Court upholds ban on using COVID-19 funds for tax cuts

A federal appellate court on Friday ruled for the administration of President Biden and against Ohio Attorney General Dave Yost who was hoping to overturn a prohibition against using coronavirus relief dollars to fund tax cuts.

In 2021, Congress passed the American Rescue Plan Act, a $1.9 trillion legislative package aimed at helping states and individuals weather the COVID-19 pandemic. It provided $350 billion in state and local recovery funds, so long as governments didn’t use the money “directly or indirectly” to fund tax cuts. The federal government could claw back money from violators.

Yost filed a lawsuit challenging this prohibition in March 2021, arguing the ban is unconstitutional and overly vague. He said the term “indirectly” essentially prohibits a state from enacting tax cuts during the yearslong time period covered by the legislation because the government could argue any tax cut would not have been feasible without the financial injection.

In June of that year, Ohio enacted its most recent state budget, including an income tax reduction for all earners that disproportionately favored the wealthy.

The next month, U.S. District Judge Douglas R. Cole ruled for Yost in his challenge of the ban on using ARPA money to fund tax cuts, arguing the “tax mandate” was insufficiently clear and blocked its enforcement.

The U.S. Treasury Department appealed that ruling. On Friday, a three-judge panel of the Sixth Circuit Court of Appeals ruled for the federal government. The court did so on procedural grounds, finding subsequent guidance from the federal government largely cleared up the alleged ambiguity, and thus Ohio lacked the harm required to bring a lawsuit.

To prevail, Ohio needed “to submit concrete evidence about why Treasury might imminently pursue a recoupment action in response to its behavior past, present or future,” the court opinion states. But Ohio didn’t present evidence of a looming tax cut or a subsequent attempted clawback from the federal government.

The opinion doesn’t stop Ohio from challenging ARPA provisions down the line but holds that the current lawsuit is not a “justiciable dispute,” and so it reversed the lower court’s ruling.