A federal court yesterday agreed with Kansas and held that an attempt by Congress and the Biden administration to prohibit states that accept federal COVID-19 relief money from reducing state taxes is unconstitutional, Attorney General Derek Schmidt said in a press release today.

“The federal court’s ruling ensures that tax relief enacted earlier this year by the Kansas Legislature over Governor Kelly’s veto will remain in effect and will not result in the Biden administration demanding that Kansas return some of its federal COVID-19 relief funds,” Schmidt said. “It also clears the way for Kansas to adopt our bipartisan recommendations to eliminate or significantly reduce the state’s sales tax on groceries without fear of federal reprisal. This is welcome news that confirms our view that the Constitution does not permit the federal government to micromanage how Kansas sets its own state-level tax policy.”

In March, Congress passed and President Biden signed into law the American Rescue Plan Act, which contained a provision prohibiting states from using any ARPA funds to “directly or indirectly” pay the cost of reducing state taxes for the next three years. On March 16, Schmidt and 20 other state attorneys general wrote Treasury Secretary Janet Yellen requesting clarity on what the “indirectly” requirement means and how states could avoid violating it. In response, Yellen declined to clarify the federal government’s position, and on March 31 Schmidt joined with 12 other states in filing a lawsuit seeking to invalidate the provision as exceeding the power vested in the federal government by the United States Constitution.

The federal court yesterday agreed and entered a permanent injunction prohibiting the federal government from enforcing the unconstitutional provision.

“[T]he Tax Mandate dictates more than what States do with federal funds; it dictates what States do with State funds as well,” the court wrote. “The Tax Mandate’s restriction on direct or indirect state tax cuts pressures States into adopting a particular — and federally preferred — tax policy. … This is a federal invasion of State sovereignty…”

The State of Kansas is scheduled to receive $1.6 billion in ARPA funds.

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