The American Rescue Plan’s Invasion of State Sovereignty

When the federal government sends money to the states, it is not uncommon for the money to come with conditions. Indeed, in South Dakota v. Dole (1987), the Supreme Court ruled that the federal government could attach conditions to funding within reasonable bounds. What’s puzzling about the American Rescue Plan (the $1.7 trillion spending bill enacted in March 2021), however, is the provision that the money cannot be used to “directly or indirectly” offset tax cuts. The provision is vague enough that it could apply to any tax cut passed by states that received the funds. Beyond the peculiarity of restricting federal aid from being used to relieve taxpayers, the federal government has no right to dictate how states should manage their finances. This controversial provision, which was included in ARPA at Senator Joe Manchin’s request, is a blatant invasion of state sovereignty. That’s why nineteen state attorneys general have since filed suit against that provision, arguing it should be struck down as unconstitutional.

One of those lawsuits was filed by Arizona Attorney General Mark Brnovich (R), who argues that “[t]he federal government does not get to tell states how to set their tax rates.” His lawsuit initially hit a roadblock when a federal judge in Phoenix ruled that Arizona had no standing to sue. On May 19, however, the 9^th U.S. Circuit Court of Appeals overruled that decision and remanded the case, handing it back to the same judge to decide on the merits, which involves determining whether Congress overstepped its authority by trying to tell states they could not cut state tax rates—any state taxes—if they took federal aid.

Arizona is not the only state to have noticed this egregious infringement of state sovereignty. So far, nearly two dozen attorneys general have filed six lawsuits challenging this provision as states assert the right to set their own tax policies. Four of the six cases were initially decided in favor of the states with the remaining two (including the aforementioned Arizona case) initially being dismissed for lack of standing. As the cases remain pending on appeal, states continue to await a final decision.

The fact that income tax relief was enacted in 14 states last year and eight so far in 2022 is an indicator that state lawmakers are confident the ARPA prohibition on state tax cuts will be overruled. Even Democrat strongholds like California and Vermont are cutting taxes for their citizens as they experience record budget surpluses and tens of billions of dollars in excess tax collections. Despite attempts by Congress to thwart it, states are cutting taxes across the country, in both blue and red states. This is welcomed relief for many Americans reeling from the highest inflation in four decades and the looming possibility of a coming recession. When the ARPA prohibition on state tax relief is ultimately struck down, as many expect to be the final outcome, it will be another instance in which a loss for the Biden administration is a win for taxpayers.