Bonds

Treasury dealt another blow as Sixth Circuit denies rehearing in Tennessee case

The Sixth Circuit Court of Appeals has denied Treasury’s request for a rehearing of the court’s decision barring the federal government from enforcing its Offset Provision against Tennessee due to compliance issues being unconstitutionally burdensome.

That’s the latest in the multi-state battle against Treasury’s Offset Provision, which many states argue is a way for the federal government to usurp local taxing authorities. The provision bars states from using American Rescue Plan Act funds to offset tax cuts.

“Another loss for the Treasury Department,” said Joseph Bishop-Henchman, executive vice president of the National Taxpayers Union Foundation. “I hope they will see the light and acknowledge that the statute is badly written.”

But whether the Supreme Court will take up the appeal is still undecided.

In his rejection to rehear the Sixth Circuit’s previous decision, Circuit Judge John K. Bush cited Alexander Hamilton’s insistence in the Federalist Papers that states would retain their authority over their own taxation and that “because taxing power would be held concucurrently by the federal government on the one hand and the states on the other, there would be ‘no power on either side to annul the acts of the other,'” he said.

He also points to the fact that the Offset Provision is vague and that Treasury Secretary Janet Yellen acknowledged as much when she said “we will have to define what it means to use money from this Act as an ‘offset’ for tax cuts. And given the fungibility of money, it’s a hard question to answer.”

Judge Bush also cites Pennhurst v. Halderman, which held that the Eleventh Amendment prohibits federal court from ordering state officials to obey state law, in addition to other precedents, that “more is at stake when Congressional spending legislation threatens state sovereign interests than is at issue in a run-of-the-mill private contract dispute.”

“Congress must speak with a clear voice when it imposes conditions on states for the receipt of federal funds–a principle from Pennhurst that our court faithfully implemented in this case,” Judge Bush said in his statement.

In their request to rehear the case, Treasury argued that states like Tennessee agreed to the conditional funding provisions in accepting the funds and that they essentially want to have their cake and eat it too.

“Allowing states to renege on this agreement not only contravenes the Spending Clause and basic contract law, but it also goes against principles of equity and fairness,” the dissenting statement said. “And allowing states to do this harms the public—rather than use ARPA funds only for the public benefits outlined in 802(c)(1), states may keep some funding to balance their own books.”

The petition was denied due to less than a majority of the judges voting in favor of rehearing.

Appeals are still ongoing in a number of states including West Virginia, Texas, Arizona and Missouri.

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