ARPA State Tax Mandate
Tax & AccountingDecember 21, 2021

ARPA Provision Barring State Tax Cuts Blocked

By: CCH AnswerConnect Editorial

Several states have received a permanent injunction against the Secretary of the Treasury. The injunction blocks the Secretary from enforcing a provision of the American Rescue Plan Act of 2021 (ARPA) barring states from using relief funds for tax cuts.

What is the ARPA?

The ARPA is a $1.9 trillion economic stimulus bill enacted into law on March 11, 2021. The ARPA distributes around $195.3 billion to the states. To receive the funds, the states must certify to the Secretary that they will follow certain conditions.

What does the tax mandate in the ARPA require?

The ARPA tax mandate says that a state cannot use funds 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.”

The states must supply the Secretary a detailed account of all changes to the state’s tax revenue sources for three years. The Secretary is then allowed to recoup funds that she views are used in violation of the tax mandate.

Which States Challenged the tax mandate?

The states challenging the mandate in this case include:

  • Alabama;
  • Arkansas;
  • Alaska;
  • Florida;
  • Iowa;
  • Kansas;
  • Montana;
  • New Hampshire;
  • Oklahoma;
  • South Carolina;
  • South Dakota;
  • Utah; and
  • West Virginia.

What legislation did states enact that could be barred by the mandate?

A few of the states challenging the mandate enacted legislation this year reducing tax rates. If the mandate was upheld, the Secretary would need to review the legislation and decide if recovery funds should be recouped.

Some of the rate reduction legislation includes:

In addition to rate reductions, states often make changes to deductions, credits, and other tax items. Each of these pieces of legislation, in any state receiving ARPA funds, would be subject to review.

On what grounds did the court make its decision?

The states argued that the tax mandate:

  • exceeded Congress’s power under the Spending Clause of the U.S. Constitution;
  • ·violated the Tenth Amendment to the U.S. Constitution; and
  • ·violated the anticommandeering doctrine because it intrudes on the states’ sovereignty by prohibiting them from reducing taxes for the next three years.

The court decided that Congress exceeded its authority under the Spending Clause.

The states reasoned the mandate violated the Spending Clause because:

  • it was unconstitutionally coercive because the amount of ARPA funding offered to the states was so large they did not have a real choice but to accept the restriction on their sovereign taxing powers;
  • it was unconstitutionally ambiguous because it does not contain an explanation how the Treasury would determine if ARPA funds were used to offset tax cuts; and
  • it was not related to the purpose that the ARPA serves.

The court agreed with the states and issued a permanent injunction enjoining the enforcement of the tax mandate against the listed states. In separate suits, Ohio, Kentucky, and Tennessee have previously received injunctions against the Secretary. 

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