Arizona v. Yellen

34 F.4th 841

State of ARIZONA, Plaintiff-Appellant,

v.Janet YELLEN, in her official capacity as Secretary of the Treasury ; Richard K. Delmar, in his official capacity as acting inspector general of the Department of Treasury ; United States Department of the Treasury, Defendants-Appellees.

No. 21-16227

United States Court of Appeals, Ninth Circuit.

Argued and Submitted January 13, 2022 San Francisco, California

Filed May 19, 2022

Drew C. Ensign (argued), Deputy Solicitor General; Wilson C. Freeman, Senior Litigation Counsel; Robert J. Makar, Assistant Attorney General; Joseph A. Kanefield, Chief Deputy & Chief of Staff; Brunn ("Beau") W. Roysden III, Solicitor General; Mark Brnovich, Attorney General; Office of the Attorney General, Phoenix, Arizona; for Plaintiff-Appellant.

Daniel Winik (argued), Mark B. Stern, and Alisa B. Klein, Appellate Staff; Brian M. Boynton, Acting Assistant Attorney General; Civil Division, United States Department of Justice, Washington, D.C.; for Defendants-Appellees.

Jacob Huebert, Scharf-Norton Center for Constitutional Litigation at the Goldwater Institute, Phoenix, Arizona, for Amicus Curiae Goldwater Institute.

Dave Yost, Attorney General; Benjamin M. Flowers, Solicitor General; Zachery P. Keller and Sylvia May Davis, Deputy Solicitors General; Office of the Attorney General, Columbus, Ohio; Steve Marshall, Alabama Attorney General; Treg R. Taylor, Alaska Attorney General; Leslie Rutledge, Arkansas Attorney General; Ashley Moody, Florida Attorney General; Lawrence G. Wasden, Idaho, Attorney General; Tom Miller, Iowa Attorney General; Derek Schmidt, Kansas Attorney General; Daniel Cameron, Kentucky Attorney General; Jeff Landry, Louisiana Attorney General; Lynn Fitch, Mississippi Attorney General; Austin Knudsen, Montana Attorney General; Douglas J. Peterson, Nebraska Attorney General; John M. Formella, New Hampshire Attorney General; Wayne Stenehjem, North Dakota Attorney General; John M. O'Connor, Oklahoma Attorney General; Alan Wilson, South Carolina Attorney General; Jason Ravnsborg, South Dakota Attorney General; Herbert H. Slatery III, Attorney General and Reporter of Tennessee; Ken Paxton, Texas Attorney General; Sean D. Reyes, Utah Attorney General; Patrick Morrisey, West Virginia Attorney General; for Amici Curiae States of Ohio, Alabama, Alaska, Arkansas, Florida, Idaho, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Montana, Nebraska, New Hampshire, North Dakota, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, and West Virginia.

Paul D. Clement, Erin E. Murphy, Kasdin M. Mitchell, Laura E. Wolk, and Elizabeth Hedges, Kirkland & Ellis LLP, Washington, D.C.; Daryl Joseffer and Paul Lettow, U.S. Chamber Litigation Center, Washington, D.C.; Karen Harned and Rob Smith, NFIB Small Business Legal Center, Washington, D.C.; for Amici Curiae Chamber of Commerce of the United States of America, and National Federation of Independent Business Small Business Legal Center.

Joseph D. Henchman, National Taxpayers Union Foundation, Washington, D.C., for Amicus Curiae National Taxpayers Union Foundation.

Before: Ronald M. Gould, Mark J. Bennett, and Ryan D. Nelson, Circuit Judges.

Opinion by Judge Gould ;

Concurrence by Judge R. Nelson

GOULD, Circuit Judge:

It is well established that Congress has the power pursuant to the Spending Clause to pass legislation authorizing federal grants to the States that come with strings attached. For the most part, cases challenging Spending Clause legislation come to us arising from a specific dispute between the federal government and the recipient of federal funds. Usually, the federal government will claim that the recipient violated a condition that Congress placed on the federal grant and demand repayment. The recipient, in turn, will claim that the condition on the funds violates the limits of the Spending Clause, as enumerated in South Dakota v. Dole , 483 U.S. 203, 107 S.Ct. 2793, 97 L.Ed.2d 171 (1987).

This appeal, however, requires us to decide whether a State has standing to challenge the constitutionality of Spending Clause legislation before a specific and concrete dispute arises between grantor and grantee. We hold that Arizona has standing to challenge the American Rescue Plan Act, 42 U.S.C. § 802(c)(2)(A), ("ARPA" or "the Act"), both because there is a realistic danger of ARPA's enforcement, and because there is a justiciable challenge to the sovereignty of the State, which alleges infringement on its authority to set tax policy and its interest in being free from coercion impacting its tax policy.

BACKGROUND

Congress passed the American Rescue Plan Act, Pub. L. No. 117-2, 135 Stat. 4, in March 2021 to help state, local, and tribal governments mitigate the ongoing effects of the COVID-19 pandemic. ARPA provides nearly $200 billion in new federal grants to States. 42 U.S.C. § 802(b)(3)(A). Arizona accepted ARPA funds and expects to receive $4.7 billion in total aid from the Act, equivalent to about a third of Arizona's total budget for the 2022 fiscal year.

Like most federal funding, ARPA funds come with conditions attached. The Act delineates permissible uses for its funds:

(A) to respond to the public health emergency with respect to the Coronavirus Disease 2019 (COVID-19) or its negative economic impacts, including assistance to households, small businesses, and nonprofits, or aid to impacted industries such as tourism, travel, and hospitality;

(B) to respond to workers performing essential work during the COVID-19 public health emergency by providing premium pay to eligible workers ... or by providing grants to eligible employers that have eligible workers who perform essential work;

(C) for the provision of government services to the extent of the reduction in revenue of such State, territory, or Tribal government due to the COVID-19 public health emergency ...; or

(D) to make necessary investments in water, sewer, or broadband infrastructure.

Id. § 802(c)(1). In addition to specifying permissible uses for the funds, ARPA also stipulates impermissible uses. First, no State or territory may use ARPA funds "for deposit into any pension fund." Id. § 802(c)(2)(B). Second, the statute contains a provision—challenged in this appeal—prohibiting a State from using ARPA funds to subsidize a tax cut or otherwise offset a reduction in state net tax revenue. More specifically, this condition (hereinafter the "Offset Provision") provides:

A State or territory shall not use the funds provided under this section or transferred pursuant to section 803(c)(4) of this title to either directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.

Id. § 802(c)(2)(A). If a State wants to accept federal money under ARPA, it must certify to the Treasury Department that it will use the funds "in compliance with" these conditions. Id. § 802(d)(1). ARPA provides that if a State violates the Offset Provision, it must repay the Treasury the lesser value of the amount of funds used in violation of the condition or the total amount of funds received under the Act. Id. § 802(e). ARPA also authorizes the Secretary of the Treasury to "issue such regulations as may be necessary or appropriate to carry out this section." Id. § 802(f). It is this Offset Provision which is the subject of the State's challenge.

The Treasury Department issued an Interim Final Rule ("IFR") in May 2021 explaining how it would implement ARPA and its conditions, including the Offset Provision. See Coronavirus State and Local Fiscal Recovery Funds , 86 Fed. Reg. 26,786 (May 17, 2021) (codified at 31 C.F.R. § 35.1 et seq. ). Specifically, the IFR provides that a State will

be considered to have used [ARPA funds] to offset a reduction in net tax revenue resulting from changes in law, regulation, or interpretation if, and to the extent that, the recipient government could not identify sufficient funds from sources other than the [ARPA funds] to offset the reduction in net tax revenue.

86 Fed. Reg. at 26,807. Recognizing that "money is fungible," the IFR states that even if ARPA funds "are not explicitly or directly used to cover the costs of changes that reduce net tax revenue, those funds may be used in a manner inconsistent with the statute by indirectly being used to substitute for" state funds that would "otherwise have been needed to cover" the reduction. Id. at 26,807.

To identify direct or indirect offsets, the IFR provides state governments with a four-step framework. First, using the State's "existing approach for measuring the effects of fiscal policies," a State must "identify and value" any actions that it predicts will reduce tax revenue in a given reporting year. Id. at 26,809. Second, the State must "calculate the total value of all covered changes" to determine if there was a reduction in net tax revenue. Id. If the reduction is below a de minimis level—1 percent of the reporting year's baseline—the Offset Provision is not implicated. Id. Third, if a State's annual tax revenue exceeds the amount received for fiscal year ending in 2019 adjusted for inflation, it is in a "safe harbor" and does not violate the Offset Provision. Id. If, however, there has been more than a de minimis reduction in net tax revenue from a change in state law, the fourth step is for the State to "identify any sources of funds" that have been used to offset the reduction. Id. at 26,809. Macroeconomic growth, increases in revenue, and spending cuts in areas where the State has not spent ARPA funds can all be used to offset reductions in net tax revenue without violating the Offset Provision. See id. at 26,809. A State would be required only to repay any amount of federal funds from ARPA that was used to offset a...