Court of Appeals sides with Fitch in ARPA tax mandate case

June 27 –  The Fifth Circuit Court of Appeals has affirmed a permanent injunction and sided with Attorney General Lynn Fitch agreeing that the Tax Mandate in the American Rescue Plan Act (ARPA) “unlawfully forc[es] the States to adopt certain tax policies” and noting that it exceeds Congress’ Spending Clause authority and violates the anti-commandeering doctrine. Fitch filed this suit alongside the Attorneys General of Texas and Louisiana.

“It is the responsibility of our elected legislators to decide how and when to cut taxes, as well as how to best stimulate economic growth post-COVID-19,” said Fitch. “This thoughtful opinion ensures that decisions with substantial fiscal and economic implications for our State are made by Mississippi legislators with the needs of the Mississippi citizens they represent in mind. I am proud to stand with both Texas and Louisiana to protect our right to give money back to the people without federal interference or overreach.”

The Tax Mandate is a provision of the American Rescue Plan Act (ARPA), signed into law on March 11, 2021, that bars states from “directly or indirectly” using federal aid granted to states in ARPA for tax cuts. Under the tax mandate, the U.S. Treasury may claw back funds it believes have been misused to provide tax relief.

Fitch, along with the Attorneys General for Louisiana and Texas, filed suit on May 3, 2021, arguing that the Tax Mandate violates the Spending Clause of the U.S. Constitution, commandeers the States’ sovereign authority over their tax policies in violation of the Constitution’s Tenth Amendment, and is ambiguous and not reasonably related to encouraging post-pandemic economic recovery.

“In exercising its power under the Spending Clause, Congress has a constitutional obligation to cut a clear deal with the states when they accept federal funding. Because the challenged provision is not clear about what it requires of the states, it falls short of that obligation and is impermissibly ambiguous,” the opinion explains.

Under ARPA, Mississippi received nearly $2 billion in COVID-19 relief funds, which is roughly equivalent to 31% of Mississippi’s 2021 budget. Governor Reeves signed the Mississippi Tax Freedom Act into law on April 5, 2022. This law provides more than $500 million in tax relief, eliminating the 4% tax bracket and gradually scaling back the 5% top bracket to 4% over 4 years.

“ARPA coerces [the States] into making a choice between losing potentially billions of dollars or surrendering their ability to set state tax policy,” the three-judge panel continued.

The complaint was filed in the U.S. District Court for the Northern District of Texas.