Federal judge rules Tennessee can use COVID-19 relief money for tax cuts

Staff file photo / Tennessee Attorney General Herbert Slatery III speaks to attendees at the Pachyderm Club meeting at 2 on the Roof on Monday, Oct. 26, 2015, in Chattanooga, Tenn.

NASHVILLE - A federal judge has ruled that Tennessee and Kentucky officials are free to disregard provisions in a congressional coronavirus-related spending measure that bar states from using the money to allow for tax cuts.

In his permanent injunction issued last week, Judge Gregory Van Tatenhove with the Eastern District of Kentucky ordered the federal government to back off the prohibition on tax cuts as a way to spend the $1.9 trillion in government relief amid the pandemic.

Congress passed the American Rescue Plan Act in March with no Republican support. The legislation designated nearly $200 billion for states.

Van Tatenhove wrote the federal mandate amounted to "undue influence" over the states' tax policy in exchange for accepting the relief funds.

"This is a coercive grant of federal money. The spending power of the federal government does not go so far. The price for accepting these funds is unconstitutional," Van Tatenhove opined as he instituted a permanent injunction against enforcement of the provision in both states.

Spokespeople for Tennessee Gov. Bill Lee, a Republican, had no immediate comment Tuesday.

Tennessee Attorney General Herbert Slatery and Kentucky Attorney General Daniel Cameron filed the lawsuit, saying the legislation now "prevents [states] from lowering taxes for [their] citizens for four years."

"We are very pleased with the court's decision," Slatery said. "Tennessee should not have to hand over its constitutional right to establish state tax policy in exchange for federal relief from this pandemic."

Asked if the attorney general acted at Lee's request or on his own authority, Slatery spokeswoman Samantha Fisher said "this is just the type of an issue the attorney general should engage in, preserving the state's authority to set its own tax policy and preventing the federal government from placing an unconstitutional condition on receiving federal funds."

Estimates are that Tennessee's state share of the $1.9 trillion legislation comes to $3.73 billion. Another $2.28 billion is headed to local governments for a combined state/local figure of nearly $6.2 billion.

The provision in question

A State or territory shall not use the funds provided under this section or transferred pursuant to section 603(c)(4) 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.

Lee and legislative leaders have so far agreed to use $500 million of that for rural broadband expansion and another $1.35 billion for local sewer and water infrastructure investments. The state is also strongly recommending local governments use their own American Rescue Plan Act funds to go along with those priorities.

The National Federation of Independent Business, which filed briefs in support of the legal challenge to federal restrictions, called Van Tatenhove's ruling a "big victory" for small businesses continuing to recover from the economic downturn caused by the coronavirus pandemic.

"Last year, Tennessee was able to use federal relief funds to help small businesses avoid higher taxes. We're pleased the court agreed that states should have the flexibility to establish tax policies that will help continue our post-pandemic economic recovery," said the federation's Tennessee director, Jim Brown.

U.S. Treasury Department spokespeople did not respond to Times Free Press requests for comment on the ruling and whether the Biden administration planned an appeal.

The decision by Van Tatenhove, an appointee of former President George W. Bush, represents the second ruling by a federal judge over the American Rescue Plan Act.

In July, U.S. District Judge Douglas R. Cole in Ohio issued an injunction in a somewhat similar case. Cole held the provision "falls short of the clarity" required by U.S. Supreme Court precedent for legislation related to the U.S. Constitution's spending clause when it comes to conditional grants to states, the Law360 website reported.

Contact Andy Sher at asher@timesfreepress.com or 615-255-0550. Follow him on Twitter @AndySher1.