Kentucky Attorney General Daniel Cameron and his legal team were in Cincinnati on Thursday to hear an appeal on a ruling that could impact how lawmakers devise the state’s tax code.
The ruling said that the federal government can’t enforce its tax provision as part of the American Rescue Plan Act, which that gave Kentucky $2.6 billion in funds to help Kentuckians through the COVID-19 Pandemic.
The tax provision said that states couldn’t spend ARPA funds to offset tax cuts. The lawsuit filed by Cameron and Tennessee Attorney General Herbert Slatery III said the provision is unconstitutional as it takes the power out of the states’ hands on how they deal with taxes and policy.
“Kentuckians expect state tax policies to be set by the men and women they elect to represent them in the General Assembly, and not as a result of an edict from the federal Government,” said Attorney General Cameron in a statement when he filed the lawsuit.
Eleven other states filed similar lawsuits.
The tax provision could impact the way Kentucky deals with tax law, especially as the legislature tries to reduce the income tax to zero while increasing sales taxes to cover the revenue shortfall created from the reduced income tax.
“Because of the way in which the federal government and the Treasury Secretary have spoken about these ARPA funds, meaning is it an indirect or direct offset, the challenge in Tennessee, as explained in this as well, is that it stops us in our tracks in terms of our ability to make determinations in the future about what our income tax looks like, what our sales tax looks like,” Cameron said outside the federal courthouse in Cincinnati on Thursday.
On Thursday, an attorney representing U.S. Secretary of Treasury Janet Yellen presented their appeal to the Sixth District Court of Appeals in Cincinnati on the grounds that the states are challenging something that doesn’t exist.
“We think there is a genuine jurisdiction issue because the states are challenging something that doesn’t exist,” said Daniel Winik, an attorney for the Department of Justice, during oral arguments in front of Judges John B. Nalbandian, Judge John K. Bush, and Judge Bernice B. Donald.
But, in a ruling from United States District Judge Gregory F. Van Tatenhove, he said that the provision could cause issues for states when implementing tax law or policy.
“If you think about it, the coercion presented in the ARPA is exactly the kind of intrusion on state sovereignty that the Constitution prohibits,” Tatenhove says in his ruling. “Accordingly, the Court rests on the above-mentioned considerations in finding the federal government’s offer coercive, but feels compelled to mention the particularly injurious nature of the Tax Mandate.”
Gov. Andy Beshear weighed in during his Thursday presser, saying that he hasn’t read the specific rulings. Still, Kentucky has used the ARPA money on things such as the Cleaner Water Program and broadband infrastructure.
“The General Assembly and I have come to bipartisan agreements on how to spend ARPA money,” Beshear said, elaborating that the state has already budgeted the remaining part of its ARPA funds.
The Republican supermajority in the legislature gave more than $200 million in tax breaks during the 2021 legislative session after receiving the funds, and it’s unclear if the state violated the provision. If Judge Tatenhove’s decision is upheld, it is irrelevant.
“We have budgeted all of it, so I don’t know it would have any impact ultimately on how that lawsuit goes,” Beshear said.