CHARLESTON – West Virginia Attorney General Patrick Morrisey is part of a 13-state coalition that has filed a lawsuit against the U.S. Department of Treasury regarding states’ ability to cut taxes despite a provision in the most recent COVID-19 release package.
The AGs filed the lawsuit March 31 in federal court in Alabama. Morrisey led the bipartisan coalition with Alabama AG Steve Marshall and Arkansas AG Leslie Rutledge. He said the suit is meant to protect the “well-established authority” of states to lower taxes for citizens.
The coalition contends that the latest COVID aid package force states to relinquish control of their taxing authority in return for the economic relief. The AGs take specific issue with a stimulus bill provision that the coalition refers to as one of the most egregious power grabs by the federal government in the nation’s history.
Morrisey
Morrisey says this matter directly impacts whether the American Rescue Plan will infringe upon the West Virginia Legislature’s consideration of a proposal to eliminate the state’s income tax, specifically with regards to how U.S. Treasury officials interpret the word “indirectly” as contained in the provision.
“Never before has the federal government attempted such a complete takeover of state finances,” Morrisey said. “We cannot stand for such overreach.
“The Constitution envisions co-sovereign states, not a federal government that forces state legislatures to forfeit one of their core constitutional functions in exchange for a large check equal to approximately 25 percent of their annual respective general budgets.”
Morrisey and the other AGs say the matter directly impacts whether the federal tax mandate will infringe upon the West Virginia Legislature’s consideration of a proposal to eliminate the state’s income tax, specifically with regards to how U.S. Treasury officials interpret the word “indirectly” as contained in the provision.
“Our lawsuit is designed to protect West Virginia from federal overreach,” Morrisey said. “This ensures our citizens aren’t stuck with an unforeseen bill from the feds years from now.”
The coalition says the mandate could be used to claw back a share of a state’s stimulus allotment. This creates an impermissible chilling effect on state lawmakers’ willingness to reduce the tax burdens on their citizens.
Earlier this month, members of the coalition wrote a letter to U.S. Treasury Secretary Janet Yellen asking her to confirm the provision would not strip states of their taxing authority. The said her answer wasn’t satisfactory. The treasury, Yellen and Acting Inspector Richard K. Delmar are named as defendants in the lawsuit.
Last week, Morrisey called Yellen’s response “simply unacceptable.”
“We will now take the final steps necessary to meet the Biden administration in court,” Morrisey said March 24. “West Virginia cannot accept the statute’s ambiguity, and given the administration’s failure to correct this problem, we are left with no option other than seeking a court order to protect West Virginia’s interests.
“Money is fungible and the term ‘indirectly’ remains ambiguous and overbroad. The federal government cannot strip from the state one of its core constitutional functions in exchange for a large check. Federal spending power has clear limitations and Congress may not micromanage a state’s fiscal policies.”
In the lawsuit, the coalition argues that her response did not place limits on the vague provision – uncertainty that she admits exists in referring to the ambiguity as a “thorny” issue in testimony to Congress. It also notes uncertainty remains in West Virginia as to whether potential changes to a sales tax exemption on aircraft repair and maintenance or an extension of the state’s Neighborhood Investment Tax Credit would violate the federal tax mandate.
The lawsuit sets forth charges of unconstitutional exercise of federal power, specifically violations of the 10th Amendment, the conditional spending doctrine and the anti-commandeering doctrine. The AGs seek a court order that prohibits enforcement of the federal tax mandate and declares it unconstitutional.
“Federal spending power has clear limitations,” Morrisey said. “Congress may not micromanage a state’s fiscal policies in violation of anti-commandeering principles nor coerce a state into forfeiting one of its core constitutional functions in exchange for a large check from the federal government.
"Such ‘economic dragooning’ of the states cannot withstand constitutional scrutiny.”
Morrisey also had a March 17 press briefing with state legislative leaders to discuss the letter and the situation.
“We’re working on an issue of upmost importance for the citizens of the state of West Virginia and for our country,” Morrisey said during his March 17 press briefing with state legislative leaders. “We take great issue with Congress’ decision to potential deny states the ability to cut taxes in any matter whatsoever.
“Even if these states and these gentlemen here would’ve enacted the cuts without the use of the COVID relief funds, there are huge legal and constitutional problems with these provisions.”
Morrisey said he and other AGs agree they never have seen anything like this, calling it “one of greatest attempted invasions of state sovereignty by Congress in the history of our republic.”
“The law expressly prohibits states from using funds to either directly or indirectly offset a reduction in net tax revenue,” he said. “We aren’t taking issue with direct part, but the indirect part is impermissible coercion.
“West Virginia, of course, is currently considering making change to a wide variety of taxes. These changes could be worth close to a billion dollars. If we don’t get clarity from the Treasury Department or the courts, West Virginia will have a sword of Damocles hanging over its head for the foreseeable future.”
House Finance Committee Chairman Eric Householder called the possible federal overreach intrusive.
“It hampers our ability to provide tax relief and tax reform to our citizens,” Householder (R-Berkeley) said.
Senate Finance Committee Chairman Eric Tarr agreed.
“This is a destruction of federalism,” Tarr (R-Putnam) said. “The worst I’ve ever seen. We will fight this.”
Senate President Craig Blair said the law could hold the state and lawmakers hostage. He also called out U.S. Senator Joe Manchin.
“Let’s be honest, we’ve got one U.S. Senator who is opposed to our tax plan,” Blair (R-Berkeley) said. “I’d actually call out on him, Sen. Joe Manchin, to come out and get clarity for us on this issue as well … not to use a piece of federal legislation to hamper our ability to grow our state.
“What we’re doing it is right. We’re getting it right. We’re working on changing our tax structure.”
The coalition’s letter takes specific issue with a provision of the American Rescue Plan Act of 2021 that prohibits states from using stimulus funds to directly or indirectly offset a reduction in net tax revenue.
Gov. Jim Justice and lawmakers have proposed major cuts to the state income tax and other changes to taxes. Justice also has mentioned a reserve money “bucket” using funds coming into state government as a byproduct of federal relief being used for other things, such as unemployment compensation.
AGs from Alaska, Florida, Iowa, Kansas, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota and Utah also signed the lawsuit.
U.S. District Court for the Northern District of Alabama Western Division case number 7:21-cv-00465-GMB