State attorneys general challenge Janet Yellen over tax mandate in coronavirus relief package

Arizona is using Treasury Secretary Janet Yellen’s own words against her in its legal challenge to President Biden’s $1.9 trillion coronavirus relief package.

Ms. Yellen’s admission that the law’s restrictions on state tax cuts are tough to define is proof that courts shouldn’t enforce the law, the state said in a new court filing.

The filing is the latest salvo in a legal battle involving more than a dozen states that are challenging the law, in several lawsuits, as an unconstitutional infringement on their ability to set their own tax policy.

“Secretary Yellen’s own testimony to Congress powerfully demonstrates the hopeless ambiguities inherent in the tax mandate, stating that the tax mandate creates ’a host of thorny questions,’ and that ’given the fungibility of money, it’s a hard question to answer’ what the effect of the tax mandate will be,” lawyers for Arizona Attorney General Mark Brnovich said in a court filing this week.

Mr. Brnovich is seeking a preliminary injunction to block enforcement of language in the $1.9 trillion law that bars states and localities from using their share of $350 billion in federal aid to offset lost revenue from tax cuts.

A spokesman for Mr. Brnovich said Ms. Yellen’s comments demonstrate the language is at best ambiguous “or at worst, designed to unconstitutionally commandeer state budgets.”

His lawyers said Ms. Yellen hasn’t provided clear answers to 21 state attorneys general on whether specific examples of possible “tax cuts” would violate the coronavirus relief law and force states to forfeit their share of the funds.

For example, Arizona Gov. Doug Ducey has called for $600 million in income tax cuts, and legislators are considering whether to phase out a vehicle-registration fee.

“This ambiguity makes the tax mandate unconstitutional and unenforceable,” they said in the new filing. “Because Congress lacks constitutional authority to impose such an ambiguous and potentially broad condition on this federal aid, Arizona now seeks a preliminary injunction of the tax mandate’s enforcement against it.”

Sen. Mike Crapo of Idaho, the top Republican on the Senate Finance Committee, also has pressed Ms. Yellen for answers, as have other congressional Republicans.

The senator received a reply Monday essentially telling him to stay tuned.

“The provisions concerning the state and local funding programs apply to a diverse range of states and localities,” Craig Radcliffe, a deputy assistant secretary in Treasury’s Office of Legislative Affairs, wrote to Mr. Crapo. “We are committed to getting the program parameters and operations right and doing so as quickly as possible.”

Ohio Attorney General Dave Yost filed a lawsuit last month, as did Mr. Brnovich. Thirteen other state attorneys general teamed up to file a similar complaint.

Ms. Yellen told Mr. Brnovich and the other attorneys general that the language isn’t a blanket ban on states’ ability to cut taxes.

“It simply provides that funding received under the act may not be used to offset a reduction in net tax revenue resulting from certain changes in state law,” she wrote in a letter dated March 23. “If states lower certain taxes but do not use the funds under the act to offset those cuts — for example, by replacing the lost revenue through other means — the limitation in the act is not implicated.”

A day later, Mr. Crapo pressed Ms. Yellen at a hearing on how she intends to approach the definition of an “offset” for a tax cut.

“When I said that we have thorny questions to work through, you have just indicated why we do,” Ms. Yellen replied. “We will have to define what it means to use money from this act as an offset for tax cuts. And given the fungibility of money, it’s a hard question to answer. But that’s what we’re required to do, and we will do our best to offer guidance on it.”

Mr. Brnovich’s office said they haven’t gotten additional answers or clarity from Treasury beyond Ms. Yellen’s initial response letter and that her testimony demonstrates the need for the courts to clear things up.

The White House has said the purpose of the state and local funding was to keep police, firefighters and other essential employees on the job, not to cut taxes.

Tom Schatz, president of Citizens Against Government Waste, a fiscal watchdog group, said that regardless of constitutionality, the language is part of an effort by Democrats to expand the size, scope and power of the federal government.

“If you have a provision that says to the states, ’you can’t cut taxes with the money we give you,’ that’s something that is creating control that’s I think beyond anything that we’ve seen,” Mr. Schatz said.