FILE - Scales of justice

(The Center Square) – A federal court has granted Tennessee and Kentucky freedom on how to distribute funds from the American Rescue Plan Act.

The attorneys general from the states filed a lawsuit challenging the prohibition of ARPA money from being used in a way that would result in a tax cut, often referred to as ARPA’s “tax mandate.”

The court, citing the competing viewpoints of Founding Fathers Thomas Jefferson and Alexander Hamilton in its ruling, ruled Friday in favor of the states, allowing them to use the ARPA money as they deem necessary.

“The topic was one of trust,” U.S. District Judge Gregory Tatenhove wrote. “Hamilton put his in a strong federal government with considerable power. Jefferson, the agrarian, fought against the expansion of federal power at the expense of the States. Here, the federal government wants to give Kentucky and Tennessee a lot of money. These funds are desperately needed in the midst of a pandemic. But they come with a price – states must forego the exercise of important flexibility and power when it comes to making their own taxing decisions.”

The National Federation of Independent Business (NFIB) filed an amicus brief in July, supporting the lawsuit.

“The past 18 months have taken a tremendous toll on small businesses,” NFIB Kentucky State Director Tom Underwood said. “They can’t afford to pay high taxes. Kentucky needs the freedom to spend the money from the American Rescue Plan in a way that makes sense for Kentucky.”

NFIB Tennessee State Director Jim Brown said the stance was one of principle, that states should have the flexibility to use the money as they determined, and the ARPA funding was far different than Coronavirus Aid, Relief and Economic Security (CARES) Act funds because ARPA funds can be spent over a five-year period as opposed to CARES Act money being spent in one year.

Tennessee spent nearly $1 billion of its (CARES) Act allotment in 2020 to fund its unemployment insurance trust fund. The allocation prevented businesses from seeing unemployment insurance tax rates rise by 300% to cover $837,000 in additional unemployment funds, the Tennessee Department of Finance and Administration said.

“Last year, Tennessee was able to use federal relief funds to help small businesses avoid higher taxes, in particular unemployment taxes,” Brown said. “We're pleased the court agreed that states should have the flexibility to establish tax policies that will help continue our post-pandemic economic recovery.”

Tatenhove wrote in is ruling, “The coercion presented in the ARPA is exactly the kind of intrusion on state sovereignty that the Constitution prohibits.”

“The Court sees no cognizable interest of the federal government in enforcing the Tax Mandate and, given the limited scope of the permanent injunction, the Defendants will be free to enforce every other provision of the ARPA as they see fit,” he wrote.

Staff Reporter

Jon Styf is an award-winning editor and reporter who has worked in Illinois, Texas, Wisconsin, Florida and Michigan in local newsrooms over the past 20 years, working for Shaw Media, Hearst and several other companies.