Brnovich sues feds over tax cut restriction in COVID relief act

Attorney General Mark Brnovich is asking a federal judge to strike down a provision of the recent $1.9 trillion COVID-19 relief package that bars states from using the money to “directly or indirectly” offset the cost of tax cuts, arguing that the law is either unconstitutionally vague or an infringement of state sovereignty.

The Attorney General’s Office filed a lawsuit in U.S. District Court on Thursday, following through on Brnovich’s pledge to sue the U.S. Treasury Department and Treasury Secretary Janet Yellen after they failed to assure Arizona that the American Rescue Plan Act wouldn’t preclude major income tax cuts being negotiated by Gov. Doug Ducey and Republican legislators.

Brnovich and 20 other Republican attorneys general had sought guidance from Yellen on what states could and couldn’t do under the tax cut restriction in the relief package. Yellen informed the attorneys general that states could still enact tax cuts without running afoul of the law, as long as they don’t offset the lost revenue with federal dollars. States that violated the provision would lose relief dollars equal to the amount of the tax cuts.

In the lawsuit, Brnovich’s office said statements made by the Treasury Department indicate that it believes states are free to cut taxes without triggering the restriction as long as they don’t explicitly use federal dollars to offset the lost revenue. But there are divergent views, making the situation unclear. U.S. Sen. Joe Manchin, D-W.V., intended the provision as a broader blanket prohibition on tax cuts, the lawsuit stated.

“The fact that those politically allied to enact the Act cannot even agree with each other as to what the Tax Mandate means provides powerful evidence that it is subject to multiple potential interpretations. Indeed, the language of the Tax Mandate is patently ambiguous, and even borderline incoherent,” the lawsuit read. “This ambiguity alone renders the Tax Mandate unconstitutional.”

Arizona’s legislature would have to determine whether to pass its planned tax cuts without knowing whether it will cost the state federal dollars by doing. And Brnovich noted that the American Rescue Plan Act includes no mechanism for a state to dispute a finding by the Treasury Department that it impermissibly used the relief funds to reduce taxes. 

Ducey has proposed $600 million in income tax reductions, while GOP lawmakers are planning $1 billion in cuts. Those plans are predicated on projected revenue surpluses, and the plans have been underway since before the passage of the American Rescue Plan Act. Ducey and lawmakers have not changed their plans due to the anti-tax cut provision of the relief act, and the governor has said he does not believe that restriction applies to the planned reductions, though his administration has not said what led it to that conclusion.