Federal Judge Blocks Provision Prohibiting States From Using Relief Funds to Offset Tax Cuts

A federal judge blocked the U.S. Treasury from prohibiting states to use pandemic relief funds to offset tax cuts on Monday.

U.S. District Judge L. Scott Coogler ruled in Alabama that Congress exceeded its power by putting the tax mandate on states. Thirteen states filed lawsuits against the mandate, in which Coogler ruled in favor of and instructed the Treasury Department not to enforce the provision.

Coogler described the tax-cut restrictions as "a federal invasion of State sovereignty" that was "unconstitutionally ambiguous," which would leave states guessing as to whether their tax cuts would trigger a repayment of federal funds.

"The Tax Mandate's restriction on direct or indirect state tax cuts pressures States into adopting a particular—and federally preferred—tax policy," Coogler wrote. That "may disincentive" states "from considering any tax reductions for fear of forfeiting ARPA funds."

The rejected American Rescue Plan steered $195 billion in flexible relief funds to states but specified that states could not use it as a means to cut taxes by using the federal relief dollars to offset the revenue reduction.

For more reporting from the Associated Press, see below:

Alabama State House
A federal judge blocked the U.S. Treasury from prohibiting states to use pandemic relief funds to offset tax cuts on Monday. Opponents of several bills targeting transgender youth attend a rally at the Alabama State House to draw attention to anti-transgender legislation introduced in Alabama on March 30 in Montgomery, Alabama. Julie Bennett/Associated Press

Alabama Attorney General Steve Marshal called the tax-cut restrictions "an unprecedented and unconstitutional assault on state sovereignty by the federal government."

Officials from other states on Tuesday also praised the ruling.

West Virginia Attorney General Patrick Morrisey said the decision "ensures our citizens aren't stuck with an unforeseen bill from the feds years from now."

Kansas Attorney General Derek Schmidt said it "clears the way" for the state to pursue a sales tax cut on groceries "without fear of federal reprisal."

Justice Department lawyers representing the Treasury Department argued the money should be used for its intended purpose—pandemic recovery.

"Congress did not provide Rescue Plan funds for States to replace purposeful decreases in net tax revenue; it provided the money to help States economically recover from the pandemic in ways they otherwise could not," federal lawyers wrote in an August court filing.

Federal government lawyers added, "states are free to cut all the taxes they want, as long as they do not use the federal aid to 'offset' any decreased revenue."

The lawsuit was filed by Alabama, Arkansas, Alaska, Florida, Iowa, Kansas, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota, Utah and West Virginia.