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Federal judge rules in favor of TN and KY, deeming state tax mandate in American Rescue Plan unconstitutional

The judge's ruling found a tax mandate within the ARPA was unconstitutionally coercive.

FRANKFORT, Ky. — A federal judge on Friday ruled a tax mandate within the American Rescue Plan Act was unconstitutional after Tennessee and Kentucky sued to have it blocked.

Judge Gregory Van Tatenhove with the U.S. District Court in the Eastern District of Kentucky ruled in favor of the two states, deeming the federal mandate exerted "undue influence" over the states' tax policy in order for them to accept relief funds and was therefore unconstitutional -- issuing a permanent injunction for the two states.

Tennessee Attorney General Herbert Slatery and Kentucky Attorney General Daniel Cameron filed the lawsuit, which they said "prevents [states] from lowering taxes for its citizens for four years." 

“We are very pleased with the court’s decision,” Slatery said. “Tennessee should not have to hand over its constitutional right to establish state tax policy in exchange for federal relief from this pandemic.”

After passing Congress and being signed into law by President Joe Biden in March 2021, the U.S. Treasury's guidelines for the mandate restricted states that receive direct aid from using the funds to "either directly or indirectly offset a reduction in the net tax revenue." States not complying with the mandate would be required to repay the amount of used funds found to be in violation.

The federal government argued the lawsuit attempted to "manufacture standing where it does not exist" and that Congress had not exceeded the bounds of its authority for Spending Clause purposes.

Tennessee and Kentucky argued the unconstitutionality of the mandate on four points, but the judge issued an opinion on just one point: that the mandate amounted to undue coercion from the federal government because it required states to adjust tax policy in order to receive necessary relief funds to offset the financial impact of the COVID-19 pandemic. 

The judge refrained from issuing further opinions on whether the mandate violated the Tenth Amendment for states to set their own tax policy, whether the mandate wasn't related to the federal interest in passing the ARPA, or if the mandate's language was in violation of the Spending Clause for being "unconstitutionally ambiguous."

"Kentucky and Tennessee may very well be correct about these alternative grounds. But, having found the Tax Mandate unconstitutionally coercive, this Court will refrain from anticipating further questions of constitutional law “in advance of the necessity of deciding [them]," the judge ruled.