Federal court blocks ARPA tax mandate enforcement


On Nov. 15, 2021, an Alabama federal district court granted a final judgment in favor of 13 plaintiff states, permanently enjoining the U.S. Department of Treasury from enforcing the controversial spending restriction on funds provided to the states under the American Rescue Plan Act (ARPA).1 In granting the permanent injunction, the court reasoned that the restriction lacks the clarity required for Congress to exercise its power under the Spending Clause of the U.S. Constitution because the states are unable to make an informed choice about the costs of receiving ARPA funds. The decision marks the third ruling by a federal court to block the enforcement of the ARPA provision since the law’s enactment.2






In March 2021, Congress approved ARPA, a $1.9 trillion economic stimulus bill for the purpose of mitigating the economic impact of the COVID-19 pandemic. ARPA provided approximately $195 billion in state and local fiscal recovery funds for distribution to state and local governments. The law requires states to either use the funds for a wide variety of pandemic-related purposes, or to make infrastructure investments.3


ARPA also restricts the ability to use the state relief funds in several ways. Notably, states are prohibited from using the funds to offset a reduction in 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 In order to receive the funds, states are required to comply with a variety of certification and reporting requirements, 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 multiple requests for more specific guidance regarding the scope of the restrictive provision (referred to as the Tax Mandate in the current litigation), the U.S. Treasury Department (Treasury) adopted an interim final rule designed to provide further guidance to states regarding when the ARPA Tax Mandate would be triggered.7 The interim guidance specifies that even funds not “explicitly or directly used” to cover the costs of changes that reduce net tax revenue may violate ARPA where they are “indirectly being used” to substitute for the state’s funds that would otherwise be needed to cover the costs of tax cuts. A final rule has not been issued to date.


On March 31, 2021, 13 states brought an action in Alabama federal court against Treasury, seeking declaratory and injunctive relief from the Tax Mandate.8 First, the states alleged that the Tax Mandate exceeds Congress’ power under the Spending Clause of the U.S. Constitution because it is ambiguous, coercive and unrelated to the purpose of ARPA. Second, the states argued that the Tax Mandate violates the Tenth Amendment to the U.S. Constitution because it intrudes into the states’ sovereign power to set tax policy. Separately, the Wisconsin legislature moved to intervene as a plaintiff in the lawsuit, requesting that the Court invalidate the Tax Mandate as applicable to the state of Wisconsin.




District Court decision


In deciding to enjoin Treasury from enforcing the Tax Mandate, the Court addressed three major issues: (i) the Court’s subject matter jurisdiction over the current action, including the states’ standing to sue; (ii) the merits of the states’ constitutional challenge; and (iii) whether the Wisconsin legislature could intervene as a plaintiff in the action.





First addressing the matter of its jurisdiction to hear the case, the Court considered the question of the states’ standing to bring the lawsuit.9 Treasury argued that the states could not prove an imminent threat of the Tax Mandate’s enforcement, in part because 10 of the 13 states certified compliance with ARPA’s conditions, thus ending the original harm claimed when filing the lawsuit. In response, the states argued that they suffered harm to their sovereign power to make tax policy since the law’s effective date because the Tax Mandate does not define how the states may use ARPA funds to indirectly offset net tax revenue reductions caused by a change in state law.


Concluding that it has jurisdiction over the present action, the Court agreed that the states continue to suffer harm to their sovereign authority to set tax policy, regardless of whether 10 of the states have accepted the terms of ARPA’s “ambiguous deal.” Acknowledging “the harm that the Tax Mandate inflicts on the legislative process,” the Court agreed with the states that they lack sufficient information in considering tax changes to determine the impact the changes will have on their ability to retain the ARPA funds. The Court recognized that such harm may continue regardless of whether the funds are recouped by the federal government. Accordingly, the Court concluded that the states sufficiently demonstrated an injury in fact to establish standing at this stage of the litigation.



Spending Clause violation


Turning to the merits of the litigation, the Court considered the states’ claim that the Tax Mandate exceeded Congressional authority under the Spending Clause of the U.S. Constitution. In doing so, the states argued that the Tax Mandate is unconstitutionally coercive because the amount of funding is so large that they have no choice but accept the restrictions of mandate. The states also alleged that the mandate is unconstitutionally ambiguous because it contains no explanation as to how Treasury will determine whether a state has offset any tax cuts with ARPA funds.


The Court agreed with the states, observing that the Tax Mandate does not define what it means to “directly or indirectly” offset tax cuts with ARPA funds, meaning that any funds received by the states may be viewed as indirectly offsetting any reduction in net tax revenue from a change in state law or policy. The Court reasoned that this ambiguity makes it impossible for the states to exercise their taxing authority without putting the ARPA funds at risk of being recouped by the federal government.


The Court next considered federal case law used to support Treasury’s argument that nothing else is required of Congress once it makes explicitly clear that a condition on the grant of federal money to the states exists. Finding there is no question that the Tax Mandate exists as a condition to states accepting ARPA funds, the Court determined that U.S. Supreme Court case law requiring Congress to clearly state its intent to impose a condition should not be interpreted to mean “that Congress need not also define the condition sufficiently so that States can know how to comply with it.”10


Second, the Court distinguished the Tax Mandate from an 11th Circuit Court of Appeals decision in Benning v. Georgia, which considered whether Congress violated the Spending Clause in enacting a federal law that required state prisons receiving federal funds to refrain from burdening the religious exercise of prisoners.11 The Court noted that the Tax Mandate is different from a spending condition prohibiting states from discriminating based on religion. Where the federal government had a legitimate interest in protecting individuals from discrimination in Benning, the Court pointed out that no such interest exists in proscribing state tax policy. Beyond dictating what states do with federal funds, the Court reasoned, the Tax Mandate “dictates what States do with State funds as well,” finding that the restriction on direct or indirect tax cuts “pressures States into adopting a particular – and federally preferred – tax policy.” As such, the Court concluded that the Tax Mandate’s ambiguity disincentivizes states from considering tax reductions, resulting in a federal invasion of state sovereignty.


The Court finally considered the question of whether Treasury’s interim final rule cures the Tax Mandate’s failure to meet the Spending Clause’s clarity requirements. Putting aside the issue of whether an administrative regulation can provide the clarity needed for a statutorily ambiguous spending condition to satisfy the Spending Clause, the Court focused on the interim rule’s lack of definitions of key terms, including how a state may “indirectly offset” spending cuts with ARPA funds. For example, the Court noted that Treasury may interpret a spending cut in 2021 followed by the use of ARPA funds in 2023 to violate the mandate’s offset provision based on the number of tax years during which Treasury can make such an assessment. For these reasons, the Court determined that the rule does not cure the statutory ambiguity of the Tax Mandate.


Finding that the Tax Mandate exceeds Congress’s power under the Spending Clause, the Court found it unnecessary to address the states’ claims under the 10th Amendment. Accordingly, the Court granted the states’ motion for a final judgment and permanent injunction, thus preventing Treasury from enforcing the Tax Mandate against the states.



Wisconsin legislature’s motion to intervene


Separately, the Court considered the Wisconsin legislature’s motion to intervene in the litigation as of right, and alternatively, on a permissive basis.12 The Court ultimately rejected the request on the basis that the Wisconsin Department of Justice is the appropriate entity to represent the interests of the state according to Wisconsin law. According to the Court, the state legislature may only intervene to represent the state’s interests in court only to defend the validity of a Wisconsin law.13 Noting that the state legislature sought to join a lawsuit challenging a federal statute, the Court explained that “[t]here is no question about the validity of any Wisconsin statute at issue in this case.” Therefore, the Court found that the state justice department retains exclusive authority to represent the state of Wisconsin.


The state legislature further argued that it should be allowed to intervene in the litigation because it is in fact representing the state’s interest in the validity of state laws by challenging the Tax Mandate. However, the Court declined to interpret the relevant Wisconsin statute so broadly, noting that the legislature failed to show that it has or will suffer an injury as an institution. Rejecting the argument that the mandate harms the sovereign dignity of both the state and the legislature, the Court distinguished that the sovereign is the state and that “ARPA’s funds are offered to the states, not to state legislatures.” Concluding that the state legislature does not have a “direct, substantial and legally protectable” interest in the case, the Court denied the legislature’s motions to intervene.






Like its counterpart federal courts in Kentucky and Ohio, the U.S. District Court in Alabama became the third court to declare the ARPA Tax Mandate unconstitutional and permanently enjoin the Treasury Department from enforcing the provision. Similar to the Ohio federal court, the Court focused primarily on the clarity requirement of the Spending Clause, finding it unnecessary to address the states’ Tenth Amendment and anti-commandeering arguments. Arriving at the same result, the Kentucky court granted a preliminary injunction in favor of Kentucky and Tennessee, but on the grounds that the Tax Mandate was unconstitutionally coercive under the Spending Clause. In contrast, two federal district courts in Arizona and Missouri found in favor of the federal government on the basis that the plaintiff states lacked standing to bring the lawsuits.14


With six total ARPA lawsuits at various stages of litigation taking place around the country, the panoply of procedural and substantive issues addressed by the states and the federal government is becoming even more comprehensive as the cases are appealed to higher courts.15 As an example, the federal appeals courts hearing the appeals of the cases from the Missouri and Arizona lower courts will be faced with the question of whether the plaintiff states met the procedural standing requirements to file the lawsuits, which would then allow them to consider the substantive merits of those cases. Given the compelling issues raised by the Tax Mandate, potentially conflicting views of the federal appellate courts, and the potential impact of the restriction on the future of state tax policy, it remains possible that the constitutionality of the Tax Mandate may soon be considered by the U.S. Supreme Court.



1 State of West Virginia et al. v. U.S. Department of Treasury et al., U.S. District Court for the Northern District of Alabama, Western Division, No. 7:21-cv-00465-LSC, Nov. 15, 2021.

2 See Kentucky et al. v. Yellen, U.S. District Court for the Eastern District of Kentucky, Central Division, No. 3:21-cv-00017-GFVT-EBA, Sept. 24, 2021; Ohio v. Yellen, U.S. District Court for the Southern District of Ohio, Western Division, No. 1:21-cv-18, July 1, 2021. For further discussion of these cases, see GT SALT Alert: “Kentucky and Tennessee succeed in ARPA challenge;” and GT SALT Alert: “Ohio granted injunction from ARPA tax cut prohibition.”

3 42 U.S.C. § 802(c)(1).

4 42 U.S.C. § 802(c)(2).

5 42 U.S.C. § 802(g)(1). Because ARPA funds must be spent by Dec.31, 2024, the ending date of the covered period could extend for several years.

6 42 U.S.C. § 802(d), (e).

7 31 C.F.R. Part 35, RIN 1505-AC77, Coronavirus State and Local Fiscal Recovery Funds. The interim rules note that three sources could potentially offset a prohibited reduction in tax revenue: (i) organic growth; (ii) increases in revenue; and (iii) certain types of spending cuts. Additionally, the interim rules confirm that a reduction in net tax revenue could result from any “covered change,” including a change in law, regulation or administrative interpretation. 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.

8 The plaintiff states include West Virginia, Alabama, Arkansas, Alaska, Florida, Iowa, Kansas, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota and Utah. The Court previously considered and denied the states’ motion for a preliminary injunction against the Tax Mandate in July 2021, but nonetheless concluded that the states had standing to bring the action in federal court.

9 Generally, a plaintiff shows standing by demonstrating that they suffered or will suffer an injury in fact, that the injury was caused by the defendant’s conduct, and that the injury is redressable by a court decision. Fla. Stat. Conf. of N.A.A.C.P. v. Browning, 522 F.3d 1153 (11th Cir. 2008). The injury must be “concrete and particularized” and “actual and imminent.” Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992).

10 Citing Pennhurst State Sch. & Hosp. v. Halderman, 451 U.S. 1 (1981).

11 391 F.3d 1299 (11th Cir. 2004).

12 A party may intervene in a federal cause of action as a matter of right if: (i) the application to intervene is timely; (ii) the applicant has an interest relating to the subject of the litigation; (iii) the result of the litigation may impede or impair their interests; and (iv) the party’s interests are not adequately represented by the existing litigants. FED. R. CIV. P. 24(a); Sierra Club, Inc. v. Leavitt, 488 F.3d 904 (11th Cir. 2007). Permissive intervention is permitted when common questions of law and fact exist, but the decision is left to the court’s discretion. FED. R. CIV. P. 24(b).

13 WIS. STAT. § 803.09(2m).

14 See Arizona v. Yellen, No. 2:21-cv-00514, U.S. District Court for the District of Arizona, July 22, 2021; Missouri v. Yellen, No. 4:21-cv-00376, U.S. District Court for the Eastern District of Missouri, May 11, 2021.

15 A sixth lawsuit brought by Texas, Louisiana and Mississippi is pending before a Texas federal court. Texas et al. v. Yellen, No. 2:21-cv-00079, U.S. District Court for the Northern District of Texas, filed May 3, 2021.






This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.


More SALT alerts