Attorney General Brnovich Files Lawsuit to Protect Arizona's Ability to Craft State Tax Policy

Federal Government Placed Unconstitutional Restrictions on Stimulus Funds for States

PHOENIX – Arizona Attorney General Mark Brnovich filed a lawsuit today against the U.S. Department of Treasury (Treasury) and federal officials challenging the Tax Mandate portion of the American Rescue Plan Act (Act) because it threatens to penalize states by withholding federal COVID-19 relief funding if they lower taxes in any fashion. Arizona believes the Tax Mandate of the Act is unconstitutional and threatens state sovereignty.

In the lawsuit filed in the U.S. District Court of Arizona, General Brnovich argues the Tax Mandate is ambiguous and the Treasury has failed to provide Arizona with the proper assurances that states can continue to craft their own tax policies and budgets without fear of federal encroachment, even if those policies are unrelated to relief funds. Arizona is asking the court to provide both declaratory and injunctive relief. 

“It's unacceptable for the federal government to commandeer states’ tax policies and micromanage their budgets,” said Attorney General Brnovich. “We will always fight on behalf of hardworking taxpayers and push back against federal overreach.”

Arizona is expected to receive $4.7 billion of the Act to address the impacts of COVID-19. The Act states the funds can be used to respond to the public health emergency, negative economic impacts (including assistance to households, small businesses, and nonprofits), or to aid impacted industries such as tourism, travel, and hospitality. However, the Tax Mandate of the Act forbids states from using the relief funds to “directly or indirectly offset a reduction in… net tax revenues.”

That stands in stark contrast to the Act itself in which Congress provided extensive tax relief as economic stimulus—but simultaneously attempted to ban the States from providing any stimulus through tax relief themselves. Under the Act and its Tax Mandate, Congress has effectively told the States: “Tax cuts for me, but not for thee.” The Constitution does not permit Congress to place the States in such a demeaned and subservient position.

Additionally, in today's filing, Arizona argues the Tax Mandate represents an unprecedented intrusion on the separate sovereignty of the States through federal overreach. The Tax Mandate undermines democratic accountability by empowering current governors in ways that violate separation of powers. Because the Act funds are available until 2024, a single governor could bind both the state legislature and a successor governor from providing any tax relief in the future. This would be a clear intrusion by Congress upon the democratic structures of the States.

General Brnovich sent a letter, along with 20 attorneys general, to Secretary Yellen on March 16, 2021, seeking assurances that the Tax Mandate would not prohibit states from crafting their own tax policies and budgets without being stripped of federal funding. Unfortunately, the Secretary’s response letter was ambiguous and directly contradicts what the principal proponent of the Tax Mandate, Senator Manchin, has publicly stated (and insisted upon including the Tax Mandate as a condition of his vote). Senator Manchin has said that “states should not be cutting taxes at a time when they need more money to combat the virus." He further urged states to "postpone their plans to cut taxes.” 

At a Wednesday Senate Banking Committee hearing, when asked about offsets for tax cuts, Secretary Yellen stated, "...given the fungibility of money, it's a hard question to answer."

Attorney General Brnovich is now seeking clarification from the court on the meaning of the Tax Mandate. Additionally, Arizona is seeking a declaration that the Tax Mandate is unconstitutional: either because (1) it is too ambiguous to place valid conditions upon the States or (2) actually means what its sponsors intended, in which case it is a patently unconstitutional violation of the sovereignty of the States. 

Copy of the filing here.