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Missouri Attorney General Files Suit Against Treasury Department Over Provision in American Rescue Plan Concerning State Tax Cuts

Mar 29, 2021, 11:15 AM by AG Schmitt
Missouri Attorney General Eric Schmitt today filed a lawsuit against the United States Department of the Treasury and Treasury Secretary Janet Yellen over the interpretation of a mandate in the American Rescue Plan Act that would force states to choose between accepting COVID-19 relief funds or exercising their sovereignty over state tax policy.
“As a state senator, I helped pass one of the largest tax cuts in Missouri history. Now, as Attorney General, ensuring that the State of Missouri’s sovereign ability to implement tax policy is not infringed upon by federal overreach is vitally important,” said Attorney General Schmitt. “Missouri should not have to choose between implementing tax policy or receiving federal COVID-19 relief funds, especially as this pandemic has crushed small businesses and individuals.”
At issue in the lawsuit is the interpretation of Section 9901 (602(c)(2)(A)) of the American Rescue Plan Act, which reads, “A state or territory shall not use the funds provided under this section or transferred pursuant to section 603(c)(4) 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 lawsuit argues that the narrow interpretation of the tax mandate mentioned above is the correct interpretation, stating, “Properly understood, the Tax Mandate imposes only a very narrow restriction on the States’ ability to cut taxes—it merely prohibits the States from taking COVID-19 relief funds and deliberately applying them to offset a specific tax reduction of a similar amount.”
By contrast, according to the lawsuit, “Notwithstanding this narrower interpretation, certain federal officials have advanced a broader interpretation of the Tax Mandate, which would prohibit a State from enacting any tax-reduction policy that would result in a net reduction of revenue through 2024 or risk forfeiting its COVID-19 relief funds. Under this broader interpretation, the Tax Mandate would be manifestly unconstitutional.”
On March 16, 2021, Missouri Attorney General Eric Schmitt and 20 other state attorneys general sent a letter to Secretary Yellen to ensure that the narrow interpretation was applied and that states’ sovereign authority to effectuate tax policy was not impacted. Secretary Yellen’s reply letter to state attorneys general on March 23, 2021 declined to adopt the narrow interpretation and thus created confusion and uncertainty about the meaning of the Tax Mandate.
Furthermore, the lawsuit argues that the broad interpretation would “impose a draconian and unprecedented federal restriction on a core aspect of state sovereignty—each State’s authority to set its own tax policy. This interpretation would be plainly unconstitutional. It is also incorrect as a matter of statutory interpretation. The relevant principles of interpretation confirm that the narrow interpretation of the Act, which properly respects both Congress’s role and the States’ authority in our federal system, is the correct interpretation of the Tax Mandate.”
The lawsuit asks the Court to provide clarity as it relates to the interpretation of the Tax Mandate, ensuring that the narrow interpretation is applied, and states’ sovereignty is respected. Alternatively, if the Court adopts the broad interpretation, the lawsuit asks the court to declare that the Tax Mandate is unconstitutional, sever the Tax Mandate from the rest of the American Rescue Plan Act, and enjoin the Treasury and Treasury Secretary from enforcing the broad interpretation of the Tax Mandate.
The full lawsuit can be found here: