Appeals court revives Arizona case on virus cash tax cut ban

The ruling by a three-judge panel of the 9th U.S. Circuit Court of Appeals overruled a decision by a federal judge in Phoenix who said Arizona did not have the right to sue over the provision.

The panel did not rule on the merits of the case, instead sending it back to the same judge for her to weigh the state’s allegation that Congress overstepped its authority when it tied acceptance of American Rescue Plan Act money to state certification that it would not be used to offset tax cuts.

Attorneys general in 22 Republican-led states had urged the appeals court to either revive the case or find the provision unconstitutional.

“The federal government does not get to tell states how to set their tax rates,” Arizona Attorney General Mark Brnovich said in a statement. “Yet, the Biden administration is attempting to intimidate and punish states with the loss of COVID-19 relief funding if they don’t submit to these unconstitutional demands.”

Lawyers for Arizona argued that the provision was ambiguous and illegally infringed on state sovereignty by blocking the state from making its own tax policy decisions.

“This case involves potentially one of the most aggressive encroachments upon state sovereignty ever enacted by Congress in the history of the Republic,” Arizona’s lawyers wrote of the law signed by Biden in March 2021. The $1.9 trillion law gave nearly $200 billion to states to help weather the coronavirus pandemic.

But attorneys for the U.S. Treasury Department argued that Arizona was blowing the impact of the provisions way out of proportion. The law and the Treasury Department’s published rules do not contain a blanket ban on tax cuts, they argued. Rather, “the provision restricts only the use of Fiscal Recovery Funds to offset the revenue effects of tax cuts.”

They also noted that Arizona’s Legislature enacted a $1.9 billion income tax cut last year, something the state would not have done if lawmakers were truly worried about the provision.

The provision was included in Biden’s rescue plan at the insistence of West Virginia Democratic Sen. Joe Manchin. His state’s Republican governor was moving to eliminate income taxes.

Besides Arizona’s challenge, other states have argued the tax cut ban is unconstitutional. A federal judge in November sided with West Virginia and 12 other states that challenged the provision. He agreed with arguments that were similar to what Arizona raised.

The Treasury Department has appealed that ruling.