Federal Court Tosses Lawsuit to Nix ARPA Tax Cut Prohibition

A Missouri federal court yesterday dismissed the state’s bid to block the federal government from enforcing a prohibition against using federal coronavirus aid to offset tax cuts, finding Missouri lacks standing to challenge spending restrictions on COVID-19 relief funds because it cannot show that it suffered an injury due to those limits.

As previously reported on Conduit Street, the American Rescue Plan Act of 2021 provides $350 billion in emergency funding for state, local, territorial, and Tribal governments to remedy the mismatch between rising costs and falling revenues. This includes:

  • $195 billion for states (a minimum of $500 million for each State);
  • $130 billion for local governments (a minimum of $1.25 billion per state is provided by the statute inclusive of the amounts allocated to local governments within the state);
  • $20 billion for tribal governments; and
  • $4.5 billion for territories

One condition has attracted legal controversy. ARPA prohibits states from using relief funds to “directly or indirectly offset a reduction in the net tax revenue of such State” resulting from “a change in law, regulation, or administrative interpretation” that reduces “any tax” or delays the imposition of any tax or tax increase. In other words, rescue plan money cannot pay for state tax cuts.

The State of Missouri, along with several other states, sued the US Department of the Treasury over the provision that bars states from using federal relief aid to pay for tax cuts, arguing that it violates the 10th Amendment’s limitations on federal power.

According to The Kansas City Star:

Henry Autrey, a U.S. District Court judge in St. Louis, wrote that Schmitt’s office had not proven Missouri would be harmed by the federal law.

“The alleged harm to Missouri is too speculative, abstract, and remote” to hear the case, Autrey wrote.

The court also found the federal law does not prevent states from enacting tax cut legislation. “In short, state tax cuts are not proscribed by the ARPA. Missouri’s sovereign power to set its own tax policy is not implicated by the ARPA,” the court said. “The Missouri Legislature is free to propose and pass tax cuts as it sees fit.”

As previously reported on Conduit Street, the US Department of the Treasury this week released its first official guidance on the use of funds from the American Rescue Plan – including resources for state and local governments to manage the local implementation of the ambitious program.

Stay tuned to Conduit Street for more information.

Useful Links

The Kansas City Star: Judge tosses Missouri AG Eric Schmitt’s tax cut lawsuit against Biden administration

Previous Conduit Street Coverage: New ARPA Guidance Available From US Treasury

Previous Conduit Street Coverage: Details, Timetables Emerging on the American Rescue Plan