State HouseState SenateTaxes & SpendingFederal Coronavirus Funds May Be Used to Cut Taxes, District Court Rules on Texas Lawsuit

The Texas legislature earmarked $3 billion of its American Rescue Plan Act funds for "property tax relief" in 2023.
April 12, 2022
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A federal district court in Texas ruled that states may use the coronavirus relief dollars to cut taxes, negating Congress’s prohibition within the American Rescue Plan Act (ARPA).

The State of Texas, joined by Louisiana and Mississippi, sued the federal government and Treasury Secretary Janet Yellen over the prohibition in May 2021. The U.S. Treasury is tasked with enforcement of Congress’s monetary directives.

Texas was allotted $16 billion in disaster relief aid from ARPA. During the October special session last year, the Texas legislature appropriated that sum for various purposes. Those include $7.2 billion to replenish the state’s unemployment insurance fund; $2 billion for buttressed staffing and services in the health care industry for coronavirus response; $4 billion for a medley of projects like broadband expansion and state university construction projects; and $3 billion earmarked for property tax relief during the 2023 session.

That lattermost item was pushed to the 88th legislative session because litigation challenging Congress’s stipulation was ongoing. In passing ARPA, Congress prohibited states and localities from either using it to cut taxes or shoring up underwater pension systems.

Those two provisions were a compromise between Republicans and Democrats — the latter didn’t want to finance state tax cuts and the former opposed propping up increasingly insolvent pension systems exacerbated by over-promised and under-delivered decision-making.

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The ARPA tax cut provision reads that the recipient may not use the funds “to either directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.”

It’s a broad prohibition aimed at preventing any of the money from being used on tax policy. The “indirect” aspect even prohibits a state from using ARPA funds to replace appropriations elsewhere in the budget, and then deploying that substituted pot of money to, say, buy down local property tax rates. The same “direct or indirect” language is also employed in the pension system stipulation.

While it’s not reached a final resolution, the tax cut prohibition is determined void by the Northern District Court of Texas’ ruling.

Among the plaintiff’s arguments is that the stipulation “commandeer[s] the States’ sovereign authority over their own tax polic[ies] … in violation of the Tenth Amendment” and violates “the principle of equal sovereignty by targeting and invading the sovereignty only of those States that, as a matter of history and present fact, are likely to decrease taxes and other government revenues.”

District Court Judge Matthew Kacsmaryk wrote, “If a condition prompts a State to act ‘not of her unfettered will, but under the strain of persuasion equivalent to undue influence,’ then the condition exceeds Congress’s authority under the Spending Clause.”

He likens the threat of recoupment for violating this provision to a “gun to the head,” and thus says it is coercive and violates Congress’s authority to set preconditions for its funds.

A similar example occurred, Kacsmaryk cited, in the landmark U.S. Supreme Court case NFIB v. Sebelius which upheld Obamacare under Congress’s taxing authority, equating the individual mandate to a tax, but further ruled that Congress could not compel states to expand Medicaid. 

Texas’ challenge to Obamacare aimed directly at the individual mandate was dismissed by the Supreme Court 10 months ago.

In that decision, the Supreme Court determined “[t]he threatened loss of over 10 percent of a State’s overall budget … is economic dragooning that leaves the States with no real option but to acquiesce in the Medicaid expansion.”

Kacsmaryk entwines this same line of thinking into the ARPA funding situation, saying that the $16 billion, 13 percent of the state budget, is “‘economic dragooning’ that exerts ‘undue influence’ rather than ‘relatively mild encouragement.’”

The judge issued a permanent injunction against the provision’s enforcement by the Treasury.

The federal government will likely appeal this decision to the appeals court, which would fall to the more conservative 5th Circuit Court of Appeals.

The Texas legislature, with support from the governor, is poised to look at property taxes next session — likely involving further compression of school district property tax rates. The state has bought down those rates each year since the 2019 legislative session — which is estimated to have reduced property taxes collected across the state by roughly $6 billion.

But as appraisals consistently rise, projected to increase 20 percent to 50 percent this year, and local officials adopt tax rates higher than the no-new-revenue rate, property tax bills continue to increase.

If this decision holds, the Texas legislature would be able to spend that earmarked $3 billion for another round of compression, but more ambitious reforms are being explored as well.

However, the tax stipulation is not the only one that comes with the ARPA money. No similar legal challenge has made headway contesting the pension provision, while state and local officials have largely been mum on ARPA’s Terms & Conditions that requires recipients to adhere to federal executive orders as a condition of receipt — but some localities, like the City of Brady, have rejected the funds because of the preconditions.

In addition to Texas, numerous states have already made their intentions clear to use a portion of their ARPA funds to reduce taxes in some fashion, first conditioned on a ruling like this one from the Northern District Court of Texas.

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Brad Johnson

Brad Johnson is an Ohio native who graduated from the University of Cincinnati in 2017. He is an avid sports fan who most enjoys watching his favorite teams continue their title drought throughout his cognizant lifetime. In his free time, you may find Brad quoting Monty Python productions and trying to calculate the airspeed velocity of an unladen swallow.

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