Suit well meaning, but premature

President Joe Biden’s massive COVID-19 response plan included a poison pill for states, such as Arizona, considering a tax cut.

While the American Rescue Plan Act included a bailout for states, it also prohibited the use of the funds to “directly or indirectly” backfill a tax cut. Moreover, the purported tax-cut ban lasts through 2024.

Attorney General Mark Brnovich has filed a lawsuit to enjoin enforcement of this provision of the Rescue Act. He is right about the underlying policy issue. The provision does violate the dual sovereignty principle of the American federal system, in which states have an independent dominion in which the national government doesn’t get to call the shots.

However, I suspect that the lawsuit will be found premature. And it is probably unnecessary in Arizona’s case. There should be a bulletproof defense that whatever tax cut Republicans in the Legislature decide to enact doesn’t violate the Rescue Act’s no-backfill prohibition.

The Treasury Department isn’t close to issuing regulations providing guidance on how it will apply the vague “direct or indirect” proscription. A judge is unlikely to view the case as ripe at least until that is done.

Moreover, while it is clear that an attempt by the national government to control the fiscal policy of the states violates the principle of dual sovereignty, the federal courts have been less than vigilant in policing and enforcing that principle. A district court judge has a confusing thicket of precedents to pick through.

There isn’t a body of jurisprudence that would clearly say that making this particular ban a condition of receiving federal assistance through the Rescue Act is an unconstitutional intrusion on state sovereignty. And such clarity is what an injunction at this stage would require.

The federal government attaches conditions to receipt of federal funds all the time. For the most part, the courts have upheld them.

The U.S. Supreme Court did give a little more heft to the principle of dual sovereignty when it struck down the Obamacare requirement that all states expand Medicaid coverage to include adults up to 133% of the federal poverty level. However, it did so because states failing to expand would not only miss out on the additional federal funding for the added population, but would lose all Medicaid funding entirely.

The court majority held that when the national government attaches conditions to subventions, the states must have a choice whether to accept the dough and the conditions or give them a pass. The penalty of losing existing Medicaid funding amounted to a denial of that choice. As a practical matter, it was attempted coercion.

Brnovich argues that the sheer size of the Rescue Act grants — Arizona state government is in line to receive $4.8 billion — amounts to similar coercion. But the argument that the size of the gift, as opposed to the size of the penalty, constitutes coercion is a much tougher one to make.

And, given Arizona’s particular circumstances, shouldn’t be necessary.

The state is projected to have a budget surplus from state sources of in excess of $1 billion for the next fiscal year, which begins in July.

The Legislature will be adopting a budget that will spend more on state programs from state sources than has been spent in the past, and at a rate of increase at least comparable to that of recent years.

If, in addition to that, the Legislature decides to cut taxes, it would be using surplus state revenues to do so, not directly or indirectly backfilling with Rescue Act monies.

So, unless the tax cut were to exceed the projected surplus, any tax cut enacted by the Legislature shouldn’t be subject to challenge under the Rescue Act, irrespective of what the Treasury Department regs end up saying or how aggressively the Biden administration want to squelch tax cuts among the states.

To argue otherwise, the Biden administration would have to assert the authority to not only control the use of federal funds, but the decisions the state makes about the use of its own revenues. That a surplus of state resources that arose independently from the Rescue Act could only be spent or saved, not returned to taxpayers. Courts aren’t likely to buy that.

Brnovich’s heart is in the right place in attempting to rescue a state tax cut from the Rescue Act. But his legal heroics are probably unnecessary.