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On Tuesday the U.S. Supreme Court revealed that it would not hear the case brought by the state of Missouri regarding an ongoing effort that would allow pandemic funds to be used to finance tax cuts.

“Orders for declining to hear a case do not usually include reasoning,” said Joe Bishop-Henchman, EVP, National Taxpayers Union. “My guess is that with six of these cases from 20 states out there, they would rather wait for the lower courts to flush them out more.”

The slow rolling dispute is fueled by $195 billion in pandemic aid to the states created by the American Rescue Plan Act of 2021. Missouri has $2.7 billion hanging in the judicial balance that’s weighing on a clause in the legislation that prohibits a state from using the funds to either directly or indirectly offset a reduction in net tax revenue. 

Missouri and 19 states are challenging the interpretation of the law. They claim it only prohibits the deliberate use of funds to pay for a tax cut. They also maintain the rule is a tax mandate that is unconstitutional and violates the states’ sovereignty. 

The legal fine penciling is now spread across multiple challenges across the country. Missouri’s case includes a dismissal from federal district court on a technicality, that was affirmed by the U.S. Court of Appeals for the 8th Circuit. “The Missouri case was just one state’s lawsuit and was decided on a procedural question, not reaching the merits,” said Bishop-Henchman. 

The ambiguity of the law has also pulled the Treasury Department into the fray as it is the enforcer of the law. Treasury officials have their own interpretation about what is legal which has also been called into question. “They are defending an ineptly worded statute,” says Bishop-Henchman. “As several judges have pointed out they’ve issued regulations that essentially rewrite the statute to be narrower. I personally think they should be going to Congress and saying, ‘here’s better language, adopt this.'”    

The legislation originally outlined four categories of use for the funds, including salaries and benefits, infrastructure, and police, fire, and health services. Most of the money has actually been used for revenue replacement, the overly broad category that also invites closer examination.     

If the federal government’s opinion emerges as the winner the Treasury Department could go after money that’s already been allocated to the states. Most of the states challenging the rule lean Republican which pulls partisan politics into the debate. Bishop-Henchman believes the dispute should be kicked back to where it started. 

“It’s very possible Congress repeals the statute,” he said. “There was a test vote in the Senate, and it passed on a bipartisan basis. Absent that, the litigation will continue. If a federal funding condition infringes on state powers, states can challenge it. Regulating indirect use of federal dollars is overbroad because it’s literally everything, so my prediction is the federal government will ultimately lose.” 

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