MONTGOMERY, Ala. — A federal judge has blocked the U.S. Treasury from enforcing a provision of the American Rescue Plan Act that prohibited states from using the pandemic relief funds to offset new tax cuts.
U.S. District Judge L. Scott Coogler ruled Monday in Alabama that Congress exceeded its power in putting the so-called tax mandate on states. He entered a final judgement in favor of 13 states including Montana that had filed a lawsuit and instructed the Treasury Department not to enforce the provision. The judge left the rest of the law in place.
The American Rescue Plan steered $195 billion in flexible relief funds to states but specified that states could not use it as a means to cut taxes by using the federal relief dollars to offset the revenue reduction.
The judge described the tax-cut restrictions as "a federal invasion of State sovereignty" that was "unconstitutionally ambiguous" — leaving states guessing as to whether their tax cuts would trigger a repayment of federal funds.
"The Tax Mandate's restriction on direct or indirect state tax cuts pressures States into adopting a particular — and federally preferred — tax policy," Coogler wrote. That "may disincentive" states "from considering any tax reductions for fear of forfeiting ARPA funds."
The lawsuit was filed by Alabama, Arkansas, Alaska, Florida, Iowa, Kansas, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota, Utah and West Virginia.
Alabama Attorney General Steve Marshal called that tax-cut restrictions "an unprecedented and unconstitutional assault on state sovereignty by the federal government."
Officials from other states on Tuesday also praised the ruling, including Montana Attorney General Austin Knudsen.
"This is a victory against federal overreach for Montanans and other fiscally responsible states, affirming the right to govern our own affairs," he said. "This ruling provides certainty to our state budget process knowing that the federal government won't be able claw back the tax cuts the legislature and Governor Gianforte put into place this year.”.
West Virginia Attorney General Patrick Morrisey said the decision "ensures our citizens aren't stuck with an unforeseen bill from the feds years from now."
Kansas Attorney General Derek Schmidt said it "clears the way" for the state to pursue a sales tax cut on groceries "without fear of federal reprisal."
Justice Department lawyers representing the Treasury Department argued the money should be used for its intended purpose — pandemic recovery.
"Congress did not provide Rescue Plan funds for States to replace purposeful decreases in net tax revenue; it provided the money to help States economically recover from the pandemic in ways they otherwise could not," federal lawyers wrote in an August court filing.
Federal government lawyers added, "states are free to cut all the taxes they want, as long as they do not use the federal aid to 'offset' any decreased revenue."
The Montana State News Bureau contributed to this story.