Federal judge blocks tax cut rule in pandemic relief package

A federal judge in Alabama on Monday blocked the Biden administration from enforcing a provision of the sweeping pandemic relief package passed earlier this year that would have stopped states from using the funds to offset tax cuts.

The ruling by U.S. District Judge L. Scott Coogler handed a win to 13 Republican-led states that sued on the grounds that Congress in March exceeded its constitutional authority by including in the $1.9 trillion American Rescue Plan Act (ARPA) the restriction on the states’ use of the funds.

“The Tax Mandate’s restriction on direct or indirect state tax cuts pressures States into adopting a particular — and federally preferred — tax policy. The inherent ambiguity in the text of the mandate may disincentive the plaintiff states from considering any tax reductions for fear of forfeiting ARPA funds. This is a federal invasion of State sovereignty,” wrote Coogler, a George W. Bush appointee.

The ruling effectively blocks the Treasury Department from enforcing a provision that barred states for three years from using ARPA funds to “directly or indirectly” subsidize the cost of lowering state taxes.

The order applies to West Virginia, Alabama, Arkansas, Alaska, Florida, Iowa, Kansas, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota and Utah.

Kansas Attorney General Derek Schmidt (R), one of the plaintiffs in the case, celebrated the ruling.

“This is welcome news that confirms our view that the Constitution does not permit the federal government to micromanage how Kansas sets its own state-level tax policy,” Schmidt said in a statement.

It’s unclear if the Biden administration would appeal. The Department of Justice, which argued the case on behalf of the Treasury Department, declined to comment.

Monday’s decision is one of five rulings by federal courts that have reviewed the tax mandate provision and yielded varied outcomes.