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A few things in life are certain. The sun rises in the east and sets in the west. Everyone dies. Taxes must be paid.
And if a Democratic president signs a historic piece of legislation, a Republican state attorney general will file a lawsuit claiming that the new law is unconstitutional.
Indeed, by the standards of such lawsuits, the claim in Ohio v. Yellen, a lawsuit filed by Ohio’s Republican Attorney General Dave Yost, is fairly mild. Yost does not seek a court order striking down the entire $1.9 trillion American Rescue Plan, the stimulus law passed in March. Rather, he makes a fairly targeted attack on a provision he labels the law’s “tax mandate.”
This lawsuit follows a letter from 21 state attorneys general to Treasury Secretary Janet Yellen, which makes similar arguments to those raised by Yost, so it’s likely additional suits will be filed soon.
The American Rescue Plan appropriates $195.3 billion in aid to states, and Ohio’s share is about $5.5 billion. Like every other state, Ohio has the option to turn down the funds. If it does decide to take this free money, however, it must comply with a provision of the law specifying that “a State or territory shall not use the funds provided under this section ... to either directly or indirectly offset a reduction in the net tax revenue of such State or territory.”
Essentially, Congress wanted to make sure the money it provided to help states fund public programs would actually go to fund public programs, not to cut taxes.
Congress’s power to provide conditional grants to states is broad but not unlimited, and Ohio argues that the tax-cut restriction exceeds two constitutional limits on this power to place conditions on federal grants.
As explained below, one of the state’s arguments is quite radical and could do significant harm to major federal programs such as Medicaid if the courts take it seriously. Ohio’s second assertion is stronger and more plausible — indeed, it’s the sort of argument likely to prevail in a conservative judiciary — although there is some language in the court filings that might undercut its reasoning.
The case will be heard by Judge Douglas Cole, a Trump appointee, so there’s a very good chance that Ohio will have a receptive audience from the trial court. However Cole decides the case, his decision will likely be appealed to the United States Court of Appeals for the Sixth Circuit, which is dominated by very conservative Republican appointees, and then potentially to a Supreme Court with a 6-3 conservative majority.
So there’s a decent chance that Ohio ultimately prevails, and that states will be allowed to take the money offered under the Rescue Plan without having to comply with the requirement not to spend that money on tax cuts. It is less clear, however, whether the courts will embrace the more radical of Ohio’s two legal arguments.
Conditional federal grants, briefly explained
The Constitution permits Congress to levy taxes, and then to spend this money to “provide for the common defense and general welfare of the United States.” One aspect of this power to raise and spend money is that Congress may offer grants to state governments, provided those states agree to certain conditions.
In a 1987 case, South Dakota v. Dole, however, the Supreme Court held that there are some constitutional limits on the federal government’s power to impose such conditions on grants to the states — and two of these limits are relevant in the Ohio case.
First, if Congress wants to place a condition on a grant to states, it “must do so unambiguously ... enabl[ing] the States to exercise their choice knowingly, cognizant of the consequences of their participation.” So, if the terms of the grant are confusing or uncertain, the state typically won’t be required to comply with those terms.
The second limit that’s relevant to the Ohio case is that a condition on a federal grant may be struck down if the “financial inducement” offered by Congress is not “so coercive as to pass the point at which pressure turns into compulsion” — an argument that will be familiar to anyone who followed the first round of litigation challenging the Affordable Care Act.
Ohio’s argument that the tax-cut restriction is unconstitutionally ambiguous is a fairly strong legal claim — largely because of uncertainty about what it means to “indirectly offset a reduction” in tax revenue. As Daniel Hemel, a law professor at the University of Chicago and an expert on tax law, told me, “money is fungible, so I’m not quite sure what it means for the funds to indirectly offset a reduction in net tax revenue resulting from a tax cut.”
That said, Ohio only briefly lays out its claim that the “tax mandate” is unconstitutionally coercive in its court filings, and there’s some language in one of its motions that cuts against its argument that the ban on using federal funds to pay for tax cuts is unconstitutionally ambiguous.
“Because ‘money is fungible,’” the state argues, “any money received through the Act will ‘indirectly,’ at least, ‘offset a reduction in the net tax revenue’ of a State that reduces the tax burdens on its citizens by law, regulation, or administrative interpretation. So every change in tax policy that leads to a decrease in tax revenue violates the Tax Mandate.”
The state, in other words, appears to concede that the word “indirectly” is not ambiguous. Under the state’s reading of the law, the Rescue Plan bans states from enacting any tax cut. Ohio may not like that condition, but the fact that Ohio views this condition as too onerous does not make it ambiguous.
That said, on Thursday the Treasury Department put out a statement offering its own interpretation of the contested provision — the Biden administration says that states may cut taxes so long as they don’t use Rescue Plan funds specifically to pay for those tax cuts.
That could diminish the stakes of the Ohio lawsuit considerably. But the fact that Treasury’s interpretation of the law conflicts with Ohio’s does suggest that the word “indirectly” is open to multiple interpretations.
Ohio’s other argument against the “tax mandate” is quite radical
The state’s other argument is that the tax-cut restriction is unconstitutionally coercive. This argument is quite a stretch. The federal government is offering Ohio $5.5 billion in free money. Ohio has an absolute right to refuse this money if it chooses to, and the federal government will take no action against the state if it turns down this free money.
Yes, the money comes with a condition that Ohio doesn’t like. But the only penalty if Ohio decides that it does not want to accept the money and the conditions that come with it is that Ohio will not receive free money if it doesn’t agree to the conditions. That’s hardly coercion.
The Supreme Court hasn’t placed much emphasis on Dole’s warning that, in rare cases, a conditional grant may be “so coercive” as to become unconstitutional, but there is one very high-profile case where the Court did strike down a condition as unconstitutionally coercive.
In NFIB v. Sebelius (2012), the Supreme Court struck down a provision of the Affordable Care Act intended to encourage every single state to expand its Medicaid program. As originally drafted, Obamacare required every state to either expand Medicaid to cover everyone under age 65 who earned less than 133 percent of the federal poverty rate, or else a state could lose all of its existing Medicaid funding.
As Chief Justice John Roberts explained in an opinion comparing this kind of conditional grant to a “gun to the head,” “Medicaid spending accounts for over 20 percent of the average State’s total budget, with federal funds covering 50 to 83 percent of those costs.” So states that did not agree to expand their Medicaid program risked losing at least 10 percent of their operating funds.
That kind of condition, Roberts claimed, amounted to coercion, and so he concluded that states must have the option to turn down the new Medicaid funds without losing funding for their existing Medicaid programs.
Ohio, for what it’s worth, argues that the Rescue Plan’s aid to states is similar to the conditional grant struck down in NFIB because the Rescue Plan is very generous.
The American Rescue Plan Act provides Ohio $5.5 billion in federal funds. That is a tremendous amount of money; it equals roughly 7.4 percent of Ohio’s total expenditure in 2020. No State, in the current economic situation, can turn down this “financial inducement.” So here, as in NFIB, the States have “no real option” but to take the funds on offer.
Essentially, Ohio claims that, because the states are being offered so much money — and because they are being offered that money after the pandemic eviscerated many states’ budgets — those states don’t really have the option of turning down the Rescue Plan’s funding.
But there’s a big difference between the stimulus law and the provision of Obamacare struck down in NFIB. As originally drafted, Obamacare would have stripped states of funding for existing state programs unless the state agreed to accept new funds and expand those programs. The Rescue Plan, by contrast, does not threaten any of Ohio’s existing federal grants.
If Ohio turns down the funding it’s entitled to under the Rescue Plan, then Ohio will be in exactly the same position it would have been in if the federal government had never offered it new money in the first place.
Indeed, if Ohio is correct that conditions on a federal grant are unconstitutional simply because the federal government offers a state such a good deal that no state would reasonably refuse that deal, then Medicaid itself could be declared unconstitutional.
The Medicaid program is riddled with conditions imposed by the federal government — among other things, federal law requires states to spend Medicaid funds on health care for low-income people, and not on highways or policing or a fancy new wardrobe for the state’s governor. And, as Roberts noted in NFIB, the Medicaid program funds at least 10 percent of the typical state’s budget.
No state would reasonably turn down all of this money. But that doesn’t make Medicaid coercive, it just makes it a very good deal.
In any event, the bottom line in the Ohio case is that the state’s claim that the tax-cut restriction is unconstitutionally ambiguous is strong enough that it has a very good chance of prevailing, especially in a conservative judiciary. Ohio’s coercion argument, by contrast, would so radically transform the legal doctrines governing conditional federal grants that major programs like Medicaid could be in danger.
And yet, it’s still possible such a radical argument might prevail in a conservative judiciary.
