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GOP state officials undeterred in challenging tax cut rule in COVID aid bill

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Washington — Guidance provided by the Treasury Department this week to clarify a challenged provision of President Biden's $1.9 trillion coronavirus rescue package has done little to assuage state Republican officials who are targeting the measure in a slew of legal battles.

The provision at issue prohibits states from using money from a $350 billion pot for states and localities included in Mr. Biden's economic aid package to offset tax cuts. GOP attorneys general from more than a dozen states have asked the courts to block enforcement of the prohibition, arguing it steps outside constitutional bounds.

While an interim final rule published by the Treasury Department seeks to provide clarification as to how that measure will be enforced and under what conditions the money will be recouped from states who run afoul of the prohibition, the Republican officials say it does little to satisfy their constitutional concerns.

"The proposed regulations do not make this unprecedented and unconstitutional statute any more constitutional," Alabama Attorney General Steve Marshall said in a statement to CBS News. "If anything, they confirm the tremendous scope of influence the federal government intends to wield over how Alabama exercises its sovereign power." 

Together with the attorneys general of Arkansas and West Virginia, Marshall is leading a coalition of 13 states that filed suit against the Biden administration in federal court in Alabama over the so-called tax mandate, under which a state cannot use the aid from the American Rescue Plan "to either directly or indirectly offset a reduction" in its net tax revenue. The aid package, enacted in March, also prohibits states from using their share of the $350 billion for pension funds.

The attorneys general argue the provision "impermissibly seizes taxing authority from the states" and "sets up an untenable choice" for them: give up control "over a core function of their inherent sovereign powers," or forgo the aid while they continue battling the pandemic, which the states said represents roughly 25% of their respective annual budgets.

They are asking the court to block the Biden administration from enforcing the provision against their states — West Virginia, Alabama, Arkansas, Alaska, Florida, Iowa, Kansas, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota and Utah.

The request from the 13-state coalition mirrors others from the GOP attorneys general in Arizona, Missouri and Ohio, who have separately turned to courts in their states for relief. Arizona Attorney General Mark Brnovich said the interim final rule from Treasury Secretary Janet Yellen does not address the constitutional issues he argues the measure presents, while Arkansas Attorney General Leslie Rutledge said the "proposed regulations do not fix its unconstitutionality."

"Unfortunately, what Congress passed in the American Rescue Plan was ambiguous, and Secretary Yellen still has not provided clear guidelines. Americans cannot put their faith in whatever the latest interpretation is from the Biden Administration," Brnovich said in a statement to CBS News. "Arizona should not be put in a position of losing billions of dollars because the federal government wants to commandeer states' tax policies." 

A spokesperson for Brnovich said the attorney general is proceeding with his request for a federal judge in Arizona to block enforcement of the tax mandate.

In a statement about the Treasury Department's guidance, Ohio Attorney General Dave Yost said Yellen's "own lawyers have already all but admitted that a bureaucrat's regulation can't fix an unconstitutional law. So these meaningless directives on enforcing this tax mandate ought to be treated with the same seriousness as other pieces of fantasy fiction."

The 150-page interim final rule from the Treasury Department identifies four areas states can use the aid for: strengthening the response to the pandemic and its economic impacts; easing financial pressure on state and local governments to avoid cutbacks in services; providing premium pay to essential workers; and investing in certain types of infrastructure. 

It also sets forth the framework to calculate whether the recovery funds have been used to offset tax cuts.

"Together, these steps allow Treasury to identify the amount of reduction in net tax revenue that both is attributable to covered changes and has been directly or indirectly offset with Fiscal Recovery Funds," the guidance states. "This process ensures Fiscal Recovery Funds are used in a manner consistent with the statute's defined eligible uses and the offset provision's limitation on these eligible uses, while avoiding undue interference with State and territory decisions regarding tax and spending policies."

While the directives are not deterring Republican officials in pursuing their legal battles against the Biden administration, some have already suffered setbacks in court.

A federal judge in Missouri on Monday tossed out state Attorney General Eric Schmitt's suit challenging the tax mandate, and on Wednesday, a federal judge in Ohio denied Yost's request to block enforcement of the provision against the state while its suit is pending.

In the dispute from Ohio, Judge Douglas Cole, appointed by former President Donald Trump, conceded the state has a "substantial likelihood" of showing the tax-cut provision violates the Constitution.

"Ohio has shown that it has a substantial likelihood of establishing that, as written, the tax mandate does not meet the floor for clarity that the Spending Clause imposes on federal legislation offering money to the states," Cole wrote. "The impact of the new Treasury regulations, as an 'interim' rule, or when final, on that determination is by no means clear."

Yost has asked the court to expedite proceedings on its request for permanent relief and final judgment.

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