COMMONWEALTH OF KENTUCKY; STATE OF TENNESSEE v. JANET YELLEN, in her official capacity as Secretary of the U.S. Department of the Treasury; RICHARD K. DELMAR, in his official capacity as Acting Inspector General of the U.S. Department of the Treasury; UNITED STATES DEPARTMENT OF THE TREASURY
No. 21-6108
UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT
November 18, 2022
RECOMMENDED FOR PUBLICATION Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 22a0245p.06
Argued: July 21, 2022
Decided and Filed: November 18, 2022
Before: DONALD, BUSH, and NALBANDIAN, Circuit Judges.
COUNSEL
ARGUED: Daniel Winik, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellants. Brett R. Nolan, OFFICE OF THE ATTORNEY GENERAL OF KENTUCKY, Frankfort, Kentucky, for Appellees. ON BRIEF: Daniel Winik, Alisa B. Klein, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellants. Brett R. Nolan, Barry L. Dunn, Matthew F. Kuhn, OFFICE OF THE ATTORNEY GENERAL OF KENTUCKY, Frankfort, Kentucky, Andrée S. Blumstein, Brandon J. Smith, OFFICE OF THE ATTORNEY GENERAL AND REPORTER OF TENNESSEE, Nashville, Tennessee, for Appellees. Paul D. Clement, KIRKLAND & ELLIS LLP, Washington, D.C., Joseph D. Henchman, NATIONAL TAXPAYERS UNION FOUNDATION, Washington, D.C., Sheng Li, NEW CIVIL LIBERTIES ALLIANCE, Washington, D.C., Drew C. Ensign, OFFICE OF THE ATTORNEY GENERAL OF ARIZONA, Phoenix, Arizona, for Amici Curiae.
BUSH, J., delivered the opinion of the court in which DONALD, J., joined in full, and NALBANDIAN, J., joined in part. NALBANDIAN, J. (pp. 43–51), delivered a separate opinion concurring in part and dissenting in part.
JOHN K. BUSH, Circuit Judge. In response to the grave economic challenges posed by COVID-19, Congress enacted the American Rescue Plan Act of 2021 (ARPA or the Act). Pursuant to Congresss spending power, ARPA set aside $195.3 billion in stimulus funds, to be distributed by the Treasury Department to states and the District of Columbia. This appeal concerns a challenge brought by Kentucky and Tennessee (the States) to what they allege is an ambiguous, coercive, and commandeering condition attached to those funds. Specifically, to get the money, the States had to certify that they would comply with the Acts Offset Provision. Its terms bar the States from enacting tax cuts and then using ARPA funds to directly or indirectly offset a reduction in [their] net tax revenue resulting from such tax cuts.
What the Offset Provision actually means, however, is the subject of grave dispute. Because money is fungible, enacting any tax cut and then spending ARPA funds could be construed, the States say, as having impermissibly used those funds to indirectly offset a revenue reduction from the tax cut. Appellees Br. at 12–13. As a result, should the States wish to expend their ARPA funds, they are effectively barred from enacting any tax cuts1—despite their desire to do so—for fear that Treasury could construe the cuts as implicating an indirect offset and correspondingly pursue recoupment. Id. at 22–23; 38. Compounding the Acts indeterminacy, the Offset Provision itself never explains which fiscal year (FY) serves as the baseline for calculating a reduction in net tax revenue. Id. at 13, 40. That omission allegedly
Worse yet, the States argue, they were coerced into relinquishing this control over their sovereign taxing authority. Amended Complaint ¶ 74, R. 23. By offering such a massive aid package—promising to confer on the States a sum equal to one-fifth of their annual budgets—in a time of fiscal crisis no less, the federal government made the States an offer they couldnt refuse. Appellees Br. at 4, 12. Given these alleged intrusions upon their sovereignty, the States filed suit against the Treasury Department. They sought an injunction of the Offset Provisions enforcement and a declaratory judgment that the provision is unenforceable.
Relying on the coercion rationale alone, the district court granted the States a permanent injunction in September 2021. Treasurys appeal of that order is now before us. It asserts that the States challenges are nonjusticiable and that, in any event, their objections to the Offset Provision fail on the merits.
We agree that Kentuckys challenge is nonjusticiable. At the outset of their suit, both Kentucky and Tennessee had standing to bring their pre-enforcement challenges, since the Offset Provision itself at least arguably proscribed the post-acceptance enactment of any revenue-reducing tax cut. Thus, the Offset Provision at least arguably threatened a significant intrusion upon state taxing authority—an intrusion that arguably offended the Spending Clause because it was not clearly authorized by the Offset Provision itself. But Treasury later promulgated an implementing regulation (the Rule) that disavowed this interpretation of the Offset Provision and established certain safe harbors permitting the States to cut taxes. See
Tennessee, by contrast, did adduce additional evidence of a distinct theory of injury: that Treasurys Rule (and the underlying Offset Provision it implements) burden the State with compliance costs. See Eley Dec., R. 25-3. These costs represent additional labor and other expenses that Tennessee must incur to ensure that its recent and proposed tax cuts do not violate the Offset Provision; expenses that it would not incur were enforcement of the Offset Provision enjoined. Far from mooting the compliance-costs theory of injury, the Rule in fact exacerbated the harm with its more detailed explanation of the measures required to comply with the Offset Provision. Thus, we hold that Tennessees challenge is justiciable.
On the merits of Tennessees claim, we affirm the district courts injunction on the basis that the Offset Provision is impermissibly vague under the Spending Clause. Because the Offset Provision is subject to a range of plausible meanings, Tennessee was deprived of the requisite clear notice of ARPAs conditions when it accepted the funds. Cummings v. Premier Rehab Keller, P.L.L.C., 142 S. Ct. 1562, 1574 (2022) (quoting Arlington Cent. Sch. Dist. Bd. of Educ. v. Murphy, 548 U.S. 291, 296 (2006)). As a result, Treasury cannot use its Rule to impose compliance requirements upon Tennessee that are not clearly authorized by the Offset Provision itself. And because this defect suffices to affirm, we need not consider Tennessees additional objections to the Offset Provision.
I.
Congress enacted ARPA in March 2021 to make available almost $2 trillion in COVID-related relief funding. Approximately $195.3 billion of that sum was set aside for distribution to the states and the District of Columbia. Kentuckys allotment under the Act is about $2.1 billion, while Tennessees is about $3.7 billion. Amended Complaint ¶¶ 26–27, R. 23. These
That offer also came with several conditions. For instance, the States may spend their ARPA funds in only four particular areas that Congress deemed relevant to economic recovery from the pandemic. Those four areas are as follows:
(A) to respond to the public health emergency with respect to the Coronavirus Disease 2019 (COVID-19) or its negative economic impacts, including assistance to households, small businesses, and nonprofits, or aid to impacted industries such as tourism, travel, and hospitality;
(B) to respond to workers performing essential work during the COVID-19 public health emergency by providing premium pay to eligible workers of the State, territory, or Tribal government that are performing such essential work, or by providing grants to eligible employers that have eligible workers who perform essential work;
(C) for the provision of government services to the extent of the reduction in revenue of such State, territory, or Tribal government due to the COVID-19 public health emergency relative to revenues collected in the most recent full fiscal year of the State, territory, or Tribal government prior to the emergency; or
(D) to make necessary investments in water, sewer, or broadband infrastructure.
Conversely, the States are specifically forbidden from using ARPA funds for two particular applications. First, [n]o State or territory may use funds made available under this section for deposit into any pension fund.
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.
Accompanying the Offset Provision are a couple of related enforcement mechanisms. First is the statutes reporting requirement, which instructs the states:
To provide to the Secretary periodic reports providing a detailed accounting of—
(A) the uses of funds by such State, territory, or Tribal government, including, in the case of a State or a territory, all modifications to the States or territorys tax revenue sources during the covered period; and
(B) such other information as the Secretary may require for the administration of this section.
Kentucky and Tennessee were not alone, it turns out, in their apprehensions about this statutory scheme. Several of their sister-states were similarly puzzled by the Offset Provisions requirements. So they wrote jointly to Secretary Yellen to seek clarification about the precise obligations it imposed. Secretary Yellen—who elsewhere had acknowledged that the fungibility of money presented thorny questions about the meaning of the Offset Provision—wrote back to explain that the States could expect further guidance from Treasury in the near future. Treasury Secretary & Federal Reserve Chair Testimony on COVID-19 Economic Recovery, C-SPAN (Mar. 24, 2021), at 58:00–59:11, available at https://www.c-span.org/video/?510059-1/treasury-secretary-federal-reserve-chair-testimony-covid-19-economic-recovery; see Yellen Letter, R. 1-2.2 But she also explained that Treasury did intend to enforce whatever prohibitions the Offset Provision was revealed to entail. See id. Perhaps
Kentucky and Tennessee brought their own challenge in April 2021. They each alleged that because of the funds irresistible nature in the midst of an economic crisis, they intended to accept their respective funding allotments.3 But they also alleged that the Offset Provision tied to those funds injured the States with a coercive and ambiguous restriction that unconstitutionally intrud[es] on the [States] sovereign authority, by interfering with their ordinary management of their fiscal affairs, and by requiring them to forgo their constitutional taxing powers or face an action to return much-needed federal funds after they have already been spent. Complaint ¶ 12, R. 1.
In response to this and other suits, Treasury attempted to clarify the Offset Provision by promulgating an Interim Final Rule in May 2021. See
The States reacted with an amended complaint in June 2021. The Interim Final Rule notwithstanding, the States reprised their contention that the Offset Provision functionally
Two days later, the States submitted their corresponding motion for summary judgment and a permanent injunction. They reiterated their view that they have standing to challenge the Offset Provision for the three aforementioned reasons: that it intrudes on state taxing authority, could result in a recoupment action if the States were to pursue their desired tax cuts, and imposes administrative burdens and compliance costs. As to the merits, they argued that the Offset Provision is impermissibly ambiguous under the Spending Clause, not reasonably related to ARPAs nominal goal of fiscal recovery, and unconstitutionally coercive and commandeering.
Given Treasurys strenuous objections to justiciability, the corresponding evidence the States submitted in support of their motion for summary judgment deserves particular scrutiny. Kentucky offered merely a confirmation email indicating its acceptance of the ARPA funds. See Submission Confirmation, R. 25-1. By contrast, Tennessee submitted declarations from two state officials. First was a declaration from N. Antonio Niknejad, Policy Director to Governor Bill Lee. See Niknejad Dec., R. 25-2. Niknejad explained that Tennessee has a long history of cutting taxes and spending in order to spur economic growth, that Tennessee had recently enacted several tax cuts on gym memberships, professional licensing, agricultural products, and broadband fiber optic cables, and that Tennessee is contemplating several future tax cuts. Id. ¶¶ 6, 8, 9–11. Yet he explained that uncertainty about how the Offset Provision could be construed has caused policymakers in Tennessee to defer, slow, or reconsider some of [their] taxing decisions. Id. ¶ 14.
8. Tennessee is required by its state constitution to enact a balanced budget. General fund expenditures, which include certain reductions in tax revenue due to a statutory or regulatory change, are described by category, agency, program, and the recurring or non-recurring nature of the expenditure. State revenues, which include federal funds and reimbursements, are described by source. The enacted budget appropriates a specific amount from the general fund and other funds to fund the States programs and operations. But in determining whether the budget is balanced, the Department of Finance and Administration generally compares total expenditures to total revenues and does not typically connect expenditures to specific revenue sources or “indirect” causes for those revenues. If the State receives federal funds to offset certain state expenditures, the state funds that would have been used to pay for those expenditures are not used and can be returned to the general fund for future appropriation. To comply with the Tax Mandate, the Department will be required to create new accounting processes that specifically track whether federal funds received under the Rescue Plan are being used to “directly or indirectly offset” any state expenditures resulting from a reduction in tax revenue that otherwise would have been funded from state appropriated tax revenues. That will include tracking whether any cost savings resulting from the receipt of federal funds to offset certain state expenditures are ultimately and indirectly used to offset a tax reduction. Establishing these additional processes and preparing the required reports will require at least one budget analyst and one revenue analyst to divert at least some of their work to that task and other state employees to support and review that work.
9. To comply with the Secretarys Regulations attempting to implement and enforce the Tax Mandate, the State of Tennessee will be forced to expend additional resources adjusting Tennessees “baseline” level of tax revenue for inflation each year during the covered period “using the Bureau of Economic Analysiss Implicit Price Deflator for the gross domestic product of the United States” and then using that adjusted figure to determine whether the States tax policies may violate the Secretarys interpretation of the Tax Mandate.
31 C.F.R. §§ 35.3 ,35.8(b) .10. The State of Tennessee would not incur these additional costs to determine whether any revenue reductions could be said to have been “directly or indirectly offset” by funds received under the Rescue Plan or to report its revenue modifications to the Secretary but for the Tax Mandate.
Treasury cross-moved for summary judgment, or, alternatively, to dismiss the complaint. It introduced no evidence of its own, and thus it did not attempt to controvert Niknejad or Eleys declarations. Rather, it argued that even taking the declarations as true, the States lacked standing and that their merits challenges failed as a matter of law. See Mot. to Dismiss & Mot. for Summ. J. at 8, 17, R. 32. Concerning a recoupment action, Treasury argued that none was imminent. Id. at 10. For even if the States had established that they wish to cut taxes, they failed to show that not only would such cuts result in revenue reductions, but also that they intended to use ARPA funds to offset those reductions. Id. at 11. As to compliance costs, it argued that (1) any administrative burdens were traceable solely to the reporting requirement, not the Offset Provision, and (2) no injury occurs because the States are permitted to use ARPA funds to cover administrative costs. Id. at 14–15. As to the merits, Treasury conceded that its Rule cannot cure potential ambiguities in the Offset Provision for purposes of the Spending Clause. Id. at 30. But it claimed that the text of the Offset Provision itself is unambiguous. Id. It likewise argued that no precedents support the States view that the Offset Provision is unduly coercive or commandeers state taxing authority. Id. at 18–26.
The district court rendered its opinion on these motions in September 2021. As to justiciability, it concluded that both Kentucky and Tennessee had satisfied the pre-enforcement-challenge standing test described in Susan B. Anthony List. See id. at 3–5 (citing Susan B. Anthony List v. Driehaus, 573 U.S. 149 (2014)). First, both the States intended to accept ARPA funds and yet asserted that doing so entailed compliance with the arguably unconstitutional Tax Mandate. Op. & Order at 4–5. Second, the Tax Mandate at least arguably proscribed the States desired efforts to cut taxes. Id. at 5. And third, Secretary Yellen had expressed intent to enforce the Offset Provision in her earlier letter to the States, demonstrating a credible threat of enforcement. Id. The district court thus held that both Kentucky and Tennessee had standing to challenge the Offset Provision. Id.
II.
The district courts order granting the States summary judgment and imposing a permanent injunction was a final decision. See, e.g., Reform Am. v. City of Detroit, 37 F.4th 1138, 1147 (6th Cir. 2022) (citation omitted). Thus,
As for our standards of review, we consider summary-judgment orders de novo. See Jordan v. Howard, 987 F.3d 537, 542 (6th Cir. 2021) (citation omitted). Thus, drawing all reasonable inferences in favor of the non-movant, we ask whether the party seeking summary judgment demonstrated that there is no genuine dispute as to any material fact and that it is entitled to judgment as a matter of law.
Concerning the district courts decision to grant a permanent injunction, several standards of review are relevant. [F]actual findings are reviewed under the clearly erroneous standard, legal conclusions are reviewed de novo, and the scope of injunctive relief is reviewed for an abuse of discretion. Secy of Lab. v. 3Re.com, Inc., 317 F.3d 534, 537 (6th Cir. 2003) (quoting
III.
As is our obligation, we consider first whether Kentucky and Tennessee established that their respective challenges to the Offset Provision are justiciable. See, e.g., Arbaugh v. Y&H Corp., 546 U.S. 500, 514 (2006). We hold that Tennessee alone satisfied that showing. We then explain our view that the text of the Offset Provision is insufficiently clear under the relevant Spending Clause jurisprudence for Treasury, through promulgation of its Rule, to impose the specific obligations that Tennessee complains have inflicted compliance costs upon it.
A. Justiciability
1. Kentucky and Tennessees Initial Standing to Sue
From the States original complaint onward, their central theory of standing has been as follows. First, they said, they both intended to accept ARPA funds. Complaint ¶¶ 26–27, R. 1. But second, the Offset Provision at least arguably proscribes enacting any post-acceptance tax cut should the States wish to expend their funds. Id. ¶ 32. Indeed, because money is fungible, spending ARPA funds and then cutting taxes (or vice versa) could arguably be construed as having used those funds to indirectly offset a resultant revenue reduction. Id. ¶ 35. And second, the States alleged, both Kentucky and Tennessee desire to enact (or have enacted) tax cuts. Kentucky, for instance, recently enacted a tax-deferral bill to revitalize an area of Louisville. Id. ¶ 41. Likewise, Tennessee is considering eliminating its professional-privilege tax, and it has recently enacted cuts to several other taxes. Id. ¶ 42. But the States complained that such tax cuts could be construed to come within the Tax Mandate if they result in a revenue decrease. Id. They thus contended that the Offset Provision constrained their sovereign authority to tax and exposed them to an imminent recoupment action should they wish to pursue their preferred policies.
These original theories sufficed for standing. Whether a party has standing to redress an injury is measured as of the time the injury is first asserted; here, in the original complaint. See
That brings us to the second, more specialized framework, which instructs us how to determine whether an enforcement action is sufficiently imminent to support Article III jurisdiction over a pre-enforcement challenge. See Susan B. Anthony List, 573 U.S. at 158–59. Under that test, we ask whether the States, when they first asserted these injuries, had established (1) an intention to engage in a course of conduct arguably affected with a constitutional interest, (2) that this course of conduct was arguably proscribed by the Offset Provision, and (3) that if the States should pursue such a course of conduct, there was a credible threat that Treasury would pursue a recoupment action. See id. at 161–64. Before the eventual advent of the Rule, we believe, the States had satisfied this tripartite showing.
First, Kentucky and Tennessee alleged that despite their intention to accept and expend ARPA funds, they had either enacted or planned to enact tax cuts that could potentially result in revenue reductions. Complaint ¶¶ 41–42, R. 1. And their decision to do so was at least arguably affected with a constitutional interest, given that states have a powerful sovereign prerogative under federalism principles to control their own internal taxation policies. See id. ¶ 40; see also Lane County v. Oregon, 74 U.S. 71, 76 (1868) (describing states control over the power of taxation as indispensable and an essential function of government); Dep‘t of Revenue of Oregon v. ACF Indus., Inc., 510 U.S. 332, 345 (1994) (Subsection (b)(4), like the whole of
Second, this course of conduct was at least arguably proscribed by the Offset Provision. As we noted before, money is fungible. Complaint ¶ 35, R. 1; see also United States v. Sperry Corp., 493 U.S. 52, 62 n.9 (1989) (Unlike real or personal property, money is fungible.); Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 79 (2011) (same); Ark Encounter, LLC v. Parkinson, 152 F. Supp. 3d 880, 904 (E.D. Ky. 2016) (Because money is fungible, such benefits will to some extent have the incidental effect of allowing the institutions other funds to be used to advance their [other] purposes if they wish. Indeed any reimbursement, aid, or tax exemption necessarily frees up other funds for other purposes.). As a result, merely enacting a revenue-reducing tax cut and expending ARPA funds could at least arguably be construed as having used the funds to indirectly offset the revenue reduction, given that the ARPA funds could support continued state spending rendered otherwise impossible by the tax cuts.5
Indeed, Treasury acknowledged in the commentary to its own Final Rule that this is at least a plausible interpretation of the statute. For instance, it explained, because money is fungible, even if [ARPA] funds are not explicitly or directly used to cover the costs of changes that reduce net tax revenue, those funds may be used in a manner inconsistent with the statute by indirectly being used to substitute for the states or territorys funds that would otherwise have been needed to cover the costs of the reduction.
Last, the States had illustrated a credible threat of enforcement. For instance, the States produced Secretary Yellens letter indicating that Treasury intended to enforce the Offset
2. The Interim Final Rule Complicates the Initial Imminent-Recoupment and Sovereign-Authority Theories of Injury
A little over a month after the States had filed their original complaint, Treasury promulgated its Interim Final Rule (IFR) offering its construction of the Offset Provision. Several features of that Rule are relevant to this dispute. First, the IFR supplied the missing baseline for calculating whether a tax cut results in a revenue reduction. It clarified that the revenue baseline would be the states fiscal year 2019 tax revenue adjusted for inflation.
A recipient government would only be considered to have used Fiscal Recovery Funds to offset a reduction in net tax revenue resulting from changes in law, regulation, or interpretation if, and to the extent that, the recipient government could not identify sufficient funds from sources other than the Fiscal Recovery
Funds to offset the reduction in net tax revenue. If sufficient funds from other sources cannot be identified to cover the full cost of the reduction in net tax revenue resulting from changes in law, regulation, or interpretation, the remaining amount not covered by these sources will be considered to have been offset by Fiscal Recovery Funds, in contravention of the offset provision. The interim final rule recognizes three sources of funds that may offset a reduction in net tax revenue other than Fiscal Recovery Funds—organic growth, increases in revenue (e.g., an increase in a tax rate), and certain cuts in spending.
Yet this narrowing construction created apparent justiciability issues for the States challenge to the Offset Provision. In their initial complaint, the States had alleged only that they have enacted or plan to enact tax cuts that may result in reduced state revenues. Complaint ¶¶ 41–42, R. 1. They never additionally alleged that they would then fail to identify a permissible source of revenue—such as from macroeconomic growth or a reduction in certain state spending—to offset the resultant reductions in inlays. And only if that contingency were to occur, according to Treasurys new Rule, would Treasury pursue a recoupment action against the States. See
And the States sovereign-authority theory now suffered from a similar issue. The States apparent view was that they had either been injured (1) in the past from the receipt of an ambiguous or coercive offer, or (2) are being continuously injured because the Offset Provision prohibit[s] . . . tax relief. Appellees Br. at 46. But an injunction cannot be used to redress a purely past injury. See City of Los Angeles v. Lyons, 461 U.S. 95, 105 (1983). Rather, the States had to show why they were likely to suffer some present or future harm. Id. So that leaves the
3. The States File Their Amended Complaint and Motion for Summary Judgment But Provide No Evidence that They Intend to Violate the Rule
About a month after the IFRs promulgation, the States filed their amended complaint and corresponding motion for summary judgment and a permanent injunction. Despite the advent of the IFR, the States made no allegations and adduced no specific evidence about how
Those omissions are problematic for justiciability, since the States produced no evidence about why there is a realistic risk of an enforcement proceeding. And justiciability must be established with the degree of evidence required at each respective stage of the suit. See Lujan, 504 U.S. at 561. So the States were obliged to submit evidence—such as a sworn declaration—detailing how they are able and ready to pursue a course of action that would run afoul of the Rule. Carney, 141 S. Ct. at 501–02. For only then would there be a demonstrated risk of a recoupment action, which a federal court could redress by enjoining such action. See Jackson, 141 S. Ct. at 2495 (citing California, 141 S. Ct. at 2115–16). In the absence of that evidence, we conclude that Treasurys disavowal of the money-is-fungible interpretation dispelled the States claim that they run the risk of an imminent enforcement action—as when, for instance, a prosecutor credibly disavows that he will enforce a challenged statute. See, e.g., Mink v. Suthers, 482 F.3d 1244, 1256–57 (10th Cir. 2007); cf. Commodity Trend Serv., Inc. v. Commodity Futures Trading Commn, 149 F.3d 679, 687 (7th Cir. 1998) (explaining that courts will find a credible threat of enforcement when the Government fails to indicate affirmatively that it will not enforce the statute (emphasis omitted)).
The only remaining question is what kind of justiciability defect Treasurys disavowal created. The parties initially framed the issue as one of the States standing. But we disagree with that characterization. Whether an intervening circumstance arising after a suit has been filed causes a plaintiffs asserted injury to dissipate is really a question of mootness. See Genesis Healthcare Corp. v. Symczyk, 569 U.S. 66, 72 (2013). And whether the Rule mooted the imminent-recoupment and sovereign-authority theories comes down to whether we should credit Treasurys voluntary disavowal of a broad view of the Offset Provision; in essence, whether
We hold that Treasury satisfied this showing. Its Final Rule resulted from the notice-and-comment process, and thus it may be rescinded only pursuant to that process as well. See
Moreover, that holding ends the case for Kentucky. Kentucky submitted nothing other than an email indicating its intent to accept the ARPA funds. Submission Confirmation, R. 25-1. It furnished no proof about how it intends to violate the Rule, or about why it suffers a continuing sovereign injury when it identified no desired tax cut that, if enacted, would likely provoke recoupment. It also offered no additional theory of injury, such as compliance costs, that might sustain its challenge even in the absence of an imminent recoupment action. See Recording of Oral Arg. at 30:38–30:45 (conceding that there is no evidence in the record about Kentuckys budgeting processes). Thus, the district court should have dismissed its challenge to the Offset Provision as moot.12
4. Tennessees Challenge Remains Justiciable, However, Under a Compliance-Costs Theory of Injury
The same cannot be said for Tennessee. Recall how, in their amended complaint, the States made allegations about an additional injury the Offset Provision would inflict upon them:
And, unlike with the imminent-recoupment and sovereign-authority theories, we have no similar imminence concern about the compliance-costs argument.13 Tennessee already accepted the funds, so it must undertake compliance efforts at present. Given those facts, we conclude that Tennessee satisfied its obligation to show an actual injury traceable to the defendants and likely redressable by a favorable decision. Indeed, compliance costs are a recognized harm for purposes of Article III. See, e.g., Federal Election Comm‘n v. Ted Cruz for Senate, 142 S. Ct. 1638, 1646 (2022); Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973, 983 (2017) (“For standing purposes, a loss of even a small amount of money is ordinarily an ‘injury.‘“); see also State Nat. Bank of Big Spring v. Lew, 795 F.3d 48, 53 (D.C. Cir. 2015) (Kavanaugh, J.) (“The Rule also offers a safe harbor, but banks such as State National Bank must incur costs to ensure that they are properly complying with the terms of that safe harbor. . . . Under Lujan, the Bank therefore has standing to challenge the constitutionality of the Bureau.“); Grand River Enters. Six Nations, Ltd. v. Boughton, 988 F.3d 114, 121 (2d Cir. 2021) (collecting cases). Tennessee‘s expenditure of those resources, as we explain below, is traceable to the Offset Provision. Its proscriptions are why Tennessee must incur such costs—to maintain compliance with the Offset Provision and stave off a recoupment action.14 And permanently enjoining the Offset Provision‘s enforcement
Still, however, Treasury disputes several aspects of this analysis. Its objections focus on whether these compliance costs are a legitimate injury in fact, and, even assuming they are, whether such an injury is truly traceable to the Offset Provision. After more fully describing those objections below, we explain why none persuades us that we lack jurisdiction.
a. Treasury‘s Objection that Tennessee‘s Compliance Costs are not an Injury in Fact
Treasury at points seems to dispute that the compliance costs the Offset Provision (and Rule) inflict on Tennessee even constitute an injury in fact. See, e.g., Reply Br. at 4 n.1. Its argument rests on a portion of the Final Rule—which, we note, acknowledges that ARPA imposes an “administrative burden” on the States—but that permits states to use ARPA funds to defray the costs of complying with ARPA‘s reporting requirement. Id.; 87 Fed. Reg. at 4,444. The theory seems to be that Tennessee cannot be injured by ARPA-related compliance costs when ARPA funds may themselves be used to offset administrative expenses.
We perceive two central problems with this argument. The first is that even if the Rule permits states to use ARPA funds to defray the costs of complying with the reporting requirement, 87 Fed. Reg. at 4,444, that is simply beside the point as concerns Tennessee‘s compliance-costs argument. Tennessee complained of compliance costs distinct from those imposed by the reporting requirement. See Eley Dec. ¶¶8–9, R. 25-3. Indeed, Eley‘s declaration draws an explicit distinction between the costs of reporting Tennessee‘s uses of ARPA funds, on the one hand, and the costs of tracking whether any such use could be construed as an “indirect offset,” on the other. Id. ¶10. And that distinction makes perfect sense based on the statute‘s text. The reporting requirement explains that states must provide a “detailed accounting
Second, and more fundamentally, even if we assumed that the Rule permitted Tennessee to use ARPA funds to defray its Offset Provision-related compliance costs, that would still represent an injury in fact. Tennessee has an independent interest in expending its ARPA funds on other legitimate uses; for instance, spending in one of the four areas that Congress deemed necessary to recovery from the pandemic.
b. Additional Concerns about Traceability
Next, Treasury reframes the same argument as an objection to traceability—that all of Tennessee‘s compliance costs are traceable solely to the unchallenged reporting requirement, rather than to the Offset Provision. Reply Br. at 4. But we reject this argument for the same reason we rejected it above; again, that it is undercut by both law and fact. The reporting requirement contains no prohibition on how funds may be used. It establishes only an obligation that states inform Treasury of which uses a state pursues. The Offset Provision, by contrast, contains a substantive prohibition on use—that the funds cannot be used to “indirectly offset” revenue reductions resulting from tax cuts.
That discussion appears to exhaust Treasury‘s arguments about why the compliance-costs injury is nonjusticiable. But given our independent obligation to ensure that we have jurisdiction, we find a few additional comments about traceability in order. See, e.g., Arbaugh, 546 U.S. at 514. One important issue, we note, is whether Tennessee‘s compliance costs are truly traceable to the Offset Provision itself, or whether they are traceable merely to the Rule. In our view, Tennessee‘s costs are most proximately traceable to the Rule, rather than to the Offset Provision‘s text. If the Rule had never existed, after all, the statute alone arguably might have entailed obligations wholly distinct from those described by the Rule, and thus a distinct set of compliance costs as well. Absent the Rule‘s safe harbors about growth, tax increases, and spending cuts, for instance, the Offset Provision itself, under the money-is-fungible interpretation, arguably proscribed all revenue-reducing tax cuts during ARPA‘s “covered period.” So compliance costs under that regime would have been much simpler: just don‘t cut taxes if you want to expend ARPA funds. But the Rule clarified that Tennessee may cut taxes insofar as it establishes a new tracking procedure to ensure that funds offsetting a tax cut stem from a permissible replacement revenue source (e.g., growth) rather than from ARPA funds. Eley Dec. ¶8, R. 25-3. Likewise, Eley‘s declaration explained that Tennessee must expend additional resources to inflation-adjust its revenues for each year of the “covered period” and then compare them with a 2019 baseline to determine whether any year during the “covered period” witnessed a “reduction” in net tax revenue. That specific requirement only became clear from the Rule. Id. ¶9 (citing
Yet while these refined obligations’ origin in the Rule may highlight the indeterminacies of the underlying Offset Provision, they do not establish that Tennessee‘s injuries cannot be traced to the Offset Provision itself. The Supreme Court recently confronted an analogous issue in Federal Election Commission v. Ted Cruz for Senate, 142 S. Ct. 1638. There, the Cruz campaign challenged a campaign-finance restriction found in an agency regulation implementing a statute but absent from the underlying statute‘s text. Id.. Thus, the government argued, “[a] challenge to the regulation . . . is separate from a challenge to the statute that authorized it.” Id. But the Court declined to endorse this distinction. To the contrary, it held that an injury from a regulation implementing a statute was still traceable to the statute itself. Id. at 1649. “An agency, after all, ‘literally has no power to act‘—including under its regulations—unless and until Congress authorizes it to do so by statute.” Id. (citations omitted). And “[a]n agency‘s regulation cannot ‘operate independently of’ the statute that authorized it.” Id. (citation omitted). So even if Tennessee‘s injuries are most proximately traceable to the Rule, we nonetheless conclude that these injuries also suffice for standing to challenge the Offset Provision itself. For if enforcement of the Offset Provision itself were enjoined, it would necessarily preclude enforcement of the Rule, at least to the extent it implements the Offset Provision.
Last, we address the notion that Tennessee‘s compliance costs are a “self-inflicted injury” and are thus traceable solely to its own conduct in accepting the ARPA funds, rather than to some wrongful conduct of the federal government.15 It is in some sense true that Tennessee exposed itself to the risk of compliance costs when it accepted the ARPA funds. Of course, Tennessee did so with a reservation about the Offset Provision, and it also insists that it took the funds under duress. See Recording of Oral Arg. at 27:38–27:55; Appellees’ Br. at 29. But even if we assumed that Tennessee took the money purely of its own volition, that would not make its compliance costs “self-inflicted” in a way that would defeat jurisdiction. The Supreme Court recently rejected a similar argument in, incidentally, Ted Cruz for Senate, 142 S. Ct. at 1647–48. There, the Cruz campaign stipulated that its “sole and exclusive motivation” for violating the campaign-finance restriction was to create a factual basis for challenging the restriction. Id. at 1647. The government accordingly argued that any resultant injury was traceable not to the restriction, but to the Cruz campaign‘s willful violation of it. Id. Again, however, the Court unequivocally rejected this theory. As it explained, “[w]e have never recognized a rule of this kind under Article III. To the contrary, we have made clear that an injury resulting from the application or threatened application of an unlawful enactment remains fairly traceable to such application, even if the injury could be described in some sense as willingly incurred.” Id.; see
Moreover, Tennessee points out, such a jurisdictional bar would be irreconcilable with the Supreme Court‘s broader Spending Clause jurisprudence. See Appellees’ Br. at 18 n.5. In any Spending Clause challenge, it could be argued, states that accepted federal funds assumed the risk that an ambiguous condition could be construed against their interests. Id. For instance, states might have recognized that the term “costs” in the Individuals with Disabilities Education Act (“IDEA“) could be construed to include expert-witness fees. Arlington Cent. Sch. Dist. Bd. of Educ. v. Murphy, 548 U.S. 291, 293–94 (2006). That it did was, in fact, the position of three dissenting Justices. See id. at 308 (Breyer, J., dissenting, joined by Stevens, J., and Souter, J.). Or, states might have recognized, the term “appropriate relief” could be construed to include money damages—a position that two dissenting Justices called “self-evident.” Sossamon v. Texas, 563 U.S. 277, 293 (2011) (Sotomayor, J., dissenting, joined by Breyer, J.). But in neither of those cases were the states held subject to such obligations, since the question is not whether states could have conceived of those liabilities when accepting the funds; it is instead whether they assumed an obligation about which the relevant statute conferred notice clearly and unambiguously. Arlington Cent. Sch. Dist. Bd. of Educ., 548 U.S. at 298; Sossamon, 563 U.S. at 289–91. Conversely, therefore, jurisdiction is not defeated by (and the merits of the challenge are established by) a spending law‘s omission of clear warnings about the obligations it entails.
B. The Merits
Having concluded that Tennessee‘s challenge is justiciable, we now explain why we agree with Tennessee that the Offset Provision did not establish, with the requisite clarity, the putative obligations it was revealed to entail by the Rule.
At the outset, we note that the States have labeled their challenge as against an “unconstitutionally ambiguous” piece of spending legislation. See, e.g., Amended Complaint ¶57, R. 23. Neither of those terms is entirely accurate. First, as a technical matter, the Offset Provision is more than merely “ambiguous.” Ambiguity refers to situations in which language has at least two definite meanings and a court must select between or among them. See Caleb Nelson, Statutory Interpretation 77–80 (2011). (For instance, the word “bank” without further context might refer to either a riverside or a financial institution.) Vagueness, by contrast, arises when a term is open-ended and lacks inherent or definite content. Id. The Offset Provision is better described as suffering from the latter defect. The States could not have known from the statute itself the reticulated way that Treasury‘s Rule would construe the Offset Provision, since that construction was hardly obvious ex ante. Nor could they have reliably predicted which of the several potential baselines Treasury would select to measure a “reduction,” nor when Treasury might deem such a reduction to have “resulted” from a tax cut. To the contrary, the statute‘s open-endedness gave Treasury expansive discretion to construe its terms in the particular way Treasury saw fit.
And second, the Offset Provision is not “unconstitutional” under the Spending Clause, strictly speaking, just because of those indeterminacies. Rather, the Supreme Court has explained that because Congress can cajole the states to enact policies indirectly (through a spending inducement) that it could never directly order them to perform with its other enumerated powers, we must employ a federalism-based clear-statement rule when construing spending legislation as a matter of statutory interpretation. See, e.g., South Dakota v. Dole, 483 U.S. 203, 207 (1987); Cummings, 142 S. Ct. at 1570, 1574; Sch. Dist. of City of Pontiac v. Sec‘y of U.S. Dep‘t of Educ., 584 F.3d 253, 283–84 (6th Cir. 2009) (en banc) (Sutton, J., concurring) (describing the clear-statement rule as a “statutory limitation on Congress‘s spending power“); see also Haight v. Thompson, 763 F.3d 554, 568 (6th Cir. 2014) (“One of the distinguishing features of the spending power is that it allows Congress to exceed its otherwise limited and enumerated powers by regulating in areas that the vertical structural protections of
So, as we explain below, we do not hold the Offset Provision “unconstitutional” under the Spending Clause. Rather, our holding is this. As a matter of statutory interpretation, we conclude that the Offset Provision does not clearly explain (1) how to calculate a “reduction” in net tax revenue, (2) how to determine whether such a reduction resulted from a tax cut, or (3) how to tell what particular conduct constitutes an “indirect” offset. And Treasury‘s attempted liquidation of the Offset Provision via the Rule in no way followed clearly from the Offset Provision‘s text. Thus, Tennessee may legitimately discontinue the compliance procedures entailed by the Rule, and if, as a result, it should engage in conduct Treasury deems a violation of the Offset Provision, Treasury may not initiate enforcement proceedings in response.
2. Applying the Spending Clause Clear-Statement Rule
It is undisputed that ARPA was enacted pursuant to the Spending Clause. Unlike ordinary coercive legislation, “legislation enacted pursuant to the spending power is much in the nature of a contract: in return for federal funds, the States agree to comply with federally imposed conditions. The legitimacy of Congress‘[s] power to legislate under the spending power thus rests on whether the State voluntarily and knowingly accepts the terms of the ‘contract.‘” Pennhurst State Sch. & Hosp. v. Halderman, 451 U.S. 1, 17 (1981). And “[s]tates cannot knowingly accept conditions of which they are ‘unaware’ or which they are ‘unable to ascertain.‘” Arlington Cent. Sch. Dist. Bd. of Educ. v. Murphy, 548 U.S. 291, 296 (2006) (quoting Pennhurst, 451 U.S. at 17)). As a result, Congress must provide “clear notice” of the obligations a spending law entails. Pennhurst, 451 U.S. at 25. “After all, when considering whether to accept federal funds, a prospective recipient would surely wonder not only what rules it must follow, but also what sort of penalties might be on the table.” Cummings, 142 S. Ct. at 1570. And this clear-statement rule applies with particular force where “a State‘s potential obligations under the Act are largely indeterminate.” Pennhurst, 451 U.S. at 24. “Accordingly, if Congress intends to
a. “Indirectly Offset”
In assessing justiciability, we spoke at length about the Offset Provision‘s indeterminacies; particularly, the prohibition on “indirect” offsets. So we briefly reiterate those points here. The first core issue with the Offset Provision, again, is that its text does not clearly explain what it means to “indirectly offset” revenue-reducing tax cuts with ARPA funds. “Indirectly” means “not directly; obliquely; not straightforwardly, or the like; in an indirect, roundabout, or subtle manner.” Indirectly, Webster‘s New International Dictionary 1267 (2d ed. 1960); see also Indirectly, New Practical Standard Dictionary 677 (1956) (“Not in direct relation; not tending to a result by the shortest or plainest course; inferential.“); Indirectly, Compact Edition of the Oxford English Dictionary 1418 (1971) (“By indirect action, means, connexion, agency, or instrumentality; through some intervening person or thing; mediately.“). And “offset,” in the relevant sense, simply means “to counterbalance” or “compensate” for something. Offset, Webster‘s New International Dictionary at 1691; see also Offset, New Standard Practical Dictionary at 917 (“Anything regarded or advanced as a counterbalance or equivalent; set-off.“); Offset, Compact Edition of the Oxford English Dictionary at 1981 (“To set off as an equivalent against something else.“). So, as Treasury contends, this statutory language apparently stands for the general proposition that states may not circumvent the use restriction “with formalities.” Appellants’ Supp. Br. at 3. Beyond that general notion, however, what this language actually obliges the States to do is difficult to say.
For instance, the States contend that an “indirect offset” could plausibly occur whenever a state enacts a revenue-reducing tax cut and expends ARPA funds—no matter whether the state
True, the Rule—as distinct from the Offset Provision itself—went on to clarify that such an “indirect offset” would not be deemed to have occurred in three particular situations: where the spending cut is offset with macroeconomic growth, another state tax increase, or a state spending reduction. 87 Fed. Reg. at 4,423; see also Appellants’ Br. at 5. But why is the presence of any safe harbor dictated by the underlying statute, much less clearly so? And why do those particular safe harbors reside in the statutory text, much less clearly so? In reality, the statute is silent on those questions. Precisely because the Offset Provision is so indeterminate about what behavior might constitute an “indirect offset,” Treasury was necessarily left with a huge range of discretion about which state behavior it would deem permissible versus impermissible. As a result, the statute itself failed to provide “clear notice” to Tennessee about whichever particular conduct Treasury would permit or proscribe. Arlington Cent. Sch. Dist. Bd. of Educ. v. Murphy, 548 U.S. 291, 296 (2006). And no doubt because of the Offset Provision‘s lack of inherent content, Treasury found it necessary to promulgate a Final Rule with a hundred pages of commentary in its attempt to establish some concrete “guidance.” See Yellen Letter, R. 1-2.
b. “A Reduction in the Net Tax Revenue . . . Resulting From” a Tax Cut
The Offset Provision‘s language concerning “a reduction in the net tax revenue . . . resulting from” a tax cut is similarly indeterminate.
The first, as we mentioned before, is that this portion of the statute never actually specifies which fiscal year‘s revenue inlays serve as the baseline against which to determine whether a state experienced a “reduction” in its revenues. See Appellees’ Br. at 40. And even Treasury‘s own Rule acknowledges how critical this omission was: “Measuring a ‘reduction’ in net tax revenue requires identification of a baseline. In other words, a ‘reduction’ can be assessed only by comparing two amounts.” 87 Fed. Reg. at 4,426. In response to that omission, the Rule happened to set the baseline for the Offset Provision as “the fiscal year ending in 2019.”
The point is that the statute itself is “indeterminate” with respect to whatever baseline the offer entailed. Pennhurst, 451 U.S. at 24. And that wasn‘t because there was some inherent obstacle to Congress‘s specification of a baseline. For instance, compare the Offset Provision with the provision just above it—
Second, setting aside the baseline issue, the Offset Provision contains further indeterminacies about how states must assess whether a reduction in tax revenue “result[ed] from a change” in state tax policy.
The Offset Provision itself does not supply an answer, because it never specifies whether it prohibits a reduction in expected tax revenues, which a state would be able to control ex ante, or whether it prohibits a reduction in actual tax revenues, which a state could potentially determine only ex post. Yet the difference matters. In the above hypothetical, for instance, the state‘s tax cut did not reduce its expected tax revenues, since the best information then available to it suggested that the effect of the tax cut would be revenue-neutral. But the tax cut arguably reduced its actual tax revenues, assuming that the only variable that changed from one year to the next was the tax cut.19
Recognizing that the Offset Provision itself is silent on this issue, the Rule, perhaps surprisingly, suggests that whether a revenue reduction “resulted” from a tax cut hinges on whichever accounting method a state uses to determine the effect of the tax cut. 87 Fed. Reg. at 4,406–07. As it explains, “[i]n assessing whether a tax change has had the effect of reducing tax revenue, recipients may either calculate the actual effect on revenue or rely on estimates prepared at the time the tax change was adopted,” so long as those estimates were “based on
Or consider this issue: the Offset Provision itself never specifies the timespan during which we assess whether a revenue reduction occurred. For instance, imagine a state recorded $100 million in tax revenues in FY 2019, enacted a tax cut in FY 2020 that stimulated the economy and produced $120 million in tax revenues, but then experienced a downturn in FY 2021 resulting in tax revenues of only $95 million (which arguably might have been higher absent the FY 2020 tax cut). Does that scenario count as a “reduction . . . in net tax revenue” resulting from the FY 2020 tax cut, given that the tax cut arguably resulted in reduced inlays in FY 2021? Or did the state actually experience an increase in net tax revenues, since, combining the inlays from FY 2020 and 2021, the state recorded a net gain of $15 million in inlays versus FY 2019? Whatever the answer, it is at least unclear from the Offset Provision itself whether such a “net reduction” is measured across the entire “covered period” or on a year-to-year basis within the “covered period.”
For those reasons, therefore, neither operative portion of the Offset Provision—“indirectly offset” and “reduction in . . . net tax revenue . . . resulting from” a tax cut—provided Tennessee “clear notice” about the measures required to maintain compliance. Cummings, 142 S. Ct. at 1570.20 Nor—as we explain below—can Treasury‘s subsequent promulgation of its Rule cure this vagueness defect.
c. Why Treasury‘s Rule Cannot Cure Spending-Law Vagueness
The question whether agency regulations construing spending legislation are entitled to deference has generated some occasional academic interest. See, e.g., Peter J. Smith, Pennhurst, Chevron, and the Spending Power, 110 Yale L.J. 1187, 1189–90 (2001). But we note at the outset that this issue is not in the present case: Treasury categorically waived reliance on the Rule to cure a vagueness defect under the Spending Clause. As it told the district court, “agency regulations should have no bearing on the Spending Clause analysis.” Defs.’ Mot. to Dismiss & Mot. for Summ. J. at 30, R. 32 (emphasis added). It argued instead that the Offset Provision itself satisfied the Spending Clause, since at the very least it put the States on notice that the offer came with “a condition“—no matter whether the contours of that condition presented significant indeterminacies as a matter of the statutory text. Id..
Treasury has reprised these arguments before us. It does not argue that the Rule—even though it was promulgated before the States accepted the ARPA funds—can provide clear notice to the States of their obligations. Rather, it argues that it was the Offset Provision‘s text alone that “clearly place[d] States ‘on notice’ that their acceptance of Fiscal Recovery Funds ‘is conditioned upon compliance with’ the requirement not to use those funds to pay for tax cuts.” Reply Br. at 7; see also Appellants’ Supp. Br. at 2 n.2. So again, Treasury acknowledges that whether Tennessee‘s Spending Clause challenge succeeds hinges on whether the Offset Provision itself is impermissibly vague about whichever obligations it imposes on the states.
But we note that even if we were bound to independently assess whether Treasury‘s Rule could provide clear notice of conditions left otherwise indeterminate by the statute, we still would hold that it could not do so in these particular circumstances.21 Our primary concern here
Yet we find that whether deference was warranted on such arcane topics as those has little relevance to the Offset Provision. It is difficult to see how the Rule represents mere “implementation details” when it supplied content without which the Offset Provision literally could not function. And, in any event, Treasury is wrong to suggest that we should act “as if we were interpreting a statute which has no implications for the balance of power between the Federal Government and the States.” Va. Dep‘t of Educ. v. Riley, 106 F.3d 559, 567 (4th Cir. 1997) (en banc).22 Unlike the distribution of incontinence products or the release of disciplinary records, control over taxation is a core aspect of state sovereignty. See Dep‘t of Revenue of Or. v. ACF Indus., Inc., 510 U.S. 332, 345 (1994); Lane County v. Oregon, 74 U.S. 71, 76 (1868). For Congress to impose conditions in that area, it must do so in clear and unmistakable terms. See, e.g., SWANCC v. U.S. Army Corps of Eng‘rs, 531 U.S. 159, 172–73 (2001) (explaining that the Court “would not extend Chevron deference” to an agency interpretation involving “federal encroachment upon a traditional state power.“); see also Ala. Ass‘n of Realtors v. Dep‘t of Health & Hum. Servs., 141 S. Ct. 2485, 2489 (2021).
3. Treasury‘s Counterarguments
Before we close, we address a couple of Treasury‘s counterarguments to our conclusions above. We first discuss the import of our decision in Cutter v. Wilkinson, which affirmed the Religious Land Use and Institutionalized Persons Act (“RLUIPA“) against a Spending Clause challenge. 423 F.3d 579, 585–86 (6th Cir. 2005). We then address Treasury‘s claim that Tennessee should have enjoyed clear notice of the Offset Provision‘s meaning because the phrase “directly or indirectly” “appears more than a thousand times in the U.S. Code.” Appellants’ Supp. Br. at 3.
a. Cutter v. Wilkinson and the RLUIPA Comparison
Resisting our merits analysis, Treasury asserts that our decision today conflicts with circuit precedent sustaining RLUIPA against a Spending Clause challenge. Cutter, 423 F.3d at 585–86. We agree that RLUIPA is a helpful comparison—just not in the way Treasury thinks.
We begin with some background about RLUIPA itself. From 1963 to 1990, the Supreme Court interpreted the Free Exercise Clause to require state officials to justify even incidental
In 1990, however, the Supreme Court functionally overruled this body of precedent, holding that incidental burdens on religious practice merited only rational-basis review. Emp. Div., Dep‘t of Hum. Res. of Or. v. Smith, 494 U.S. 872, 878–79 (1990). But Congress, incensed by the Smith decision, twice attempted to overrule it. See
Whether we ever actually adjudicated the correctness of that holding, we note, is uncertain. It appears that Ohio‘s officials pressed a different ambiguity argument on appeal to this circuit: that RLUIPA did not clearly specify that it applied to existing federally funded programs, rather than merely to programs established after its enactment. See Cutter, 423 F.3d at 585–86; see also Gerhardt, 221 F. Supp. 2d at 841 (distinguishing between the retroactivity argument and the strict-scrutiny-is-too-indeterminate argument). But we held that RLUIPA imposed that obligation clearly, since its text “explains that the Act applies to ‘any program or activity that receives Federal financial assistance.‘” Cutter, 423 F.3d at 586 (citing
Before us, however, Treasury appears to have erroneously exaggerated Cutter‘s precedential effect by claiming that our circuit also rejected the strict-scrutiny-is-too-indeterminate argument. In particular, its reply brief claims that Ohio argued “RLUIPA‘s ‘least restrictive means standard’ constituted an ‘ambiguous condition’ that was impermissible under Pennhurst. Cutter, 423 F.3d at 586 (quotation marks omitted). But this Court disagreed, explaining that ‘Congress need not ‘delineate every instance in which a State may or may not comply with the least restrictive means test.‘” Reply Br. at 6-7.24 In reality, the portions of Cutter that Treasury quotes were describing a Seventh Circuit decision that had rejected “a similar Pennhurst-based challenge to RLUIPA“—the strict-scrutiny-is-too-indeterminate argument, not the anti-retroactivity argument before the panel in Cutter. Cutter, 423 F.3d at 586 (citing Charles v. Verhagen, 348 F.3d 601, 608 (7th Cir. 2003)).
b. “Directly or Indirectly” in the U.S. Code
Perhaps implicitly recognizing the dearth of relevant caselaw, Treasury last suggests that Tennessee should have been able to ascertain its obligations under the Offset Provision because various other federal statutes employ the phrase “directly or indirectly.” Appellants’ Supp. Br. at 3. It is commonly used simply to underscore that a restriction cannot be circumvented through formalities,” Treasury says, and “appears more than a thousand times in the U.S. Code.” Id. That is perhaps true, but this factoid seems of no consequence to us for at least three reasons.
First, as we noted above, Treasury conceded that it has no example of such a phrase in a Spending Clause statute, much less one in the particular context of taxation, and, less still, one that survived ambiguity challenges in federal court. Recording of Oral Arg. at 43:00–43:50.
Second, most of these other uses appear to have no conceivable relevance to the Offset Provision. And, for that matter, they may make the vagueness issues even worse. For instance, consider
who “knowingly, directly or indirectly, imports, exports, or reexports luxury goods into North Korea.” The phrase in that context seemingly bars the use of third-party intermediaries to circumvent a trade restriction. So Company A, wishing to execute proscribed shipments to North Korea, still violates the statute by shipping the goods to Company B in Shanghai for reexport into Pyongyang. Or take
Last, as the above examples suggest, the relevant phrase is not just “directly or indirectly,” but “directly or indirectly offset.”
IV.
In closing, we reiterate the central conclusions we have reached today. Treasury‘s credible disavowal of the money-is-fungible interpretation mooted Kentucky‘s challenge to the Offset Provision, and so the district court erred when it enjoined Treasury from enforcing the Offset Provision against Kentucky. We thus REVERSE the district court‘s justiciability holding as to Kentucky and VACATE the permanent injunction to the extent it bars enforcement of the
NALBANDIAN, Circuit Judge, concurring in part and dissenting in part. I concur with nearly all of the majority‘s well-reasoned opinion. Importantly, I agree with the majority that the vagueness of the American Rescue Plan Act of 2021 (“ARPA“) violates the Spending Clause. And I agree that Tennessee has standing for the reasons that the majority gives. My only disagreement is about whether Kentucky can press its claim. In short, I believe that both Tennessee and Kentucky (“States“) have standing for reasons related to the federal government‘s intrusion on their sovereign-taxing authority. And I don‘t believe that the Department of Treasury‘s (“Treasury“) Rules on ARPA‘s enforcement (“Rules“) affect justiciability.1 So I concur with respect to Tennessee‘s participation in the case, but respectfully dissent over Kentucky‘s.
I.
Standing arises here in three possible ways: through what the majority calls the “imminent-recoupment,” “compliance-cost,” and “sovereign-authority” theories. My concern is
With respect to “injury,” courts have recognized for over a century that states “are not normal litigants for the purposes of invoking federal jurisdiction.” Massachusetts v. EPA, 549 U.S. 497, 518 (2007). This regard stems from each state‘s “well-founded desire to preserve its sovereign territory.” Id. at 519. For that reason, we don‘t treat states as “mere provinces or political corporations.” Alden v. Maine, 527 U.S. 706, 715 (1999). Instead, we recognize their “residuary and inviolable sovereignty.” The Federalist No. 39, at 245 (James Madison) (Clinton Rossiter ed., 1961). And we give “special” recognition to a case when a state sues the federal government. Saginaw County v. STAT Emergency Med. Servs., Inc., 946 F.3d 951, 957 (6th Cir. 2020).
Although states hold a unique status in federal court, they cannot avoid “the constitutional baseline” of
Still, states have “special solicitude” when they incur “quasi-sovereign” injuries. Id. They cannot “bypass proof of injury in particular or Article III in general,” but they may incur injuries that private parties cannot. Id. at 385-86. Among other things, states can allege sovereign-related injuries like federal regulation over local-lawmaking authorities, threatened intrusions on state territory, or public nuisances, in which a state seeks “to safeguard its domain and its health, comfort and welfare.” Id at 386. (quoting Kentucky v. Biden, 23 F.4th 585, 596 (6th Cir. 2022)); see Massachusetts, 549 U.S. at 517, 521-23 (recognizing the sovereign and quasi-sovereign interests in protecting coastal lands from rising sea levels).
Finally, a quick note about the “imminence” part of the injury-in-fact inquiry. The majority analyzes imminence using the “pre-enforcement” test from Susan B. Anthony List v. Driehaus, 573 U.S. 149 (2014).2 And that is the way that we typically assess imminence when a case concerns a pre-enforcement challenge. But because the States here allege sovereign and quasi-sovereign injuries, we can assess imminence under a slightly different analysis.
A state can establish an imminent injury by showing a “risk of harm” to their sovereign or quasi-sovereign interests. Massachusetts, 549 U.S. at 521 (quoting Lujan, 504 U.S. at 560). In Massachusetts v. EPA, EPA‘s refusal to regulate greenhouse gas emissions presented an imminent injury to state interests related to climate change. Id. The “risk of harm” of sea levels rising and damaging state-coastal property created the imminent injury. Id. at 521-23; see Saginaw County, 946 F.3d at 957 (recognizing that the imminence in Massachusetts came from this “risk“). And the Supreme Court reasoned that a state that has a procedural right to protect its sovereign interests can satisfy
We have analyzed imminent harms to sovereign interests in pre-enforcement challenges too. In our recent decision in Kentucky v. Biden, which concerned a pre-enforcement challenge to COVID-19 mandates, we found standing under the sovereign-authority theory. See 23 F.4th
II.
Applying the sovereign-authority framework, the States have standing in this case. See Massachusetts, 549 U.S. at 520. They allege that ARPA “unconstitutionally intrud[es] on their sovereign authority, by interfering with the orderly management of their fiscal affairs, and by requiring them to forgo their constitutional taxing powers or face an action to return much-needed federal funds after they have already been spent.” (R. 1, Original Complaint, PageID 5 ¶ 12.) Each threat poses an imminent “risk of harm to” their sovereign interests. Massachusetts, 549 U.S. at 521. As described below, they have alleged with particularity ARPA‘s “negative effects” on their taxing powers, citizens, and economy. Kentucky, 23 F.4th at 602.
This Court‘s growing list of sovereign and quasi-sovereign injuries reinforces the States’ standing in three ways. First, they have “plausibly alleged that the federal government has intruded upon an area traditionally left to the states“—state taxes on state citizens. Kentucky, 23 F.4th at 599; see (R. 1, Original Complaint, PageID 2-3, 5-6 ¶¶ 1-3, 12 (discussing the federalism implications of ARPA); R. 1, Original Complaint, PageID 15-16 ¶ 40 (“[T]he power to tax and spend is a sovereign function that lies at the core of State power.“)); see generally Dep‘t of Revenue of Or. v. ACF Indus., Inc., 510 U.S. 332, 345 (1994) (describing the tax power as “central to state sovereignty“).
All this to say, ARPA‘s vague conditions chill the States from enacting similar tax cuts. The States allege they cannot confidently enact tax policy because they fear imminent recoupment action for exercising their sovereign-taxing authority. (See id. at PageID 17 ¶¶ 43-44.) And because of the “fungible” quality of money, the States construe ARPA to “potentially affect[] all State legislative and executive actions that reduce net tax revenues,” even if they have nothing to do with ARPA‘s COVID-19 relief. (Id. at PageID 16, 17 ¶¶ 41, 44 (quotation omitted).) ARPA then “likely implicates” the powers to “make and enforce policies and regulations” and the “traditional prerogative to superintend” local taxes on state citizens. Kentucky, 23 F.4th at 599.
To top it all off, the States have standing because ARPA‘s chilling effect “threatens to damage each of the [S]tates’ economies.” Id. at 599. The chilling effect to enact tax policies that “invest in and revitalize” communities, (R. 1, Original Complaint, PageID 16 ¶ 41), or “attract new businesses and residents” to promote “economic growth,” (id. at PageID 16 ¶ 42), stagnates the States’ fiscal health and interest in helping their citizens. Kentucky and Tennessee plausibly allege that resistance to ARPA will result in fewer tax cuts for homeowners and businesses, “all to the detriment of their state economies.” Kentucky, 23 F.4th at 601. Because the States have sovereign and quasi-sovereign interests in “defending their economies from the alleged negative ramifications” of ARPA, they also “have standing to contest it.” Id.
Thus, I agree with the majority that the States allege imminent injuries that grant them standing.4 Recognizing that the States suffer from sovereign injuries raises this question: Did Treasury‘s Rules moot the States’ legal interests in obtaining relief?
III.
This is where I part ways with the majority; I believe the answer is no. Treasury‘s Rules do not moot Kentucky or Tennessee‘s controversy over their sovereign interests. Even with the guidance, the States still suffer from the same harm explained above. And both meet
A case only becomes moot “when the issues presented are no longer live or parties lack a legally cognizable interest in the outcome.” Thomas v. City of Memphis, 996 F.3d 318, 323 (6th Cir. 2021). Said differently, parties do not have a mootness problem if “the relief sought would, if granted, make a difference to the legal interests of the parties.” Ford v. Wilder, 469 F.3d 500, 504 (6th Cir. 2006) (internal quotation omitted). Even with the Rules, the States still need injunctive and declaratory relief to avoid Treasury‘s enforcement of ARPA‘s unconstitutionally vague conditions.
Although the Rules tried to fill in the blanks of ARPA, Treasury cannot resolve ARPA‘s open-endedness. The Rules tried to construct ARPA‘s guidelines by providing what ARPA didn‘t: a revenue baseline and guidance on when Treasury would enforce the Offset Provision. See
And, perhaps most importantly, the regulation does not fix the Offset Provision in three other ways: Vagueness still exists from ARPA‘s lack of explanation on how to (1) calculate a “reduction” in net tax revenue, (2) determine whether such a reduction resulted from a tax cut, and (3) tell what particular conduct constitutes an “indirect” offset.
And even if the Rules could clarify ARPA‘s open-endedness, the States still face a live threat to their sovereign authority. The Rules seek to allow states to enact tax cuts resulting in revenue reductions so long as they identify permissible sources of offsetting funds. See, e.g., 87 Fed. Reg. at 4428. Although allowing for some tax cuts, the Rules still narrow the range of permissible tax policies the States may enact, which in turn takes a toll on the States’ citizens and economies.
What‘s more, the Rules do not ease the States’ concern regarding Treasury‘s enforcement against them. Secretary Yellen‘s threat to enforce the Offset Provision in her earlier letter to the States still stands. (See R. 1-2, Yellen Letter, PageID 33-34.) Indeed, the Rules make matters worse. They expressly reserve the Secretary‘s broad authority to enforce ARPA‘s requirements and provide that “[n]othing” in the Rules “shall limit the authority of the Secretary to take action to enforce conditions or violations of law . . . .”
Next, while facing “live” issues, the States continue to have “a legally cognizable interest in the outcome” of this case. Thomas, 996 F.3d at 323. The Rules do not “mak[e] it ‘impossible for the [C]ourt to grant any effectual relief[.]‘” Id. at 330 (quotations omitted). The Court can still grant injunctive and declaratory relief given the States’ continued stake in the case without creating an “advisory opinion that
For these reasons, I do not find the claims moot like the majority. I acknowledge that the States did not allege they would fail to offset their funds with a permissible revenue source. See 87 Fed. Reg. at 4428. But I don‘t believe that moots Treasury‘s threat of recoupment action. Again, the Rules still limit the States from enacting tax policies if they do not offset a net reduction with permissible revenue sources. This restraint makes the States fear that they “cannot lower their citizens’ tax burdens without suffering a penalty.” (R. 23, Amended Complaint, PageID 131 ¶ 1.) And seeing that the Rules do not “limit the authority of the Secretary” to enforce ARPA, a credible threat of recoupment action still stands.
IV.
I concur with almost all of the majority opinion. But I respectfully dissent in part only to explain why I believe the Rules do not moot the States’ controversy over their sovereign-tax interests. Thus, I would grant both Kentucky and Tennessee their sought-after relief.
Notes
My analysis assumes that the majority is correct that the one-party rule doesn‘t apply. (See Majority Opinion, at 20 n.12.) But I‘m not sure that‘s the case. The rule allows courts to review claims so long as one plaintiff has standing. Massachusetts v. EPA, 549 U.S. 497, 505 (2007). And courts have applied the rule to other
But a different situation arises when each plaintiff would obtain the same relief regardless. For cases involving injunctive or declaratory remedies, the practical effects of granting relief may apply to each plaintiff even if we dismiss one for lack of standing. For example, in Bowsher v. Synar, the Supreme Court applied the one-party rule to avoid analyzing other plaintiffs’ standing. 478 U.S. 714, 721 (1986). Without returning to the standing questions, the Court affirmed relief that declared a statute unconstitutional. See id. at 736. Because the standing determinations wouldn‘t affect how the Court distributed relief, the Court didn‘t need to revisit its use of the rule. See id.; accord McCraw, 719 F.3d at 344 n.3 (recognizing that courts “do not need to verify the independent standing of the other co-plaintiffs” when one party with standing “rais[es] the same claims and issues” (quotation omitted)). Here, Tennessee meets