FederalTexas Joins Suit Challenging Congressional Tax Cut Ban for Coronavirus Funds

Congress prohibited recipients of the ARPA funding from using it to cut taxes but that condition is facing legal challenge.
October 28, 2021
The State of Texas has joined a case challenging the efficacy of a condition within the American Rescue Plan Act (ARPA) that forbids states to use coronavirus aid to cut taxes “directly or indirectly.”

That provision bars any offset of net tax revenue using the ARPA funds. Texas received and disbursed the $16.3 billion pot of funding earlier this month in the third special legislative session. A sizable portion of that pot, $3 billion, was set aside for tax relief to be studied and considered in the 2023 regular session.

The legislature also approved an augmented homestead exemption worth $175 for the average homeowner in perpetuity. It originally toyed with buying down school district tax rates and then one-time rebates directly to property owners, both using ARPA funds. But it instead earmarked the $3 billion for a tax cut down the road to let litigation play out.

That litigation began in an Ohio district court which ruled against Congress’s tax cut prohibition. It has since moved to the U.S. 6th Circuit Court of Appeals and awaits a final ruling there.

Along with 19 other state attorneys general, Ken Paxton and the group filed an amicus brief challenging the funding condition.

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They ask the court to “ensure that federal legislation does not ‘undermine the status of the States as independent sovereigns in our federal system.’”

The main worry by the challenging states is that the law prohibits them from cutting taxes at all, with or without the help of the ARPA money because of the word “indirectly.”

“[T]he Tax Mandate is impossible to understand to the point of being unconstitutionally ambiguous,” the states argue.

“Ohio has the requisite constitutional interest here because it has a statutory entitlement to funds under ARPA. Ohio, however, has already cut taxes and wants to continue to have authority to cut taxes into the future.”

The coalition’s brief focuses on the federal government’s argument that Ohio lacks standing to challenge the law — a common legal tactic and important buffer against frivolous lawsuits.

The amicus brief reads, “The [federal] government argues that, because Ohio cannot show that the tax cut will be ‘paid for’ by ARPA funds, it is not injured.”

The tax cut prohibition wasn’t the only condition placed on the money. The other half of the congressional compromise prohibits recipients from shoring up underwater pension systems with the money.

In total, Texas received over $40 billion with various sections earmarked for different categories of government including $16.3 billion to the state; $11.2 billion to school districts, and $10 billion to localities.

To receive the funds, entities must sign a contract with the U.S. Department of the Treasury, one section in which holds recipients to compliance with “applicable federal statutes, regulations, and executive orders.”

This provision caused the City of Brady to reject its funding and send back the tranche it had already received. Most entities are not following Brady’s path, taking the money despite trepidation surrounding the conditions.

There is both a lot of money and substantial decision-making authority at stake in this case between the federal government and states to which it has awarded funds. And its outcome may affect Texas’ ability to tackle growing property taxes down the road.


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Brad Johnson

Brad Johnson is a senior reporter for The Texan and 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.