Missouri has asked the nation's top court to weigh in on states' use of pandemic funds as part of a larger dispute between states and the Treasury Department that is playing out in federal courts.
More than 20 states have filed six lawsuits challenging the government's restriction on using American Rescue Plan Act funds to "directly or indirectly" fund a tax cut.
Most recently, Missouri
The $1.9 trillion American Rescue Plan Act of 2021 sent $195 billion to states to help with pandemic-related losses and increased needs after the onset of the pandemic. Local governments got another $130 billion.
The legislation outlined four categories of use, including salaries and benefits, some infrastructure, and police, fire and health services, among others. Those tracking the funds say
The state aid featured two restrictions: that it may not be deposited into any pension funds and that states and territories cannot use the funds "either directly or indirectly to offset a reduction in the net tax revenue." Treasury can claw back the funds if it finds a violation.
The states that have sued argue the tax mandate is unconstitutionally coercive, ambiguous and unrelated to ARPA's purpose, which was federal tax relief.
"These questions are not just hypothetical — half of the states have cut taxes since the pandemic started," said Joe Bishop-Henchman, the National Taxpayers Union Foundation's Vice President of Tax Policy and Litigation, which has filed amicus briefs in support of the states.
The use of the word "indirectly" in the ARPA statute is unconstitutionally ambiguous, Bishop-Henchman said.
"The statute doesn't define indirectly and the federal government has been very careful not to disclaim any serious limits on the word," he said. "If you pass a tax cut and receive the federal funds, there's no reason why the government couldn't argue you didn't use those funds to finance the tax cut."
The stakes are high, as pandemic funds made up substantial portions of state budgets in 2021, according to the Oct. 24 court filing by Texas, Louisiana and Mississippi in the Fifth Circuit court of appeals. ARPA dollars amounted to around 22% of states' annual 2021 general-fund budgets and 9% of all-funds budgets, the filing said.
For those three states, ARPA funds totaled $20.6 billion, with Texas receiving $15.8 billion of that, or 13% of its 2021 budget. Mississippi's $1.8 billion of ARPA funds made up 31% of its 2021 budget.
The Supreme Court should take up the case because Missouri is the only state that offers an alternative interpretation that avoids the constitutional problem — that the law prohibits only the deliberate use of ARPA funds to pay for a tax cut — and because the court needs to help "clarify how and when states may challenge conditions attached to federal funding," the state argued in its appeal, which comes after lower courts had found the state lacked standing to bring the complaint.
"What the tax mandate means is of great importance to Missouri, since it governs the use of $2.7 billion of ARPA aid and could affect the state's tax policy," Missouri said.
The Oct. 24 brief from Texas, Louisiana and Mississippi asks the Fifth Circuit to uphold an April lower court permanent injunction that blocked the government from enforcing the tax mandate. The Treasury Department appealed the ruling on June 6.
