The Tax Cut Ban and the Constitution

Ohio sues to overturn Congress’s takeover of the states’ fiscal policy.

Wall Street Journal | The Editorial Board

Democrats didn’t flip a single state legislative chamber or governor’s mansion in the 2020 election, while Republicans flipped three. Yet through their Covid bill Democrats are trying to partially nullify these election results by mandating that state governments cannot pass tax cuts as a condition of receiving aid. Ohio on Wednesday sued the Treasury to enjoin the mandate, and the case is an early test of progressive ambitions to upset the constitutional balance.

The $1.9 trillion bill marketed as Covid relief includes $350 billion in federal aid to states and localities. While states can use the money to increase spending, Congress decreed that they can’t use it to cut taxes. “A state or territory shall not use the funds,” the bill says, “to either directly or indirectly offset a reduction in the net tax revenue” from a new law or regulation.

Because the mandate applies to “indirect” revenue offsets, states are at risk of violating the law for any tax reduction “during the covered period,” which stretches through 2024. Ohio’s lawsuit by Attorney General Dave Yost argues that “this coercive offer of federal funds violates the Constitution.”

Mr. Yost’s suit emphasizes two core features of the constitutional structure. The first is federalism—the “diffusion of power between the state and federal governments” that the Framers designed to protect liberty, including and especially when it comes to the taxing power.

Congress can nudge states and offer fiscal incentives, but it can’t use “economic dragooning that leaves the states with no real option but to acquiesce.” Those were Supreme Court Chief Justice John Roberts ’ words in NFIB v. Sebelius (2012), striking down conditions Congress attached to ObamaCare’s state Medicaid expansion, which held hostage about 10% of state budgets. The $350 billion in the Covid bill represents about 9% of total state and local expenditures in 2018. Medicaid is a joint state-federal program, while state taxes are an area where states historically exercise control.

Federalism fosters competition among states, a source of American dynamism. This provision takes direct aim at that feature by hobbling the ability of states to compete for business and investment through their tax codes unless they turn down massive federal relief. Obstructing that competition was no doubt part of Democrats’ intention, as states like Illinois and New York grow less competitive. GOP-run states like West Virginia and Mississippi are considering tax cuts to lure talent and businesses.

The Ohio suit also cites corrosive effects on political accountability. The federal restriction on state tax cuts, the lawsuit says, “allows Congress to quietly impose its preferred tax policies without having to pay the full political price for doing so.”

Ohio makes a strong case that the mandate is too coercive to survive under Supreme Court precedents. The state may have more trouble winning a preliminary injunction—that is, a prohibition on Treasury enforcing the mandate before it has tried to claw back revenue. Yet the provision hampers state economic policy making.

Twenty-one other GOP attorneys general have written to Treasury Secretary Janet Yellen to object, and some will likely bring suit in federal courts across the country unless she declares in a rule-making that the restriction is dramatically narrower than the statutory text implies.

Democrats want to take credit for their spending blowout as the pandemic recedes, even as they protect their state counterparts from economic competition from small-government states. That’s an affront to representative government and a classic distortion of the constitutional structure that cries out for judicial review.

Read the full editorial here.