United States Court of Appeals for the Fifth Circuit United States Court of Appeals Fifth Circuit

____________ FILED June 25, 2024 No. 22-10560 Lyle W. Cayce ____________ Clerk State of Texas; State of Mississippi; State of Louisiana,

Plaintiffs—Appellees,

versus Janet Yellen, in her official capacity as Secretary of the Treasury; Richard K. Delmar, in his official capacity as Acting Inspector General of the Department of the Treasury; United States Department of the Treasury; United States of America,

Defendants—Appellants. ______________________________

Appeal from the United States District Court for the Northern District of Texas USDC No. 2:21-CV-79 ______________________________ Before Elrod, Ho, and Oldham, Circuit Judges. Jennifer Walker Elrod, Circuit Judge: The American Rescue Plan Act allocated nearly $200 billion to the states and the District of Columbia to assist with economic recovery in the wake of the COVID-19 pandemic. But the funds came with a catch. To accept the money, states had to agree not to use it to “directly or indirectly offset” reductions in state tax revenue. Several states filed a lawsuit seeking to enjoin the enforcement of that provision. Case: 22-10560 Document: 119-1 Page: 2 Date Filed: 06/25/2024

No. 22-10560

In exercising its power under the Spending Clause, Congress has a constitutional obligation to cut a clear deal with the states when they accept federal funding. Because the challenged provision is not clear about what it requires of the states, it falls short of that obligation and is impermissibly ambiguous. Accordingly, we reach the same ultimate conclusion as have two other circuit courts and AFFIRM the district court’s grant of a permanent injunction. I Congress enacted the American Rescue Plan Act in March 2021 in the wake of profound economic damage caused during the COVID-19 pandemic. Pub. L. No. 117-2, § 9901(a), 135 Stat. 4 (2021) (codified at 42 U.S.C. § 801 et seq.). As one of its many provisions, ARPA allocates $195.3 billion to the states and the District of Columbia to aid their economic recovery, and these funds can be used to cover a range of costs. 42 U.S.C. §§ 802(b)(3)(A), (c)(1). However, ARPA also imposes a condition on the states’ acceptance of their allotted share. Section 802(c)(2)(A) provides that: A State or territory shall not use the funds provided under this section or transferred pursuant to section 803(c)(4) of this title 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. In other words, ARPA broadly prohibits states from using their ARPA funds to take any action that would reduce their net tax revenue.

Before receiving the funds, a state must certify that it will comply with the restrictions imposed by Section 802(c). Id. § 802(d)(1). After accepting the funds, states must continue to provide “a detailed accounting” of both