Thread by @ArnabDatta321

THREAD (1/n): The Ohio AG sued the Treasury Department challenging a provision of the American Rescue Plan that prevents states that receive direct aid from lowering their net tax revenues. I wrote a piece for @Slate about the implications: bit.ly/2NMuW9U.

(2/n): The provision is common-sense: the federal government is contracting to share the burden of revenue loss from COVID-19, and the condition prevents states from releasing their share of that burden. In short, “we’re here to help fill fiscal gaps, not to pay for tax cuts.”

(3/n): The Treasury Department defended the provision, correctly pointing out that these kinds of conditions are used all the time. Also, the spending power has long been considered among the least-restricted of Congress’ powers.

(4/n): Nonetheless, the Supreme Court restricted that power when it struck down mandatory Medicaid expansion in NFIB v. Sebelius. And in this suit, the GOP arguments are tailor-made for a conservative judiciary itching to diminish the power of the federal government.

(5/n): This is a challenge that the Biden administration and a Democratic Congress will face again and again: how to design policy that can withstand a conservative legal onslaught. So what are some of the legal issues at play here?

(6/n): GOP argues that the condition is ambiguous, b/c it doesn’t define “indirectly offset a reduction in net tax revenue.” An ambiguous condition would violate the Pennhurst clear-notice rule. That's rooted in the idea that this is a contract and states need notice to consent.

(7/n): But the presence of "directly or indirectly" basically means money can’t be used to offset any reduction in net tax revenue. The GOP concedes this by arguing that the condition is also a violation of the 10th amendment, amounting to a federal takeover of state tax policy.

(8/n): This of course isn’t the case. States are welcome to cut taxes, so long as they increase revenue elsewhere to make it up. Accepting GOP argument would amount to allowing states to sign a contract with the fed gov, and then immediately release them from their obligation.

(9/n): The suit also argues that the condition is unduly coercive, which was used to strike down mandatory Medicaid expansion. But there are big differences here. This is a temporary measure. It's not cutting existing federal funding that states rely on.

(10/n): Again, the condition provides important protection to the federal government—that a contractual agreement to share burdens arising from revenue loss remain shared. Nonetheless, these arguments could find purchase within an extremely conservative judiciary.

(11/n): This underscores the precarious choice facing Secretary Yellen on this lawsuit, but the Biden Administration and Democratic Congress generally. So what can Secretary Yellen do here?

(12/n): If she argues that it’s unambiguous, conservatives may read it as heavy-handed and commandeering. She could try to clarify the statute through regulation, and per Chevron, that interpretation should be given deference.

(13/n): But that would also amount to an admission that the statute is ambiguous, violating the Pennhurst principle. The Court hasn't addressed this conflict, but an opportunity to limit Chevron and weaken the federal spending power might be too good to pass up for this court.

(14/n): There is room elsewhere in the statute for Secretary Yellen to regulate. She could clarify what “fiscal effects” are to be filled with this money and make the certification process more rigorous, firmly grounding the entire process in contractual principles.

(15/n): But Democrats also need to legislate with care, and possibly sacrifice some short-term progressive victories to avoid giving easy bait to an opportunistic and conservative judiciary. A bad ruling on spending here could put future spending in jeopardy.

(16/n): Ex: Democrats are considering a $4trillion infra package, and intend that it address racial and gender gaps and climate change. This'll require some conditional funding. An adverse ruling on this tax provision could limit the ability of the fed govt to condition funding.

(17/n): Leg counsels in Congress and counsels in the WH will have to walk a fine line here, to push progressive goals now but also ensure they can endure.

(18/18): Anyways, would love it if you all gave it a read. Special thanks to @ranavain, @tragicbios, @irvingswisher, and @Slate's @SusaneMatthews, for thoughtful edits and helping me think it through.