Federal judge rules in favor of states fighting federal ‘tax mandate’

The U.S. District Court for the Northern District of Alabama ruled in favor of 13 states that challenged an American Rescue Plan Act provision prohibiting states from using the federal funding to enact tax cuts.

“The Biden Administration was trying to punish fiscally responsible states like Iowa, which has a record budget surplus, and that’s why we took legal action,” Iowa Gov. Kim Reynolds said in a news release Tuesday about the victory. “With this ruling, Biden’s Administration can’t keep us from cutting taxes and I look forward to doing just that.”

Iowa was joined by Alabama, Alaska, Arkansas, Florida, Kansas, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota, Utah and West Virginia in the lawsuit.

The court ruled that Congress overstepped its authority under the Spending Clause of Article I , Section 8 of the U.S. Constitution by stating that states could not use the federal American Rescue Plan Act funding to reduce taxes. The plaintiff states called that part of ARPA a “Tax Mandate.”

While Congress can place conditions on states’ receipt of federal funding, there are limits on the conditions, including that Congress must make those conditions “unambiguously” so the state “can make an informed choice,” the ruling said, citing the 1981 case of Pennhurst State Sch.& Hosp. v. Halderman.

The court agreed with the states’ argument that the “Tax Mandate” portion of ARPA made it impossible for them to make an informed choice about the costs of receiving ARPA funds because they didn’t know how to exercise taxing authority without putting the funds in jeopardy, the ruling said.

Americans for Prosperity Iowa State Director Drew Klein told The Center Square in an emailed statement Tuesday that the states’ victory is an important win for taxpayers.

“The federal government’s attempt in this case to place conditions on funding to the states that would prevent them from enacting any form of tax-relief is unconstitutional and works against the interests of state taxpayers,” Klein said. “As this case continues to move through the appeals process, we are optimistic that higher courts will agree with today’s ruling.”

Iowans for Tax Relief Vice President and former House Majority Leader Chris Hagenow told The Center Square in an emailed statement Tuesday that the ruling would encourage legislators seeking to cut taxes in next year’s legislative session and cutting taxes would boost the economy.

“Iowa is on track to hold roughly $2 billion dollars of excess taxpayer money at the end of the current fiscal year. Instead of government sitting on this massive stockpile of taxpayer money, these funds should be used for permanent tax relief,” Hagenow said.

Reynolds approved tax cuts, including phasing out the state inheritance tax by 2025, in this year’s legislative session by signing SF619 in June.

Alabama, Alaska, Arkansas, Florida, Kansas, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota and Utah, and West Virginia were the other states that sued.