a legally protected interest” that is
“concrete and particularized” and “actual or imminent, not conjectural or hypothetical.” Spokeo,
Inc. v. Robins, 578 U.S. 330, 339 (2016). For an injury to be “particularized,” it “must affect the
plaintiff in a personal and individual way.” Jd. A “concrete” injury must be “de facto” — that is,
it must “actually exist” and be “real” rather than “abstract.” /d. at 340. Although tangible injuries
may be easier to recognize, “concrete,” is not necessarily synonymous with “tangible.” Jd.
Intangible injuries can be “concrete.” Jd.

The parties disagree as to when the alleged injuries occurred. The Court considers the
nature of the right asserted by Plaintiffs to determine whether an injury in fact exists. See Ohio y.
Yellen, 547 F. Supp. 713, 723-24 (S.D. Ohio 2021). The constitutional right at issue here is the
States’ power to tax. Earliest judicial decisions recognize “the power to tax involves the power to
destroy.” McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 431 (1819); ECF No. 37 at 17. The
Supreme Court recognizes the power to tax is “central to state sovereignty,” Dep ’t of Revenue v.
ACF Indus., Inc., 510 U.S. 332, 345 (1994), as the “power of self-government... cannot exist
distinct from the power of taxation,” Providence Bank y. Billings, 29 U.S. (4 Pet.) 514, 546, 548
(1830). ECF No. 37 at 17. “The allocation of powers in our federal system preserves the integrity,
dignity, and residual sovereignty of the States.” Bond v. United States, 564 U.S. 211, 221 (2011).
The States’ “power of taxation is indispensable to [the States’] existence.” Gibbons v. Ogden, 22

U.S. (9 Wheat.) 1, 199 (1824).
Case 2:21-cv-00079-Z Document 50 Filed 03/04/22 Page 8of22 PagelD 1058

Defendants argue Plaintiffs lack an injury in fact because their asserted injuries are
“hypothetical and speculative.” ECF No. 19 at 16. Defendants aver Plaintiffs’ fail to allege they
will use Section 802(c)(2)(A) to enact tax cuts reducing net tax revenue. /d. Defendants also refer
to a lack of imminent recoupment of ARPA funds by 42 U.S.C. § 802(e) enforcement as evidence
of Plaintiffs’ failure to demonstrate an injury in fact. Jd. at 17. Defendants further suggest
Plaintiffs’ reliance on their sovereign taxation authority is a “naked contention” and “abstract
question of sovereignty” insufficient to establish an Article III case or controversy. Jd. at 17-18
(citing Massachusetts y. Mellon, 262 U.S. 447, 483, 485 (1923)).

In Ohio v. Yellen, the district court found Ohio, which challenged Section 802(c)(2)(A),
had an injury in fact. The Court reasoned the limitation at issue was on Congress and not Ohio as
federal courts require Congress to state conditions on federal funds unambiguously. Ohio v. Yellen,
539 F. Supp. 3d at 802, 809, 812 (S.D. Ohio 2021). Because “the constitutional violation occurs
when the federal government offers money on ambiguous terms [,] [i]t is Congress passing the
Act, not the State accepting the money” that creates the alleged injuries at issue. /d. The district
court thus found the harm at issue as an “affront-to-sovereignty theory” because States as “co-
sovereign[s] in our constitutional structure” have the right to “bargain” in accordance with
constitutionally imposed strictures of “good faith” — one being the requirement of unambiguous
terms in a “proposed Spending Clause ‘deal.’” /d. at 813.

The Court agrees with the Ohio reasoning and finds Section 802(c)(2)(A) presents a
mandate of such an ambiguous nature that may deprive Plaintiffs from receiving the information
which it is entitled to under the Constitution. Such information would allow Plaintiffs to exercise
their sovereign prerogative to determine whether the deal presented is in the best interests of their

citizens.
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But even if the Court were to find the Section 802(c)(2)(A) condition unambiguous,
Plaintiffs still have an injury in fact. The unconstitutional conditions doctrine “vindicates the
Constitution’s enumerated rights by preventing the government from coercing people into giving
them up.” Koontz v. St. Johns River Water Mgmt. Dist., 570 U.S. 595, 604 (2013). The Supreme
Court’s decisions in unconstitutional conditions cases “have long refused to attach significance to
the distinction between conditions precedent and conditions subsequent.” /d. at 596. Accordingly,
an “unconstitutional condition” is a “constitutionally cognizable injury.” Jd. at 607.

Because the alleged constitutional violation here occurred when Congress passed ARPA,
Plaintiffs’ face an injury by being put in the position of having to choose between being injured
by the loss of a substantial amount of federal funds or the invasion of their constitutional authority
to tax. Plaintiffs face possible harm whichever choice they choose; “putting them to that choice is
an injury itself.” ECF No. 28 at 17. The Court thus finds an injury in fact exists.

2. Traceability

The Court next considers whether Plaintiffs’ injuries are traceable to the challenged statute.
To establish traceability, Plaintiffs must show a “fairly traceable” link between their alleged
injuries and ARPA. Lujan, 504 U.S. at 560. This link in causation “requires no more than de facto
causality,” and Plaintiffs need not demonstrate Defendants’ actions are “the very last step in the
chain of causation.” Dep ’t of Com. v. New York, 139 S. Ct. 2551, 2556 (2019); see also Bennett v.
Spear, 520 U.S. 154, 169-70 (1997) (same).

Defendants focus on the injury-in-fact element of standing, thereby only indirectly
addressing traceability by arguing Plaintiffs do not demonstrate how ARPA restricts any conduct

they intend to undertake. ECF No. 19 at 17. Plaintiffs, however, aver their injuries are fairly
Case 2:21-cv-00079-Z Document 50 Filed 03/04/22 Page 10of 22 PagelD 1060

traceable to the “Tax Mandate” and redressable by a “court order declaring it unconstitutional and
enjoining its enforcement.” ECF No. 28 at 24.

Plaintiffs point to the recent decisions in Ohio y. Yellen (“Ohio IT’) and West Virginia v.
U.S. Dep’t of Treasury. See 547 F. Supp. 3d 713 (S.D. Ohio 2021); No. 7:21-CV-465, 2021 WL
2952863 (N.D. Ala. July 14, 2021). In Ohio I, the district court determined Ohio’s “original and
ongoing injuries ar[o]se directly from, and thus [were] traceable to, the prospect of future
enforcement of the allegedly ambiguous—and therefore allegedly unconstitutional—Tax
Mandate.” 547 F. Supp. 3d at 727. And in West Virginia, the court simply stated, “there is no
question that the injuries in fact as discussed [ ] are fairly traceable to the Federal Tax Mandate.”
2021 WL 2952863, at *7.

The Court agrees with the Ohio IJ and West Virginia courts. The alleged injuries cited by
Plaintiffs — specifically an unconstitutional condition forcing States to decide whether to choose
“funding” or “state sovereignty” — began as soon as ARPA was enacted. ECF No. 28 at 16. But
for the devastating economic conditions from the COVID-19 pandemic, the size of funding
available from ARPA, the ambiguous Section 802(c)(2)(A) restriction on state taxing policies, and
the Section 802(e) recoupment penalty, Plaintiffs would not be put in the position to either forgo
their constitutional taxing authority or deny the alleged “unconstitutionally ambiguous deal.” Jd.
at 16-17. Therefore, Plaintiffs’ injuries are directly traceable to ARPA’s enactment.

3. Redressability

Standing requires redressability, and redressability requires Plaintiffs demonstrate a
‘substantial likelihood’ that the requested relief will remedy the alleged injury.” Vt. Agency of
Nat. Res. v. U.S. ex rel. Stevens, 529 U.S. 765, 771 (2000) (quoting Simon vy. E. Ky. Welfare Rights

Org., 426 U.S. 26, 41 (1976)). Plaintiffs seek a declaration from this Court that Section

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802(c)(2)(A) is unconstitutional and an injunction enjoining federal officials from enforcing
Section 802(c)(2)(A) against them. ECF No. 1 at 4. A declaration of unconstitutionality and an
injunction will halt the enforcement of Section 802(c)(2)(A) against Plaintiffs and thereby
eliminate the alleged irreparable harm on state sovereignty present since the enactment of ARPA.
See Ohio IT, 547 F. Supp. at 727 (“Enjoining the Secretary from enforcing the Tax Mandate against
Ohio, or declaring that the provision is unconstitutional as applied to the State, would remedy the
uncertainty surrounding Ohio’s legislative efforts relating to taxation, which is the harm that Ohio
is currently suffering.”); West Virginia, 2021 WL 2952863, at *7 (“[T]here is no question that the
injuries in fact...can be redressed by a court order invalidating the mandate.”). Therefore,
Plaintiffs have established redressability.

4. Pre-Enforcement Standing

Whereas the Court finds an injury in fact has existed since ARPA’s enactment, the Court
now considers Defendants’ emphasis on pre-enforcement standing. When a party seeks to enjoin
the future enforcement of a statute, standing exists when “the injury-in-fact requirement” demands
the plaintiff assert “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
[enforcement] thereunder.” Susan B. Anthony List v. Driehaus, 573 U.S. 149, 159 (2014) (quoting
Babbitt v. Farm Workers, 442 U.S. 298, 298 (1979)).

Defendants argue Plaintiffs lack pre-enforcement standing because their asserted injuries
are “hypothetical and speculative.” ECF No. 19 at 16. However, Plaintiffs state they will continue
to exercise their right — under constitutionally-based principles of federalism — to enact tax laws
during the covered period of the Section 802(c)(2)(A) enforcement. See ECF No. 28 at 23 (stating

“Plaintiffs have ... already considered and enacted changes to their tax laws during the covered

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period of the Tax Mandate.”). Further, the IFR — defining when a State has used ARPA funds to
“directly or indirectly offset” net tax revenue — indicates the Secretary of the Treasury’s intention
“to seek recoupment when she deems a State to have violated her understanding of the Tax
Mandate.” Jd. (citing 31 C.F.R. § 35.10). The ambiguity of Section 802(c)(2)(A)’s text and the
Secretary of the Treasury’s discretion to determine when a State’s use of ARPA funds warrants
recoupment will both arguably interfere with and proscribe the tax policies Plaintiffs intend to
enact.

A violation of Section 802(c)(2)(A) is not a prerequisite to standing. The Supreme Court
does not require plaintiffs challenging the constitutionality of a law to “confess that [they] will in
fact violate the law.” Driehaus, 573 U.S. at 163. Pre-enforcement standing in Spending Clause
cases is common. See NFIB y. Sebelius, 567 U.S. 519, 542 (2012); New York v. United States, 505
U.S. 144, 171-72 (1992); South Dakota vy. Dole, 483 U.S. 203, 205-06 (1987). If a plaintiff is
subject to the threat of enforcement, “an actual... enforcement action is not a prerequisite to
challenge the law.” Driehaus, 573 U.S. at 158. An argument that Plaintiffs have not violated the
Tax Mandate lacks force, as it does not mean Plaintiffs cannot and will not violate the Tax Mandate
in the future. See, e.g., ECF No. 28 at 23 (“Plaintiffs have, in fact, already considered and enacted
changes to their tax laws during the covered period of the Tax Mandate.”’). The Court thus finds
Plaintiffs have standing to raise each of their claims even if their alleged injuries are considered at
a pre-enforcement stage.

B. Rule 12(b)(6): Failure to State a Claim

Defendants aver Plaintiffs challenge to the Section 802(c)(2)(A) condition fails as a facial
matter because “Plaintiffs do not claim that any particular state enactment that will lead to

recoupment.” ECF No. 19 at 20-21. Defendants argue Plaintiffs must demonstrate Section
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802(c)(2)(A) is “unconstitutional in all its applications” and “there is no set of circumstances under
which the law would be valid.” ECF No. 19 at 21 (quoting Bucklew y. Precythe, 139 S. Ct. 1112,
1127 (2019)). Defendants further assert Plaintiffs fail to demonstrate a “plain showing” Congress
exceeded its constitutional bounds in enacting Section 802(c)(2)(A). /d.

The question before the Court is whether Plaintiffs plead sufficient facts — when accepted
as true and viewed in the light most favorable to Plaintiffs — to state a facially plausible claim for
relief. See Iqbal, 556 U.S. at 678; White v. U.S. Corr., L.L.C., 996 F.3d 302, 306-07 (Sth Cir.
2021). The Court considers each of Plaintiffs’ claims with the understanding that “[a] claim has
facial plausibility when the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at
678. “A complaint ‘does not need detailed factual allegations,’ but the facts alleged ‘must be
enough to raise a right to relief above the speculative level.’” Cicalese v. Univ. of Tex. Med.
Branch, 924 F.3d 762, 765-66 (5th Cir. 2019) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544,
555 (2007)).

1. The Spending Clause

Plaintiffs assert Section 802(c)(2)(A) exceeds Congress’s Spending Clause authority by its
coercive effect and ambiguous conditions unrelated to ARPA’s purpose of mitigating economic
harms resulting from the COVID-19 pandemic. ECF No. 1 at 11-13. Defendants disagree. They
argue Plaintiffs fail to state a claim on the merits because they “have not come close” to showing
Congress exceeded its Spending Clause authority. ECF No. 19 at 20. Defendants claim Congress
validly exercised its spending power through its “broad leeway in establishing permissible uses of
federal funds” and “overriding interest in ensuring that the new [ARPA] funds will be used for the

broad categories of state expenditures it identified.” Jd. at 23.

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The Spending Clause confers Congress the authority to “lay and collect Taxes, Duties,
Imposts, and Excises, 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. Congress may exercise its spending power to
incentive States to follow federal policies. See Coll. Savings Bank v. Fla. Prepaid Postsecondary
Ed. Expense Bd., 527 U.S. 666, 686 (1999) (Congress can condition spending upon the States
“taking certain actions that Congress could not require them to take.”). Congress may not,
however, use this authority to cross the line between persuasion and compulsion. See NFIB, 567
U.S. at 577-78 (“[W]hen ‘pressure turns into compulsion,’ . . . the legislation runs contrary to our
system of federalism.”). In short, Congress must use its spending power in pursuit of “the general
Welfare” and may only place conditions on State receipt of federal funds that are unambiguous,
do not violate other constitutional provisions, and are reasonably related to the purpose of the
federal grant. Dole, 483 U.S. at 207-08; see also New York, 505 U.S. at 171-72.

a. Coercion

Congress may attach “appropriate conditions to federal taxing and spending programs to
preserve its control over the use of federal funds.” NFIB, 567 U.S. at 579. Congress, however,
cannot order States to forgo a sovereign power through an explicit command or a conditional offer
a State cannot refuse. Jd. While the choice before Plaintiffs may be one in theory, the Court
considers whether it is plausible Plaintiffs do not have a choice in fact. See id. at 581; Dole, 483
USS. at 211-12.

Plaintiffs allege ARPA’s billion-dollar proposal of pandemic recovery funds — totaling 22
percent of all States’ annual general funds budgets in exchange for compliance with the “Tax
Mandate” — is an offer akin to a “gun to the head.” ECF No. 28 at 29-30; see also NATIONAL

ASSOCIATION OF STATE BUDGET OFFICERS, THE FISCAL SURVEY OF STATES 13 (2020). The Court

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recognizes Plaintiffs have not been notified of any recoupment of ARPA funds. The alleged
coercion here — however — is judged at the time the States must choose whether to surrender
their sovereignty or forgo billions of dollars in federal funds. NFB, 567 U.S. at 582 & n.12. In
NFIB y. Sebelius, the Supreme Court held Congress’s financial inducement crossed the line
between persuasion and coercion by conditioning Medicaid funding on a State’s agreement to
expand Medicaid coverage — resulting in a “threatened loss of over 10 percent of a State’s overall
budget.” Jd. at 581-82. Such a loss was an “economic dragooning that [left] the States with no real
option but to acquiesce.” Jd. The Supreme Court contrasted the facts in NFYB with those in its
South Dakota vy. Dole decision. Jd. at 580-81. In Dole, the NFIB Court explained, Congress only
offered “relatively mild encouragement to the States” when South Dakota risked losing five
percent of its highway funds — amounting to “less than half of one percent of South Dakota’s
budget at the time” — if the State chose to adhere to its own policy regulating minimum drinking
age. Id.

Here, ARPA funds amount to around 22 percent of all States’ annual general fund budgets
and 9 percent of all States’ total fund budgets. ECF No. 39 at 17 n.2. Specific to Plaintiffs, Texas
is entitled to nearly $16 billion, which accounts for more than 13 percent of the State’s 2021
budget; the amount available to Mississippi is nearly $2 billion, equivalent to 31 percent of the
State’s 2021 budget; and the amount available to Louisiana is over $3 billion, which equals 7
percent of the State’s 2021 budget. See ECF No. 28 at 10. By contrast, in NF7B the Supreme Court
determined “[t]he threatened loss of over 10 percent of a State’s overall budget . . . is economic
dragooning that leaves the States with no real option but to acquiesce in the Medicaid expansion.”

567 USS. at 582.

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Although the 10-percent mark in NFB is not a dogmatic, nominal amount that must be met
for unconstitutional financial coercion to exist, the figure guides this Court when determining
whether Congress has acted in a manner akin to “undue influence” over ‘yelatively mild
encouragement.” 567 U.S. at 578, 579-80 (quoting Steward Machine Co. vy. Davis, 301 U.S. 548,
590 (1937); Dole, 483 U.S. at 211). The threat to Plaintiffs’ budgets is “economic dragooning”
that exerts “undue influence” on the States rather than “relatively mild encouragement.” Jd. at 579-—
80, 582. Plaintiffs therefore assert a plausible coercion claim.

b. Ambiguous Conditions

When Congress imposes conditions on the receipt of federal funds, the conditions must be
related “to the federal interest in particular national projects or programs” or “bear some
relationship to the federal spending.” Dole, 483 U.S. at 207 (quoting Massachusetts vy. United
States, 435 U.S. 444, 461 (1978) (plurality op.)); New York, 505 U.S. at 172. Plaintiffs aver
Section 802(c)(2)(A) is too “overinclusive and underinclusive to bear reasonable relationship to
any legitimate purpose underlying the Act’s funding provisions” as it “arrogates to federal policy
numerous fiscal decisions constitutionally left to the sovereign States, [yet] it imposes no similar
restriction on cities, local governments, or tribal governments.” Jd. For example, Plaintiffs argue
the “Tax Mandate” frustrates “Congress’s endorsement of tax cuts as a tool for economic recovery”
because nothing in Section 802(c)(2)(A) prevents them from spending freed-up State funds
previously allocated towards an ARPA-approved category for non-COVID-19 recovery purposes.
ECF No. 28 at 39; see also Pub. L. No. 117-2, §§ 9621, 9673. Therefore, Plaintiffs claim, the “Tax
Mandate” is unrelated to ARPA’s purpose of mitigating the fiscal effects stemming from the
COVID-19 pandemic. ECF No. 28 at 38. Defendants argue the “offset provision” ensures ARPA

399

funds are spent “according to [Congress’s] view of the ‘general Welfare’” by limiting their use to

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four categories: “assistance to households and businesses, essential worker compensation,
replacement of lost government revenues, and infrastructure investment.” See 42 U.S.C.
§ 802(c)(1); ECF No. 19 at 24.

Defendants fail to demonstrate how Section 802(c)(2)(A) satisfies the “minimum
rationality” required of Spending Clause legislation. United States v. Lipscomb, 299 F.3d 303, 322
(Sth Cir. 2002) (quoting Kansas vy. United States, 214 F.3d 1196, 1199 (10th Cir. 2000)). Section
802(c)(2)(A)’s restrictions do not ensure ARPA funds are related to Congress’s view of the
“general Welfare.” For example, limiting the use of ARPA funds while allowing States to use their
freed-up funds towards non-COVID-19 recovery purposes undermines Defendants’ alleged
interest in ensuring the relief it provides is devoted towards ARPA-approved categories related to
pandemic recovery. And Congress’s acknowledgement in ARPA that tax cuts are a tool for
economic recovery — such as tax relief for families and businesses — contradicts the purpose
behind the “Tax Mandate” prohibition. See Pub. L. No. 117-2, § 9621, § 9673. The Court finds
Plaintiffs plausibly assert Congress’s conditions set forth in Section 802(c)(2)(A) are unrelated to
ARPA’s purpose.

The conditions Congress imposes “must [also] be set out ‘unambiguously,’” because
“States cannot knowingly accept conditions of which they are ‘unaware’ or which they are ‘unable
to ascertain.’” Arlington Cent. Sch. Dist. Bd. of Educ. v. Murphy, 548 U.S. 291, 296 (2006)
(quoting Pennhurst State Sch. & Hosp. y. Halderman, 451 U.S. 1, 17 (1981)). Congress must
clearly impose conditions on the grant of federal funds, especially when a State’s potential
obligations are “largely indeterminate” so that States may “knowingly decide whether or not to
accept those funds.” Pennhurst, 451 U.S. at 24. The Court must determine “whether Congress

spoke so clearly that we can fairly say that the State could make an informed choice.” Jd. at 25.

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The Court considers the statute “from the perspective of the state official who is engaged
in the process of deciding whether the State should accept [the] funds and the obligations that go
with those funds.” Murphy, 548 U.S. at 296. The Court then “ask[s] whether such a state official
would clearly understand” the statute’s requirements. Tex. Educ. Agency v. U.S. Dep’t of Educ.,
908 F.3d 127, 136 (Sth Cir. 2018) (quoting Murphy, 548 U.S. at 296). To make this determination,
the Court begins with the statute’s text. The Court presumes Congress “says in a statute what it
means and means in a statute what it says there.” Conn. Nat’l Bank v. Germain, 503 U.S. 249,
253-54 (1992). A’ statute is ambiguous when “its text, literally read, admits of two plausible
interpretations.” Graham Cnty. Soil & Water Consery. Dist. v. U.S. ex rel. Wilson, 545 U.S. 409,
419 n.2 (2005).

Plaintiffs argue Section 802(c)(2)(A)’s broad prohibition on using funds to “directly or
indirectly offset a reduction in the net tax revenue” collected by States provides no “clear limiting
principle” to explain how attenuated an “indirect offset” must be to violate the “Tax Mandate.”
ECF No. | at 12. They argue “‘it is unclear what it means to ‘indirectly offset a reduction in. . . net
tax revenue,’” and “it is unclear how to determine if there has been ‘a reduction in... net tax
revenue.’” ECF No. 28 at 32. Plaintiffs cite the Secretary of the Treasury’s failed attempts at
clarifying the difference between direct and indirect offsets as evidence of Section 802(c)(2)(A)’s
ambiguity. ECF No 28 at 32-36. Plaintiffs also refer to the absence of a baseline to determine a
reduction in net tax revenue in the “Tax Mandate” — present in other ARPA provisions — as
additional textual evidence of ambiguity. /d. at 36.

The Secretary of the Treasury attempted to clarify Section 802(c)(2)(A) through an IFR
providing a framework to determine when a State has used its ARPA funds to “directly or

indirectly offset” a reduction in the net tax revenue. ECF No. 19 at 13 (citing 86 Fed. Reg. 26,786

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(May 17, 2021)). The Fifth Circuit has held “regulations cannot provide the clarity” required for a
State’s acceptance of a Spending Clause condition to be “knowing.” Tex. Educ. Agency v. U.S.
Dep’t of Educ., 992 F.3d 350, 361-62 (Sth Cir. 2021). “Relying on regulations to present the clear
condition” — rather than the text of the statutory provision in question — “is an acknowledgment
that Congress’s condition was not unambiguous.” Jd. at 361. The Secretary of the Treasury’s
attempts to clarify the conditions in Section 802(c)(2)(A) arguably allows the Executive — rather
than Congress which is empowered through the Spending Clause — to place conditions on federal
grants. See id. at 362. Such an attempt by the Executive serves as an acknowledgement of the
statute’s ambiguity as the “needed clarity” must come “directly from the statute.” Jd. Therefore,
the Court finds Plaintiffs plausibly assert Congress’s conditions set forth in Section 802(c)(2)(A)
are ambiguous.

2. The Tenth Amendment

The Constitution establishes a system of “dual sovereignty.” Printz y. United States, 521
U.S. 898, 918 (1997) (quoting Gregory y. Ashcroft, 501 U.S. 452, 457 (1991)). “The powers not
delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved
to the States respectively, or to the people.” U.S. CONST. amend. X. The Tenth Amendment
confirms legislative power granted to Congress is not unlimited as “[t]he Constitution confers on
Congress . . . only certain enumerated powers,” leaving “all other power [reserved] for the States.”
Murphy v. Nat’l Collegiate Athletic Ass’n, 138 S. Ct. 1461, 1476 (2018).

a. The Anti-Commandeering Principle

The Anti-Commandeering Principle affirms the Tenth Amendment’s restriction on
Congress’s ability to “issue direct orders to the governments of the States.” Jd. Defendants argue

nothing in ARPA “force[s] the States to implement a federal program,” so States have a “legitimate

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choice whether to accept the federal conditions in exchange for federal funds.” ECF No. 19 at 29.
The Court, however, finds although ARPA does not “directly command the Plaintiff States to
implement Congress’s preferred tax policy,” Congress may commandeer States in practice by
threatening to deny them billions of dollars in “badly needed funding” should they not comply
with the “Tax Mandate.” ECF No. 1 at 14.

For example, Plaintiff the State of Texas avers it expects to receive $16.45 billion under
ARPA, which accounts for more than 13 percent of its 2021 budget Jd. at 2-3. The refusal of such
a significant amount — especially during a once-in-a-century pandemic when funds for economic
recovery are in greater need — plausibly puts Texas officials in an unfair position of political
accountability that should rest with federal officials. NFIB, 567 U.S. at 578. This danger is
heightened when Congress acts under the Spending Clause “because Congress can use that power
to implement federal policy it could not impose directly under its enumerated powers.” Id.
Accordingly, the Courts finds Plaintiffs assert a plausible Anti-Commandeering claim under the
Tenth Amendment.

b. Equal Sovereignty Principle

The Equal Sovereignty Principle recognizes the “historic tradition” in the United States
“that all States enjoy ‘equal sovereignty.’” My. Austin Mun. Util. Dist. v. Holder, 5S7 U.S. 193,
203 (2009) (quoting United States v. Louisiana, 363 U.S. 1, 16 (1960)). A statute that
“differentiates between the States” may only be upheld upon a “showing that [the] statute’s
disparate geographic coverage is sufficiently related to the problems that it targets.” Jd.

Plaintiffs argue Section 802(c)(2)(A) intrudes “upon a sensitive area of state policymaking”
in a subset of states which historically are more likely to exercise their sovereign right to decrease

taxes and other government revenues. ECF No. 1 at 15. Plaintiffs further assert

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Section 802(c)(2)(A) does not directly serve a legitimate purpose “sufficiently related to the
problem that it targets” because it imposes no similar restrictions on cities, local governments, or
tribal governments — and, therefore, the “Tax Mandate” does not promote pandemic recovery.
Id.; ECF No. 28 at 26-27. Defendants cite Mayhew v. Burwell, to support their claim that Section
802(c)(2)(A) does not implicate the Equal Sovereignty principle. ECF No. 19 at 33; 772 F.3d 80
(1st Cir. 2014). Defendants argue because the “offset provision” does not differentiate between
states on its face, Plaintiffs fail to assert an Equal Sovereignty claim. See Mayhew, 772 F.3d at 82
(finding the Affordable Care Act’s requirement that States accepting Medicaid funds maintain
their state-level Medicaid eligibility standards for children for a specified period “is constitutional,
fitting ‘easily within congressional spending power to condition federal Medicaid grants.”).
Plaintiffs rebut: Defendants fail to consider the Mayhew court’s distinction between the federal
provision in question before the First Circuit and Section 802(c)(2)(A) before this Court. ECF No.
28 at 27. They argue the Mayhew court determined the “provision at issue . . . does not intrude on
an area of traditional state concern.” 772 F.3d at 94-96.

The U.S. Supreme Court recognizes the taxation authority of state governments as a
traditional power central to state sovereignty. ACF Jndus., Inc, 510 U.S. at 345.
Section 802(c)(2)(A) may appear neutral on its face, but in practice the provision runs the risk of
intruding into a sensitive area of state policymaking by conditioning a federal benefit on States
forgoing their sovereign power to tax. Such an intrusion into a realm that is traditionally in the
exclusive province of States is an “‘extraordinary’ departure from basic principles of federalism.”
Id.; see also Mayhew, 772 F.3d at 94-95. Section 802(c)(2)(A)’s prohibition on using ARPA funds
to reduce net tax revenue may plausibly result in the disparate treatment of Plaintiffs because they

historically use their taxation authority to decrease government revenue. ECF No. 28 at 26. Any

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disparate treatment between States must be “sufficiently related to the problems that it targets.”
Louisiana, 363 U.S. at 16. ARPA is intended to “mitigate the fiscal impacts of the pandemic on
States.” ECF No. 44 at 9. The “Tax Mandate,” however, is arguably unrelated to the problem
Congress targets because cutting taxes is a legitimate fiscal policy used to spur economic recovery
consistent with ARPA’s purpose. ECF No. 28 at 26. The Court thus finds Plaintiffs’ pleadings
assert a facially plausible Equal Sovereignty claim under the Tenth Amendment.

CONCLUSION

For the reasons set forth above, the Court DENIES Defendants’ Motion to Dismiss.

SO ORDERED.

MATAHEW J. KACSMARYK
UNITED STATES DISTRICT JUDGE

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