Ohio granted injunction from ARPA tax cut prohibition


In a controversy involving application of a spending restriction on funds provided in the American Rescue Plan Act (ARPA)1 by the federal government to the states, an Ohio federal district court granted the state of Ohio a permanent injunction from such restriction on July 1, 2021.2 The decision, which is certain to be challenged by the federal government, enhances the uncertainty surrounding whether, and to what extent, a state can use proceeds obtained under ARPA to provide broad-based state tax reductions over the next several years.






As a means to combat the economic effects of the COVID-19 pandemic, ARPA created Coronavirus State and Local Fiscal Recovery Funds for distribution to state and local governments. Under ARPA, states are required to use the funds for either a wide variety of pandemic-related purposes, or to make necessary investments in water, sewer or broadband infrastructure.3


Importantly, the ability to use the funds is restricted in several ways. The states are prohibited from using the funds to offset a reduction in the state’s net tax revenue resulting from a change in law, regulation or administrative interpretation during a “covered period” that reduces any tax, or from depositing the funds into a pension fund.4 The “covered period” began on March 3, 2021, and ends on the last day of the fiscal year in which the funds are used or returned to the federal government.5 The states are required to comply with certification and reporting requirements to receive the funds, and the federal government has the right to recoup the funds if the states do not comply with the ARPA restrictions.6


In response to numerous requests for information on the scope of this provision (termed the “tax mandate” in the litigation at issue), the U.S. Treasury Department adopted interim rules designed to provide further guidance to states regarding when the ARPA tax mandate would be triggered.7 The guidance noted that three sources potentially could offset a prohibited reduction in net tax revenue: (i) organic growth; (ii) increases in revenue; and (iii) certain types of spending cuts.8 In addition, the interim guidance confirmed that a reduction in net tax revenue could result from any covered change, including a change in law, regulation or administrative interpretation.9 However, a covered change does not include a change that cannot be controlled by the state, or income tax changes simply conforming to changes in federal law.10


Upon enactment of ARPA, Ohio immediately challenged the ARPA tax mandate, filing suit in the U.S. District Court for the Southern District of Ohio for relief. The challenge was based on grounds that the tax mandate violates the Spending Clause, as well as the Tenth Amendment of the U.S. Constitution.11 The lawsuit was paired with a motion for a preliminary injunction designed to prevent the federal government from enforcing the tax mandate during the litigation to follow. The court ultimately denied the preliminary injunction, but in doing so, held that Ohio “had shown a likelihood of success on the merits of its constitutional claim” based on Spending Clause concerns, and that the state was “suffering ongoing irreparable harm.”12 Based on this determination, Ohio immediately requested a permanent injunction and final declaratory relief, with an expedited briefing of the case.




Court claims jurisdiction over case


The court began its analysis by addressing the federal government’s argument that Ohio lacked standing to bring the lawsuit, and that even if Ohio had standing, the issue became moot once the federal government issued the interim regulations addressing ARPA and the tax mandate. In order to prove standing, the court outlined the following requirements at the time the plaintiff files suit: (i) that the plaintiff establish a concrete, particularized, actual and imminent injury in fact; (ii) that there is a causal connection between the injury and the defendant’s alleged wrongdoing; and (iii) that the injury can likely be redressed.13 In this case, the court focused on the “injury in fact” requirement, as the court had previously determined in the preliminary injunction hearing that an “injury in fact” had been established when Ohio was presented with an “unconstitutionally ambiguous deal.” Based on this injury in fact, the court reached the conclusion that it had standing to hear the matter. The court rejected arguments by the federal government that Ohio did not provide enough evidence to support a showing that it had suffered injury, and that Ohio’s acceptance of the funding deal prevented the court to claim standing.


Following the analysis on standing, the court entertained arguments regarding the case being mooted because Ohio did in fact accept “the deal.” Finding that Ohio continues to suffer ongoing harm even after accepting the deal, consisting of the uncertainty it has been facing (and will continue to face) in being able to exercise its sovereign taxing power, the court likewise disposed of the federal government’s mootness argument. Notably, the court did not believe that waiting until the federal government actually requests recoupment of the funds through future enforcement of ARPA to be appropriate based on the continuing harm felt by Ohio.




The tax mandate and violation of the Spending Clause


Mandate falls short of ‘clarity’ needed to meet Spending Clause requirements


The first substantive issue considered by the court related to whether the tax mandate satisfied the clarity requirement under the Spending Clause. The court determined that the tax mandate was too ambiguous to pass Spending Clause scrutiny, because several limitations under the Spending Clause developed under case law were not met. The limitations highlighted by the court under the Spending Clause prohibit Congress from imposing conditions unrelated to the federal interest in enacting spending legislation, and coercing the states into accepting funds and the associated regulations.14 Additionally, the conditions imposed by Congress must be stated unambiguously in the text of the enacting statute.15


Ohio challenged the ARPA tax mandate on both coercion and ambiguity grounds, but the court relied on the ambiguity in the enacting statute to determine that the mandate fell short of the clarity needed to meet the dictates of the Spending Clause. The court noted that the Constitution requires Congress to advise states of the specific conditions attached to funding, not just to advise that conditions exist. In this case, the tax mandate did not put Ohio on clear notice of its obligations under ARPA, outlining several interpretive problems contained in the ARPA statute. These problems included ambiguity in the terms “indirect offset” and “net tax revenues,” and the difference between indirect offsets and direct offsets, leading to difficulty regarding how to measure reductions in net tax revenue. For these reasons, the court concluded that the ambiguously written tax mandate exceeded Congress’s power under the Spending Clause.



Effect of interim final rule on Spending Clause analysis


The court next analyzed the effect of the Treasury Department’s issuance of the interim final rule interpreting the tax mandate. While the court noted that Congress could delegate authority to an agency of the federal government to provide clarity on Spending Clause issues, the court held that Congress did not do so in this instance. In reaching this conclusion, the court focused on general principles of the power of Congress to delegate. In order for Congress to delegate its authority to an administrative agency, Congress was required to “articulate an intelligible principle” in the statute, clearly say that it was going to delegate its powers to an administrative agency to address major questions regarding the statute, and legislate clearly if it meant to “upset federalism norms.”16 Since Congress did not do so in ARPA, the court found that the tax mandate violated the Spending Clause, without addressing the question of whether the interim final rule provided enough clarity to Ohio with respect to the operation of the tax mandate.




Court grants specific injunction relief to Ohio


Following the court’s determination that the ARPA tax mandate violated the Spending Clause, the court addressed the appropriate remedy to apply. Ohio requested that an injunction apply to enjoin the Treasury Secretary from enforcing the tax mandate against the state, and a declaration that the tax mandate was unconstitutional.


The court ultimately granted a permanent injunction against application of the tax mandate to Ohio, based on satisfying the relevant four-part test governing such relief.17 The court reiterated that Ohio was suffering irreparable harm to its ability to tax by being bound to an “unconstitutionally ambiguous deal.” Further, the court noted that Ohio has no remedy at law to compensate for the irreparable injury because the federal government has sovereign immunity against claims for money damages, and payment of such damages would not cure the harm to its ability to tax. In weighing the balance of hardships between Ohio and the federal government, the court determined that the federal government would “endure no meaningful hardship” if the injunction were granted, because the Treasury Department could continue to enforce other ARPA provisions. Finally, the injunction promoted the public interest by protecting the federal-state sovereign structure and promote individual liberty through proper enforcement of the Spending Clause. Based on the court’s grant of the permanent injunction with respect to the ARPA tax mandate to Ohio, the court did not extend the reach of the permanent injunction to apply to states other than Ohio, despite Ohio’s request for broader declaratory relief.






As states continue to evaluate how to address the economic effects of the pandemic from a state tax perspective, the giant question resulting from this decision is whether the tax mandate contained in ARPA will be enforceable. Will Ohio and other states that take the “deal” and now have relatively healthy budget surpluses feel emboldened by the court’s sweeping endorsement of state sovereignty? If so, will they decide to ignore the tax mandate and the interim final rule explaining how the tax mandate works to provide broad-based tax cuts or other significant tax relief over time?


Based on a consideration of the flurry of activity in state legislative sessions that have taken place since the enactment of ARPA and the desire for the states to utilize the funds as soon as possible, it is clear that several states are so emboldened. In pursuing policies that will result in reductions in net tax revenue that could violate the tax mandate, some states are positing that these reductions were planned prior to ARPA and have nothing to do with the funds received from ARPA. This is especially true in states (including Ohio) that are pursuing structural tax reforms that are designed to de-emphasize the impact of personal and/or corporate income taxes.18 At the same time, counting Ohio’s lawsuit, there are no less than six states currently challenging the ARPA tax mandate in the federal courts.19 As a result, it is relatively clear that this issue is not going to disappear anytime soon. In fact, given the stakes involved, the types of constitutional issues implicated here, and the possibility that the federal cases may not be consistent in their analysis, the U.S. Supreme Court may be called upon to rule on the ARPA tax mandate at some point in the near future.


The court did not undertake a substantive review of the interim final rule based on its determination that Congress never delegated its power to an administrative authority to address the tax mandate ambiguities. However, it stands to reason that even if examined, the court likely would have found in favor of Ohio on the grounds that such interim guidance does not cure the ambiguities and simultaneously hamstrings the states from undertaking tax policies. To be sure, the guidance in the federal government’s interim final rule was developed quickly in an attempt to provide guideposts on complex, analytical issues arising from a relatively brief provision tying billions of dollars in funding to compliance on the types of tax policy that a state can implement over several years. Ultimately, unless the ARPA tax mandate does not survive constitutional scrutiny, state agencies charged with fiscal responsibilities will need to become familiar with the intricacies of the interim final rule that is likely to be finalized in the coming months.



1 P.L. 117-2 (2021).

2 Ohio v. Yellen, United States District Court for the Southern District of Ohio, Western Division, Case No. 1:21-cv-18, 2021 U.S. Dist. LEXIS 123008, July 1, 2021.

3 Social Security Act, Title VI, 42 U.S.C. § 802(c)(1).

4 Social Security Act, Title VI, 42 U.S.C. § 802(c)(2).

5 Social Security Act, Title VI, 42 U.S.C. § 802(g)(1). As the funds obtained from ARPA must be spent by Dec. 31, 2024, the ending date of the covered period could extend for several years.

6 Social Security Act, Title VI, 42 U.S.C. § 802(d), (e).

7 31 C.F.R. Part 35, RIN 1505-AC77, “Coronavirus State and Local Fiscal Recovery Funds.”

8 31 C.F.R. § 35.8 generally addresses the net tax revenue calculations required to be made in order to prevent a finding that a state has violated the ARPA tax mandate provision.

9 31 C.F.R. § 35.3 (definition of “covered change”).

10 Id.

11 The Spending Clause states that “Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States . . .” U.S. CONST. art. I, § 8, cl. 1. The Tenth Amendment states that “[t]he powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.” U.S. CONST. amend. X.

12 Ohio v. Yellen, United States District Court for the Southern District of Ohio, Western Division, Case No. 1:21-cv-18, 2021 U.S. Dist. LEXIS 90274, May 12, 2021.

13 See Lyshe v. Levy, 854 F.3d 855, 857 (6th Cir. 2017); Lujan v. Defs. of Wildlife, 504 U.S. 555, 560-61 (1992).

14 See Sch. Dist. of City of Pontiac v. Sec’y of U.S. Dept. of Educ., 584 F.3d 253, 284 (6th Cir. 2009) (en banc).

15 Id.

16 In articulating the appropriate test regarding the ability of Congress to delegate its powers to administrative agencies, the court cited to a number of decisions, including Whitman v. Am. Trucking Assocs., 531 U.S. 457, 472 (2001); Gundy v. United States, 139 S. Ct. 2116, 2123 (2019); FDA v. Brown & Williamson, 529 U.S. 120, 159 (2000); King v. Burwell, 576 U.S. 473, 485-86 (2015); and Carter v. Welles-Bowen Realty, Inc., 736 F.3d 722, 734 (6th Cir. 2013).

17 See eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006), in which the U.S. Supreme Court noted the four requirements for a plaintiff to obtain a permanent injunction: “(1) that it suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.”

18 Ironically, on July 1, 2021, Ohio adopted a personal income tax reduction in its fiscal year 2022-2023 budget, so that beginning in the 2021 tax year, tax rates will be reduced from a range of 2.850%–4.797% to 2.765%–3.990%. H.B. 110, Laws 2021.

19 In addition to Ohio, the states of Arizona, Kentucky, Missouri, Texas, and West Virginia have challenged the ARP tax mandate provisions. For an issue paper addressing current challenges to ARPA, see Joseph Bishop-Henchman, National Taxpayers Union, “Six Lawsuits Filed to Challenge ARPA Ban on State Tax Cuts,” June 3, 2021, published at:






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