Jurisprudence

The GOP’s Long-Game Plan to Thwart Biden’s Agenda Is Already in Action

A lawsuit filed against the stimulus bill shows how Republicans will use the one branch of government they have left.

Treasury Secretary Janet Yellen siting at a table holding papers.
Treasury Secretary Janet Yellen in Washington on Feb. 5. The response to the GOP’s assault on the stimulus bill is largely in her hands. Drew Angerer/Getty Images

Last week, Ohio’s attorney general filed a lawsuit against the Treasury Department challenging the landmark recovery legislation just passed by Congress, the American Rescue Plan, or ARP. The lawsuit is somewhat technical, focusing on a provision that prevents states receiving direct funds from the bill from reducing their net tax revenues over the next three years. This essentially means that the federal government intends to provide funds to share the burden of pandemic revenue loss, rather than give states free money for tax cuts. The day before Ohio filed its suit, 21 other GOP attorneys general sent a letter to Secretary Janet Yellen threatening to sue if the provision on tax revenues was not narrowed. Republicans are honing in on this as a part of the bill that they might be able to attack.

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In defense of the provision, the Treasury Department has argued that such “reasonable conditions are used all the time,” and pointed out that the law does not in fact prohibit tax cuts. Rather, it requires that states not use the appropriated money to offset revenue losses from tax cuts. Substantively, the Treasury Department is right—the bill deploys the spending power, which has long been considered Congress’ least restricted power. Nevertheless, the Supreme Court limited this power when it struck down the mandatory Medicaid expansion in the Affordable Care Act, and it could take the same aggressive approach here. In other words, this lawsuit raises issues that an opportunistic conservative judiciary could use to limit the power of the federal government, a difficulty the Biden administration is likely to face again and again.

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To understand the lawsuit, it’s worth considering the relevant conditions attached to the appropriation. First, states can only use the funds in certain ways, like filling fiscal shortfalls, investing in infrastructure, or aiding those affected by the pandemic. A state must also certify that it requires the funds to carry out these activities. And second, states receiving funds cannot reduce their net tax revenue for three years. The logic between these conditions should be clear—if a state can’t fill these gaps with its own revenue, surely it can’t afford to reduce revenue either.

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But that is basically what the GOP governors are requesting—that states be allowed to use federal funds to pay for tax cuts. And their legal arguments are tailor-made for a judiciary hostile to the federal government.

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Both the Ohio suit and the attorneys general’s letter make three basic arguments. The first is that the tax provision is too ambiguous. In Pennhurst, the Supreme Court held that federal grants to states are “in the nature of a contract,” and so the conditions must be unambiguous to give clear notice. Here, the conditions state that funds cannot be used to “either directly or indirectly offset a reduction in the net tax revenue of such State or territory.” The GOP argument suggests there is a lack of clarity in what it means to “indirectly” offset a net tax revenue reduction, making this condition “hopelessly ambiguous.” But with the presence of both “directly” and “indirectly,” the statute can be read to prohibit using the funds to offset any net decrease in tax revenue. And the GOP’s second argument concedes this exact point, relying on the assumption that the legislation is plain in its intention to prevent states from reducing net tax revenue. They suggest that the provision would amount to an “unprecedented and unconstitutional … federal usurpation of essentially one half of the State’s fiscal ledgers” by limiting the states’ ability to lower taxes. They argue that the provision would create a system that “would eliminate the democratic accountability that federalism serves to protect” by prohibiting governors from enacting any tax cuts. In their view, this amounts to a violation of the 10th Amendment.

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But this is just not true. The bill doesn’t prohibit tax cuts. Instead, it requires—as a condition for choosing to accept aid—that states do not affirmatively choose to decrease net tax revenues. Governors still have policy control over the tax side of their balance sheet: Any number of tax cuts could be passed so long as they were balanced out by increased revenue elsewhere.

Finally, the GOP argues that the statute is unduly coercive, claiming states have no choice but to accept these funds during a pandemic. While the Supreme Court has not identified a clear, bright-line rule to determine what constitutes undue coercion, the Court did strike down mandatory Medicaid expansion in NFIB v. Sebelius. But this provision should be distinguishable from Medicaid expansion, given that the ARP funding is a temporary measure and affects policy for just three years. And while failing to adhere to the Medicaid conditionality would have resulted in a total loss of federal Medicaid funding for the state, the ARP conditionality does not threaten existing funding that states rely on. Essentially, the condition provides important protection to the federal government—that a contractual agreement to share burdens arising from revenue loss remain shared.

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Although the GOP arguments don’t hold up to serious scrutiny, a judiciary inclined to diminish the federal government’s power to enact progressive change may still support them. If this lawsuit were vigorously litigated by both parties, a 6–3 conservative majority on the Supreme Court could build on NFIB and further limit the ability of the federal government to enact policy change through the spending power.

Therefore, in responding to this suit, Yellen faces a precarious choice. To fight the claim that the condition is unambiguous, the government would likely have to argue that the law unambiguously states that any tax policy change that creates a net revenue loss would need to be offset with a revenue increase. But such a broad provision could be seen as heavy-handed and push a conservative judiciary to find a violation of the anti-commandeering doctrine.

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Alternatively, the Treasury Department could provide clarity on the tax provision through rulemaking. Per the Chevron doctrine, which makes commonsense regulation easier, courts would defer to an agency’s clarification of an ambiguous statute. But this could create a doctrinal conflict, as the Supreme Court has not considered whether a statute subject to the Pennhurst clear-notice rule can be clarified with agency regulation through Chevron deference. Until now this conflict between Pennhurst and Chevron has been the subject of scholarly work, and a few lower court cases, but this lawsuit could put the issue before the Supreme Court for the first time. If that happens, the current conservative-dominated Supreme Court, which is hostile to regulation, could respond by narrowing Chevron deference (if only slightly) while simultaneously weakening the federal spending power.

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How can Democrats respond? The statute gives Yellen broad authority to issue necessary regulations. She could provide guidance to determine how the contract set forth in the ARP is to be executed, further rooting it in a clear burden-sharing agreement. First, the secretary could specify what particular fiscal effects qualify for this funding, such as revenue shortfalls, infrastructure gaps exposed by the pandemic, or inadequate revenue to restore services and rehire state employees let go earlier in the pandemic. Next, the Secretary could align that guidance with the certification process. Per the statute, states must provide certification that they require “the payment or transfer to carry out the activities specified.” A rigorous certification process would further strengthen the contractual nature of the appropriation. The secretary could add further guidance that the funding must be used to fill the gap between insufficient expected revenues and the stated intended use. These actions could strengthen the legal case that this statute is a contractual agreement. Of course, states are free to cut tax revenues if they so desire, but because this appropriation is a contractual agreement to burden-share, states shouldn’t be allowed to release their share of the burden after getting the money.

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It’s possible that this lawsuit goes nowhere and the substantial costs of litigation for both sides deter further action. But regardless of what happens, the GOP will surely launch more legal attacks on the federal spending power. With the GOP shut out of the presidency and both houses of Congress, it will turn to the branch of government where it still exerts firm control: the judiciary. This case symbolizes a core challenge for the Biden administration: designing policy that can withstand a conservative legal onslaught. That battle will require legal argumentation and the use of regulatory power described above.

But perhaps most importantly, it demands a unique level of care and attention during the legislative process. Democrats must ensure they don’t provide easy bait for conservatives to further limit the federal government’s power. Justice John Roberts has already reinvented 10th Amendment federalism jurisprudence to gut not just the Medicaid expansion but also the Voting Rights Act. Justices Neil Gorsuch, Clarence Thomas, and Brett Kavanaugh stand ready to destroy the federal government’s ability to regulate to further progressive goals. At times, this may require sacrificing short-term progressive victories to ensure future ones can endure.

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Democrats are looking to pass a possibly $4 trillion infrastructure package next. Much of it would be routed through state and local governments in similar ways as ARP. The Biden administration is committed to ensuring these funds are used to address racial and gender inequality, as well as climate change. Achieving these goals will require some use of conditional funding, the very kind at stake in the Ohio lawsuit.

After years of conservative dominance, cemented by the Trump administration’s singular focus on seating judges, the federal judiciary has weakened unions, environmental regulations and the general ability of the federal government to enact progressive change. The Biden administration and Congress must make extra effort to ensure their agenda doesn’t fall into legal traps that give conservative courts the opportunity to weaken it further.

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