The Capitol in Ohio.

Photo:

Getty Images

Democrats did not win a single legislative chamber or governor’s seat in the 2020 election, while Republicans won three. However, with their Covid bill, Democrats are trying to partially undo these election results by requiring state governments not to accept tax cuts as a condition of receiving aid. Ohio filed a lawsuit Wednesday against the Treasury Department to keep the mandate, and the case is an early test of progressive ambitions to upset the constitutional balance.

The $1.9 trillion in aid to Covid includes $350 billion in federal aid to states and local governments. While states can use the money to increase spending, Congress has decided they cannot use it to cut taxes. Under the bill, the state or territory may not use these funds to directly or indirectly offset a decrease in net tax revenue resulting from a new law or regulation.

Because the mandate applies to indirect revenue offsets, states are likely to violate the law every time they cut taxes during the relevant period, which runs through 2024. The lawsuit, filed by the Ohio attorney general…

Dave Yost.

argues that this forced offering of federal funds violates the Constitution.

Yost’s lawsuit highlights two essential features of the constitutional structure. The first of these is federalism – the division of powers between the states and the federal government that the founding fathers developed to protect liberty, even and especially when it comes to the power to tax.

Congress can nudge the states and offer tax incentives, but it cannot commit economic robbery, so the states have no choice but to acquiesce. You were the chief justice of the Supreme Court…

John Roberts

The words in NFIB v. Sebelius (2012), which overturned Congress’ conditions on Medicaid expansion to states under ObamaCare, holding nearly 10 percent of state budgets hostage. The $350 billion in Covid’s bill represents about 9 percent of total state and local spending in 2018. Medicaid is a joint state and federal program, while state taxes are an area in which states have traditionally controlled.

Federalism promotes competition among the states, the source of American dynamism. This provision serves a direct purpose by preventing states from competing with each other to attract business and investment through their tax laws unless they forego extensive federal incentives. Preventing that competition was probably part of the Democrats’ intent, as states like Illinois and New York become less competitive. Government-run states like West Virginia and Mississippi are considering tax cuts to attract talent and businesses.

The Ohio lawsuit also points out the corrosive effects on political accountability. The federal cap on state-level tax cuts, the complaint says, allows Congress to quietly impose its desired tax policies without paying the full political price.

Ohio argues persuasively that the mandate is too coercive to be upheld under Supreme Court precedent. It may be more difficult for the State to obtain an injunction, i.e., an order prohibiting the Department of Revenue from enforcing the order, before attempting to collect the income. However, this situation complicates the state’s economic policy.

Twenty-one Attorneys General wrote a letter to the Secretary of the Treasury.

Janet Yellen.

object, and some are likely to go to the federal courts of the land, unless it generally alleges that the restriction is substantially less than what is implied in the text of the statute.

Democrats want their spending to show that they appreciate the pandemic’s decline, even as they protect their state counterparts from economic competition from small states. It is an affront to representative government and a classic distortion of the constitutional structure that warrants judicial review.

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Appeared in print on 19. March 2021.

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