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Treasury Tells Judge To Deny Arizona From Using COVID Funds For Tax Cuts

By Howard Fischer 

Capitol Media Services 

PHOENIX -- Lawyers for the U.S. Treasury are asking a federal judge to throw out a bid by state Attorney General Mark Brnovich to say Congress can't tell Arizona it can't use any of its COVID relief dollars to cut taxes for business and individuals. 

Stephen Ehrlich, an assistant federal attorney general, said the state has accepted money -- an estimated $4.9 billion -- as its share of the American Rescue Plan Act. And he said the law itself makes it clear that states cannot turn around and use those dollars "to either directly or indirectly offset a reduction in the net tax revenue.'' 

Now, he told U.S. District Court Judge Diane Humetewa, Brnovich can't argue that Congress has no authority to put conditions on the federal dollars. In essence, Ehrlich argued, if a state is uncomfortable with the conditions, it need not take the money. 

The legal arguments come on the heels of approval by the Republican-controlled legislature and the signature of Gov. Doug Ducey of $1.9 billion worth of tax cuts. 

Drew Ensign, an assistant state attorney general who is handling the case for Brnovich, said he does not believe the state, in approving those changes in tax law, has run afoul of the federal law. But he wants a ruling that the conditions are unconstitutional and, more to the point, the state need not surrender any of the federal aid if the government later decides that the tax cuts are an indirect use of the federal dollars. 

The problem with all that, Ehrlich told Humetewa, starts with the fact that there has yet to be a ruling that the state broke the law. And without some actual harm, he said, there's no basis for her to even consider the state's claim that the restriction is unconstitutional. 

"Arizona does nothing more than guess about how it might be injured,'' he wrote. 

And even if a violation is found, Ehrlich said, Congress has an absolute right to put conditions on federal grants. 

Ensign starts with the premise that the provision is unconstitutional. He said what will trigger a refund demand is "ambiguous,'' leaving states with no clear guidance. 

He also called the grants "insidious and coercive,'' amounting to close to 10% of the state budget. That, Ensign said, effectively made it impossible for Arizona to refuse to accept the cash in the first place, even with the conditions. 

"The harm here is that the state's policymaking apparatus is being commandeered, which happens as long as the state is coerced to enter the program,'' he wrote. "Even if the state never cut taxes and wholly complied with the mandate, if it did so because of coercion, this would still violate the  values inherent in dual sovereignty.'' 

Ehrlich did not dispute that there are limits on the authority of Congress over the states. 
He noted, though, that the U.S. Supreme Court says the Constitution says Congress "may, in the exercise of its spending power, condition its grant of funds to the states upon their taking certain actions that Congress could not require them to take.'' 

In this case, Ehrlich told Humetewa, the Rescue Plan is a lawful exercise of the constitutional powers of Congress to spend. 

"Designed to assist in the nation's economic recovery during and following a pandemic, the Rescue Plan appropriates nearly $200 billion in new federal funding for the states and the District of Columbia,'' he said. And Ehrlich said Congress gave states "considerable flexibility to mitigate the fiscal effects of the COVID-19 pandemic'' as they see fit, within the parameters set by Congress. 

Just Wednesday, Ducey allocated $101.1 million in ARPA dollars to launch what he called the Visit Arizona Initiative for campaigns to convince people from other states and countries to visit Arizona. 

In making the announcement, the governor said there is a direct link between the pandemic and the loss of thousands of jobs in the tourism industry. He said the state is "making sure employment opportunities continue to grow for hard workers across Arizona.'' 

The plan also includes funds to revitalize state parks, money for the Arizona State Fair for marketing and dollars specifically earmarked to upgrade older golf courses in the state. 

Gubernatorial press aide C.J. Karamargin said 57 courses are eligible for up to $105,000. He said that Arizona had attracted 2.4 million visitors who came here for golf prior to the pandemic. 

And Karamargin said at least part of the reason these older facilities -- pre 1986 -- are being singled out for dollars is because they could use the cash to make adjustments to their water use. 

Earlier this week Ducey separately used $759 million in ARPA funds to boost the state's unemployment trust fund balance. That reduces the burden on employers who might otherwise have to pay higher premiums to keep that fund solvent. 

None of those expenditures are at issue in the lawsuit. What is, Ehrlich told Humetewa, is whether any of those ARPA dollars are financing tax cuts. 

"Unsurprisingly, Congress sought to ensure that its monetary outlay would be used as intended,'' Ehrlich said, calling the prohibition against using it for tax cuts "a guardrail.'' 

"Congress has broad leeway in establishing permissible uses of federal funds,'' he continued. 

 "And Congress has an overriding interest in ensuring that the new Rescue Plan funds will be used for the broad categories of state expenditure it identified and no other Congress chose not to support.'' 

Ehrlich also said no one is being forced to do anything, regardless of the amount of money involved. 

"Arizona's coercion argument also fundamentally misunderstands governing law,'' he wrote. "The Supreme court has held that Congress may attach appropriate conditions to federal taxing and spending programs to preserve its control over the use of federal funds.'' 

And he urged the judge to ignore the claims by Ensign that the feds can't enforce the provision because it's not clear and unambiguous. 

"Congress is not required to list every factual instance in which a state will fail to comply with a condition, which would be potentially impossible,'' he said. "Congress must simply make the existence of the condition itself -- in exchange for the receipt of federal funds -- explicitly obvious.'' 

Humetewa has not said when she will rule. 

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