State of Arizona v. Janet Yellen

FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

STATE OF ARIZONA, No. 21-16227
Plaintiff-Appellant,
D.C. No.
v. 2:21-cv-00514-
DJH
JANET YELLEN, in her official
capacity as Secretary of the
Treasury; RICHARD K. DELMAR, in OPINION
his official capacity as acting
inspector general of the Department
of Treasury; UNITED STATES
DEPARTMENT OF THE TREASURY,
Defendants-Appellees.

Appeal from the United States District Court
for the District of Arizona
Diane J. Humetewa, District Judge, Presiding

Argued and Submitted January 13, 2022
San Francisco, California

Filed May 19, 2022

Before: Ronald M. Gould, Mark J. Bennett, and
Ryan D. Nelson, Circuit Judges.

Opinion by Judge Gould;
Concurrence by Judge R. Nelson
2 STATE OF ARIZONA V. YELLEN

SUMMARY *

Standing

The panel reversed the district court’s dismissal for lack
of subject matter jurisdiction of an action brought by the
State of Arizona against federal defendants alleging that the
American Rescue Plan Act (“ARPA”) violated the
Constitution’s Spending Clause and the Tenth Amendment.

Congress passed ARPA to help state, local, and tribal
governments mitigate the ongoing effects of the COVID-19
pandemic. The statute contains a provision (the “Offset
Provision”) – challenged in this appeal – prohibiting a State
from using ARPA funds to subsidize a tax cut or otherwise
a reduction in state net tax revenue. Specifically, Arizona
contends that it was coerced into accepting the Offset
Provision because of the size of the funds offered under
ARPA and the fraught financial situation brought on by the
pandemic. Arizona sought a preliminary injunction
enjoining the federal defendants from recouping funds or
otherwise enforcing the Offset Provision, and declaratory
relief that the Offset Provision violated the Constitution.
The district court dismissed for lack of subject matter
jurisdiction, finding that Arizona did not demonstrate a
cognizable injury in fact to establish standing.

The panel held that Arizona had standing to challenge
ARPA both because there was a realistic danger of ARPA’s
enforcement, and because there was a justiciable challenge
to the sovereignty of the State, which alleges infringement
*
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
 STATE OF ARIZONA V. YELLEN 3

on its authority to set tax policy and its interest in being free
from coercion impacting its tax policy.

The panel addressed Arizona’s three primary arguments
for standing. First, Arizona under its compliance cost theory
contended that the reporting requirements in the Treasury
Department’s Interim Final Rule (explaining how it would
implement ARPA and the Offset Provision) established an
injury in fact by imposing a regulatory burden on the States.
The panel rejected this theory because standing is measured
at the time of the complaint, and when the complaint was
filed, there was not a required compliance scheme.

Second, Arizona alleged that the future injury it will
suffer, if the Offset Provision is enforced against it, was
sufficient to confer standing. In Susan B. Anthony List v.
Driehaus, 573 U.S. 149, 159 (2014), the Supreme Court set
forth three factors that must exist for a plaintiff to have
standing to bring a pre-enforcement challenge to a law. The
panel held that the first Driehaus factor – requiring an intent
to do an act “arguably affected” by a constitutional interest
– was met. In evaluating the second Driehaus factor, the
panel determined whether Arizona’s intended future conduct
was proscribed by ARPA. Here, Arizona accepted ARPA
funds, certified that it will meet ARPA’s conditions, and
passed a $1.9 billion tax cut. The panel held that Arizona’s
tax cut would presumably lead to a reduction in Arizona’s
net tax revenue, which meant that Arizona had taken all
requisite steps to violate the Offset Provision short of using
ARPA funds “directly or indirectly” to offset a net revenue
reduction from its tax cut. This was enough to satisfy the
second factor. The panel held that the third Driehaus factor,
concerning whether there was a credible threat of
enforcement, had dispositive weight in the case. The $1.9
billion tax cut Arizona passed was a sufficiently concrete
4 STATE OF ARIZONA V. YELLEN

plan. The panel disagreed with the district court’s rejection
of this theory of standing, and held that Arizona has alleged
a sufficiently credible threat of enforcement to bring a pre-
enforcement challenge to ARPA’s Offset Provision.

Third, the panel examined Arizona’s sovereign injury
theory of standing in the alternative. Arizona contended that
the Offset Provision inflicted cognizable sovereign injuries
upon the States by being unconstitutionally ambiguous and
coercive. Because the panel was reviewing an order on a
motion to dismiss, the panel took all allegations of the
complaint as true. The panel saw no reason to dispute, deny,
or discredit Arizona’s contention at this stage that ARPA and
its Offset Provision specifically had a coercive impact on the
State. Here, Arizona alleged sufficiently concrete and
particularized harms to its ability to exercise its sovereign
prerogatives, intangible as those prerogatives may be. The
quasi-contractual funding offer at issue here can be
challenged by Arizona at the outset for offering conditions
that are unconstitutionally ambiguous or coercive. States
have standing when an allegedly unconstitutional funding
offer is made to them, and they do not need to first violate a
condition of an allegedly unconstitutional contract to have
standing to challenge it. The panel held that the district court
erred in dismissing Arizona’s claim for lack of subject
matter jurisdiction.

After concluding that Arizona had standing to bring its
challenge to ARPA on two theories, the panel declined to
consider the merits of Arizona’s constitutional claims. The
panel remanded for the district court to consider the merits
of Arizona’s Spending Clause and Tenth Amendment
claims.
 STATE OF ARIZONA V. YELLEN 5

Concurring, Judge R. Nelson agreed that Arizona had
standing to challenge the Offset Provision on its theory of
sovereign injury and concurred in Section II of the
majority’s opinion. He disagreed with the majority’s
conclusion that Arizona alleged “an intention to engage in a
course of conduct arguably affected with a constitutional
interest, but proscribed by a statute.” See Susan B. Anthony
List, 573 U.S. at 159. Arizona never alleged that it had taken
action proscribed by the Offset Provision, and this lack of
such an allegation doomed Arizona’s argument for standing
on this basis.

COUNSEL

Drew C. Ensign (argued), Deputy Solicitor General; Wilson
C. Freeman, Senior Litigation Counsel; Robert J. Makar,
Assistant Attorney General; Joseph A. Kanefield, Chief
Deputy & Chief of Staff; Brunn (“Beau”) W. Roysden III,
Solicitor General; Mark Brnovich, Attorney General; Office
of the Attorney General, Phoenix, Arizona; for Plaintiff-
Appellant.

Daniel Winik (argued), Mark B. Stern, and Alisa B. Klein,
Appellate Staff; Brian M. Boynton, Acting Assistant
Attorney General; Civil Division, United States Department
of Justice, Washington, D.C.; for Defendants-Appellees.

Jacob Huebert, Scharf-Norton Center for Constitutional
Litigation at the Goldwater Institute, Phoenix, Arizona, for
Amicus Curiae Goldwater Institute.

Dave Yost, Attorney General; Benjamin M. Flowers,
Solicitor General; Zachery P. Keller and Sylvia May Davis,
Deputy Solicitors General; Office of the Attorney General,
6 STATE OF ARIZONA V. YELLEN

Columbus, Ohio; Steve Marshall, Alabama Attorney
General; Treg R. Taylor, Alaska Attorney General; Leslie
Rutledge, Arkansas Attorney General; Ashley Moody,
Florida Attorney General; Lawrence G. Wasden, Idaho,
Attorney General; Tom Miller, Iowa Attorney General;
Derek Schmidt, Kansas Attorney General; Daniel Cameron,
Kentucky Attorney General; Jeff Landry, Louisiana
Attorney General; Lynn Fitch, Mississippi Attorney
General; Austin Knudsen, Montana Attorney General;
Douglas J. Peterson, Nebraska Attorney General; John M.
Formella, New Hampshire Attorney General; Wayne
Stenehjem, North Dakota Attorney General; John M.
O’Connor, Oklahoma Attorney General; Alan Wilson,
South Carolina Attorney General; Jason Ravnsborg, South
Dakota Attorney General; Herbert H. Slatery III, Attorney
General and Reporter of Tennessee; Ken Paxton, Texas
Attorney General; Sean D. Reyes, Utah Attorney General;
Patrick Morrisey, West Virginia Attorney General; for
Amici Curiae States of Ohio, Alabama, Alaska, Arkansas,
Florida, Idaho, Iowa, Kansas, Kentucky, Louisiana,
Mississippi, Montana, Nebraska, New Hampshire, North
Dakota, Oklahoma, South Carolina, South Dakota,
Tennessee, Texas, Utah, and West Virginia.

Paul D. Clement, Erin E. Murphy, Kasdin M. Mitchell,
Laura E. Wolk, and Elizabeth Hedges, Kirkland & Ellis
LLP, Washington, D.C.; Daryl Joseffer and Paul Lettow,
U.S. Chamber Litigation Center, Washington, D.C.; Karen
Harned and Rob Smith, NFIB Small Business Legal Center,
Washington, D.C.; for Amici Curiae Chamber of Commerce
of the United States of America, and National Federation of
Independent Business Small Business Legal Center.
 STATE OF ARIZONA V. YELLEN 7

Joseph D. Henchman, National Taxpayers Union
Foundation, Washington, D.C., for Amicus Curiae National
Taxpayers Union Foundation.

OPINION

GOULD, Circuit Judge:

It is well established that Congress has the power
pursuant to the Spending Clause to pass legislation
authorizing federal grants to the States that come with strings
attached. For the most part, cases challenging Spending
Clause legislation come to us arising from a specific dispute
between the federal government and the recipient of federal
funds. Usually, the federal government will claim that the
recipient violated a condition that Congress placed on the
federal grant and demand repayment. The recipient, in turn,
will claim that the condition on the funds violates the limits
of the Spending Clause, as enumerated in South Dakota v.
Dole, 483 U.S. 203 (1987).

This appeal, however, requires us to decide whether a
State has standing to challenge the constitutionality of
Spending Clause legislation before a specific and concrete
dispute arises between grantor and grantee. We hold that
Arizona has standing to challenge the American Rescue Plan
Act, 42 U.S.C. § 802(c)(2)(A), (“ARPA” or “the Act”), both
because there is a realistic danger of ARPA’s enforcement,
and because there is a justiciable challenge to the
sovereignty of the State, which alleges infringement on its
authority to set tax policy and its interest in being free from
coercion impacting its tax policy.
8 STATE OF ARIZONA V. YELLEN

BACKGROUND

Congress passed the American Rescue Plan Act, Pub. L.
No. 117-2, 135 Stat. 4, in March 2021 to help state, local,
and tribal governments mitigate the ongoing effects of the
COVID-19 pandemic. ARPA provides nearly $200 billion
in new federal grants to States. 42 U.S.C. § 802(b)(3)(A).
Arizona accepted ARPA funds and expects to receive $4.7
billion in total aid from the Act, equivalent to about a third
of Arizona’s total budget for the 2022 fiscal year.

Like most federal funding, ARPA funds come with
conditions attached. The Act delineates permissible uses for
its funds:

(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 . . . 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 . . . ; or
 STATE OF ARIZONA V. YELLEN 9

(D) to make necessary investments in water,
sewer, or broadband infrastructure.

Id. § 802(c)(1). In addition to specifying permissible uses
for the funds, ARPA also stipulates impermissible uses.
First, no State or territory may use ARPA funds “for deposit
into any pension fund.” Id. § 802(c)(2)(B). Second, the
statute contains a provision—challenged in this appeal—
prohibiting a State from using ARPA funds to subsidize a
tax cut or otherwise offset a reduction in state net tax
revenue. More specifically, this condition (hereinafter the
“Offset Provision”) provides:

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.

Id. § 802(c)(2)(A). If a State wants to accept federal money
under ARPA, it must certify to the Treasury Department that
it will use the funds “in compliance with” these conditions.
Id. § 802(d)(1). ARPA provides that if a State violates the
Offset Provision, it must repay the Treasury the lesser value
of the amount of funds used in violation of the condition or
the total amount of funds received under the Act. Id.
§ 802(e). ARPA also authorizes the Secretary of the
Treasury to “issue such regulations as may be necessary or
10 STATE OF ARIZONA V. YELLEN

appropriate to carry out this section.” Id. § 802(f). It is this
Offset Provision which is the subject of the State’s
challenge.

The Treasury Department issued an Interim Final Rule
(“IFR”) in May 2021 explaining how it would implement
ARPA and its conditions, including the Offset Provision.
See Coronavirus State and Local Fiscal Recovery Funds, 86
Fed. Reg. 26,786 (May 17, 2021) (codified at 31 C.F.R.
§ 35.1 et seq.). Specifically, the IFR provides that a State
will

be considered to have used [ARPA 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
[ARPA funds] to offset the reduction in net
tax revenue.

86 Fed. Reg. at 26,807. Recognizing that “money is
fungible,” the IFR states that 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” state funds that would “otherwise have been
needed to cover” the reduction. Id. at 26,807.

To identify direct or indirect offsets, the IFR provides
state governments with a four-step framework. First, using
the State’s “existing approach for measuring the effects of
fiscal policies,” a State must “identify and value” any actions
that it predicts will reduce tax revenue in a given reporting
year. Id. at 26,809. Second, the State must “calculate the
total value of all covered changes” to determine if there was
 STATE OF ARIZONA V. YELLEN 11

a reduction in net tax revenue. Id. If the reduction is below
a de minimis level—1 percent of the reporting year’s
baseline—the Offset Provision is not implicated. Id. Third,
if a State’s annual tax revenue exceeds the amount received
for fiscal year ending in 2019 adjusted for inflation, it is in a
“safe harbor” and does not violate the Offset Provision. Id.
If, however, there has been more than a de minimis reduction
in net tax revenue from a change in state law, the fourth step
is for the State to “identify any sources of funds” that have
been used to offset the reduction. Id. at 26,809.
Macroeconomic growth, increases in revenue, and spending
cuts in areas where the State has not spent ARPA funds can
all be used to offset reductions in net tax revenue without
violating the Offset Provision. See id. at 26,809. A State
would be required only to repay any amount of federal funds
from ARPA that was used to offset a reduction. Id. The IFR
also outlines a detailed “Recoupment Process” that allows
states to submit a request for reconsideration if the Treasury
Department determines they violated the Offset Provision.
Id. at 26,811–12.

PROCEDURAL HISTORY

Arizona sued the federal defendants in March 2021, soon
after President Biden signed the Act into law, alleging that
ARPA violates the Spending Clause and the Tenth
Amendment. Specifically, Arizona alleges that ARPA’s
Offset Provision is unconstitutionally ambiguous under the
Spending Clause because the statute does not specify what it
means to “indirectly offset a reduction in the [State’s] net tax
revenue.” Arizona contends that the Offset Provision could
be broadly interpreted as a “blanket prohibition forbidding
States from cutting taxes in any manner whatsoever.”
Second, the State contends that ARPA violates the Spending
Clause by being unduly coercive and unconstitutionally
12 STATE OF ARIZONA V. YELLEN

commandeering its sovereign power to set its own tax policy
in violation of the Tenth Amendment. In essence, Arizona
contends that it was coerced into accepting the Offset
Provision because of the size of the funds offered under
ARPA and the fraught financial situation brought on by the
pandemic.

Arizona sought a preliminary injunction enjoining the
federal defendants from recouping funds or otherwise
enforcing the Offset Provision, as well as declaratory relief
that the Offset Provision violates the Constitution. The
district court dismissed the case for lack of subject matter
jurisdiction, finding that Arizona did not demonstrate a
cognizable injury in fact to establish standing.

The district court rejected all five of Arizona’s
arguments for standing. First, Arizona argued that it was
injured by the Offset Provision’s ambiguity, which
prevented it from understanding the limits placed on the
federal funds. Reasoning that Congress met its duty under
the Spending Clause by making the condition “explicitly
obvious,” the district court rejected this theory. Second,
Arizona argued that the Offset Provision’s ambiguity put
Arizona policymakers in an unsettling position of
uncertainty because they do not know how to avoid violating
ARPA’s conditions. The district court found this argument
unpersuasive because Arizona policymakers passed a $1.9
billion tax cut, and Arizona did not offer evidence that their
decision was at all affected by ARPA’s conditions. Third,
Arizona claimed it was injured by the compliance costs
imposed by the Treasury Department’s IFR. The district
court rejected this theory because in ARPA, Congress vested
the Secretary with the authority to order States to produce
information, and the district court found these compliance
costs to be “part and parcel” of ARPA. Fourth, Arizona
 STATE OF ARIZONA V. YELLEN 13

relied upon caselaw that recognizes standing for pre-
enforcement challenges where there is a realistic danger of
enforcement, arguing that here there is a realistic threat that
the Offset Provision will be enforced. The district court
disagreed, concluding that Arizona did not demonstrate a
substantial likelihood that the condition would actually be
enforced against it in the way Arizona fears. Finally,
Arizona argued that it suffered an injury by being coerced
into accepting the allegedly unconstitutional condition
because of ARPA’s size and the pandemic-driven need for
the ARPA funds. The district court rejected this final theory
for standing, reasoning that Arizona would not lose any
existing federal funding if it violated the Offset Provision
and that Arizona did not allege facts showing it has
undergone financial strain.

Arizona’s suit is one of six nearly identical challenges to
ARPA brought by various states, and in those cases the
district courts have reached different conclusions on
standing. Compare Ohio v. Yellen, 539 F. Supp. 3d 802,
813–17 (S.D. Ohio 2021), West Virginia v. U.S. Dep’t of
Treasury, 2021 WL 2952863, at *6–7 (N.D. Ala. July 14,
2021), Kentucky v. Yellen, 2021 WL 4394249, at *3 (E.D.
Ky. Sept. 24, 2021), with Arizona v. Yellen, 2021 WL
3089103, at *2–5 (D. Ariz. July 22, 2021), Missouri v.
Yellen, 538 F. Supp. 3d 906, 912–13 (E.D. Mo. 2021).

Because Article III empowers this Court only to
adjudicate “live cases or controversies,” we will not wade
into disputes that would require us to “issue advisory
opinions” or “declare rights in hypothetical cases.” Clark v.
City of Seattle, 899 F.3d 802, 808 (9th Cir. 2018) (quotation
marks omitted). Only the injury-in-fact requirement for
standing is contested in this case. An injury in fact is “an
invasion of a legally protected interest” that is “concrete and
14 STATE OF ARIZONA V. YELLEN

particularized,” and “actual or imminent, not conjectural or
hypothetical.” Lujan v. Defenders of Wildlife, 504 U.S. 555,
560 (1992) (quotation marks omitted). A “concrete” injury
is one that “actually exist[s],” meaning that it is “real, and
not abstract.” Spokeo, Inc. v. Robins, 578 U.S. 330, 340
(2016) (quotation marks omitted).

Arizona’s arguments for standing fall under three
primary theories. First, Arizona contends that it has standing
because of the compliance costs imposed by the Treasury
Department’s IFR. Second, Arizona relies upon caselaw
permitting pre-enforcement challenges to statutes to support
its argument that the future injury Arizona will suffer, if the
Offset Provision is enforced against it, is sufficient to confer
standing. Third, Arizona contends that the Offset Provision
inflicts cognizable sovereign injuries upon the States by
being unconstitutionally ambiguous and coercive. We
consider each theory in turn, giving de novo review to issues
of standing. Cal. Trucking Ass’n v. Bonta, 996 F.3d 644,
652 (9th Cir. 2021).

DISCUSSION

We first address Arizona’s compliance cost theory,
which contends that the reporting requirements in the
Treasury’s IFR establish an injury in fact by imposing a
regulatory burden on the States. This theory fails for the
simple reason that standing is measured at the time of the
complaint. Lujan, 504 U.S. at 569 n.4. When the complaint
was filed, there was not a required compliance scheme. The
compliance costs Arizona complains of come from the IFR,
which was promulgated after Arizona filed its complaint.
We agree with the district court that Arizona’s compliance
cost theory should be rejected.

I.
 STATE OF ARIZONA V. YELLEN 15

We next consider whether there is a “realistic danger of
enforcement” giving rise to a cognizable injury for standing.
Because Arizona accepted ARPA funds and then passed a
tax cut, Arizona believes that there is a realistic danger that
it will be required to return some of the ARPA funds it has
accepted, which would amount to a concrete injury in fact.
The district court rejected this theory, concluding that
Arizona did not demonstrate a substantial likelihood that the
condition would actually be enforced against it. Important
to the district court’s analysis was that Arizona had not
claimed to have “directly or indirectly” used ARPA funds to
offset its tax cut, nor had Arizona claimed the tax cut it
passed would result in a net tax revenue reduction triggering
the Offset Provision. We have previously held a “likely ‘loss
of funds promised under federal law’” satisfied Article III
standing. City and Cnty. of San Francisco v. Trump, 897
F.3d 1225, 1236 (9th Cir. 2018) (quoting Organized Vill. of
Kake v. U.S. Dep’t of Agric., 795 F.3d 956, 965 (9th Cir.
2015)). We must here decide whether the potential future
recoupment of federal funds under ARPA is similarly
sufficient in this case to confer standing.

Three factors must exist for a plaintiff to have standing
to bring a pre-enforcement challenge to a law, as explained
by the Supreme Court in Susan B. Anthony List v. Driehaus,
573 U.S. 149, 159 (2014). The plaintiff must allege (1) an
“intention to engage in a course of conduct arguably affected
with a constitutional interest,” (2) “but proscribed by a
statute,” and (3) there must be “a credible threat of
prosecution” under the statute. Id. (quoting Babbitt v. Farm
Workers, 442 U.S. 289, 298 (1979)).

The first Driehaus factor requires an intent to do an act
“arguably affected” by a constitutional interest.
Determining whether Arizona meets this factor to a degree
16 STATE OF ARIZONA V. YELLEN

resembles an invitation to reach the merits of Arizona’s
constitutional claims. But the Supreme Court has cautioned
that standing “in no way depends on the merits” and has
instructed us to take as true all material allegations in the
complaint and construe the complaint in favor of the
plaintiff. Warth v. Seldin, 422 U.S. 490, 500 (1975).
Viewing the Offset Provision through Arizona’s eyes, we
must accept—for standing purposes—its allegations that the
condition is unconstitutionally ambiguous and coercive. We
conclude that the first Driehaus factor is met.

In evaluating the second Driehaus factor, we must
determine whether Arizona’s intended future conduct is
proscribed by ARPA. To do so, we first examine what
conduct is proscribed by the Offset Provision to evaluate
whether Arizona’s desired course of conduct falls under the
provision’s sweep. The Offset Provision is triggered by
specific events. A State must first accept funds under ARPA
and certify that it will meet ARPA’s conditions. Then, it
must make a change to state law that results in a “reduction
in net tax revenue.” 42 U.S.C 802(c)(2)(A). Finally, to
violate the Offset Provision, the State must then use federal
ARPA funds to “directly or indirectly” offset the reduction
in net tax revenue. Id. All these steps must be taken to
trigger and violate the Offset Provision.

Here, Arizona has accepted ARPA funds, certified that it
will meet ARPA’s conditions, and passed a $1.9 billion tax
cut. The district court rejected Arizona’s theory of standing
under Driehaus because Arizona had not claimed that its tax
cut will result in a reduction in its “net tax revenue,” nor
claimed to have “directly or indirectly” used ARPA funds to
offset the tax cut. On this point we diverge with the district
court because its reasoning approximates requiring Arizona
to admit to violating a law in order to have standing to
 STATE OF ARIZONA V. YELLEN 17

challenge it, a prerequisite the Supreme Court has repeatedly
rejected. See Driehaus, 573 U.S. at 163 (2014) (“Nothing in
this Court’s decisions requires a plaintiff who wishes to
challenge the constitutionality of a law to confess that he will
in fact violate that law.”); MedImmune, Inc. v. Genentech,
Inc., 549 U.S. 118, 129 (2007); Free Enter. Fund. v. Pub.
Co. Acct. Oversight Bd., 561 U.S. 477, 490 (2010).
Presumably, a $1.9 billion tax cut will lead to a reduction in
Arizona’s net tax revenue; it is hard for us to imagine how a
tax cut of this magnitude would not. This means that
Arizona has taken all requisite steps to violate the Offset
Provision short of using ARPA funds “directly or indirectly”
to offset a net revenue reduction from its tax cut. Unlike the
district court, we do not require Arizona to explicitly confess
to intended future conduct that is violative of the law it seeks
to challenge.

The concurrence suggests that Arizona “has alleged only
an intention to pass a tax cut.” But Arizona has done more
than announce an intention to pass a tax cut; it has passed
one. The only thing Arizona has not yet done is allege an
intention to use ARPA funds “directly or indirectly” to offset
the resulting net revenue reduction from its tax cut. Because
doing so amounts to a confession that Arizona will, in fact,
violate the law, and the Supreme Court has instructed that
plaintiffs need not do that, we disagree with the concurrence
on this point.

The third Driehaus factor, concerning whether there is a
credible threat of enforcement, has dispositive weight in this
case. We have developed a framework to evaluate whether
a claimed threat of enforcement is genuine enough to confer
standing. We consider (1) “whether the plaintiffs have
articulated a ‘concrete plan’ to violate the law in question,”
(2) “whether the prosecuting authorities have communicated
18 STATE OF ARIZONA V. YELLEN

a specific warning or threat to initiate proceedings,” and (3)
“the history of past prosecution or enforcement under the
challenged statute.” Thomas v. Anchorage Equal Rts.
Comm’n, 220 F.3d 1134, 1139 (9th Cir. 2000) (citing San
Diego Cnty. Gun Rts. Comm. v. Reno, 98 F.3d 1121, 1126–
27 (9th Cir. 1996)). Where the challenged statute is new, as
here, the history of past enforcement carries little, if any
weight. Cal. Trucking, 996 F.3d at 652.

A concrete plan need not be “cast in stone” but must be
“more than a hypothetical intent to violate the law.”
Thomas, 220 F.3d at 1139. The $1.9 billion tax cut Arizona
passed is a sufficiently concrete plan in our view. As
described above, we do not require Arizona to admit to
violating the law or having a desire to do so.

That the federal government has not disavowed
enforcement of the Offset Provision is evidence of an intent
to enforce it. Cal. Trucking, 996 F.3d at 653. And in this
case, there is affirmative conduct by the Treasury
Department evincing an intent to enforce the Offset
Provision. In response to an inquiry from a group of
Attorneys General, the Secretary of the Treasury wrote a
letter confirming that the Offset Provision will be enforced
(although, the Secretary said, not in the way feared by the
States). In California Trucking, we recognized a sufficient
intent to enforce a law where a state had “sent letters to
businesses notifying them” of its interpretation of a new
requirement under state law. 996 F.3d at 653. Like the
letters in California Trucking, we view the Secretary’s letter
as showing an intent to enforce the Offset Provision, albeit
in a cooperative fashion inviting “ongoing dialogue”
between the Treasury and the States. In addition to the
Secretary’s letter, the Treasury’s IFR outlines the detailed
and specific process that will be used to recoup funds from
 STATE OF ARIZONA V. YELLEN 19

States that violate the Offset Provision, giving more
evidence of the government’s intent to enforce the
challenged provision. 31 C.F.R. § 35.10. The concurrence
suggests that this factor is not met because the Treasury has
disavowed enforcing the law in the way Arizona fears. But
the Secretary’s letter still affirms the Treasury’s intent to
enforce the Offset Provision against the States, even if it
clarifies that nothing in ARPA “prevents States from
enacting a broad variety of tax cuts.” The Secretary’s letter
and the recoupment process outlined in the IFR show the
federal government’s intent to enforce the Offset Provision.

Arizona has done everything short of confessing a desire
to use ARPA funds “directly or indirectly” to offset the tax
cut it passed. We disagree with the district court’s rejection
of this theory of standing and hold that Arizona has alleged
a sufficiently credible threat of enforcement to bring a pre-
enforcement challenge to ARPA’s Offset Provision. There
is a realistic danger that Arizona, after accepting federal
funds under ARPA and passing a billion dollar tax cut, will
be forced to repay federal funds for directly or indirectly
using those funds to offset its tax cut, in violation of the
Offset Provision. This feared future injury is sufficiently
realistic and credible to confer standing under Driehaus and
our caselaw describing its three-factor test.

II.

We examine Arizona’s sovereign injury theory of
standing in the alternative. In our dual sovereign system,
Arizona enjoys “special solicitude in our standing analysis.”
Massachusetts v. EPA, 549 U.S. 497, 520 (2007). This
special standing has relevance here, where Arizona alleges
that ARPA infringes upon its sovereign rights. Specifically,
Arizona argues that the Offset Provision’s ambiguity
prevents Arizona from being able to exercise its choice
20 STATE OF ARIZONA V. YELLEN

voluntarily to accept ARPA funds and understand the
consequences of agreeing to ARPA’s conditions. Arizona
also contends that by coercing the States into accepting the
Offset Provision, ARPA threatens Arizona’s sovereign
prerogative to “tax its residents as it sees fit.”

If we were reviewing these issues on a record replete
with evidence submitted and a summary judgment ruling,
and looking only for an issue of fact requiring trial, we might
be somewhat skeptical of the degree to which Arizona is
being coerced in derogation of its sovereign rights. But we
do not review this today on appeal of a summary judgment
ruling. We are reviewing only an order on a motion to
dismiss which dismissed the complaint for lack of subject
matter jurisdiction. As we have noted above, in this context
we must take all allegations of the complaint as true. See
supra Part I (citing Warth, 422 U.S. at 500). We see no
reason under normal juristic standards for us to dispute,
deny, or discredit Arizona’s contention at this stage that
ARPA and its Offset Provision specifically have a coercive
impact on the State.

We examine Arizona’s sovereign injury theory for
standing through the lens of Spending Clause legislation
being “in the nature of a contract.” Pennhurst State Sch. and
Hosp. v. Halderman, 451 U.S. 1, 17 (1981). In Pennhurst, a
class of residents at a Pennsylvania institution for people
with disabilities challenged the conditions of their
confinement, seeking closure of the institution. Id. at 5–6.
The plaintiffs relied upon a provision in a federal grant
program calling for the “least restrictive” treatment setting
to argue that this provision created a binding condition upon
the States in how they used federal funds to treat people with
disabilities. Id. at 7. Rejecting that this provision created a
 STATE OF ARIZONA V. YELLEN 21

retroactive funding condition upon the States, the Court
likened federal grants to contracts:

[L]egislation 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'
power to legislate under the spending power
thus rests on whether the State voluntarily
and knowingly accepts the terms of the
“contract.” There can, of course, be no
knowing acceptance if a State is unaware of
the conditions or is unable to ascertain what
is expected of it.

Id. at 17 (internal citations omitted).

A few years later in South Dakota v. Dole, the Court
articulated the outer bounds of Congress’s authority under
the Spending Clause to attach conditions upon grants of
federal funding. 483 U.S. 203, 207–08 (1987). One limit is
that spending must be in pursuit of the “general welfare,” a
broad and deferential term. Id. at 207. A second limit is that
“if Congress desires to condition the States' receipt of federal
funds, it ‘must do so unambiguously . . . , enabl[ing] the
States to exercise their choice knowingly, cognizant of the
consequences of their participation.’” Id. (alterations in
original) (quoting Pennhurst, 451 U.S. at 17). Third, any
conditions should relate to the federal interest implicated by
the spending. Id. Fourth, conditions must not violate other
constitutional provisions. Id. at 208. The Court further
noted that “in some circumstances the financial inducement
offered by Congress might be so coercive as to pass the point
at which ‘pressure turns into compulsion.’” Id. at 211
22 STATE OF ARIZONA V. YELLEN

(quoting Steward Machine Co. v. Davis, 301 U.S. 548, 590
(1937)).

Arizona seizes upon several of these limitations to bring
a facial challenge—or so we interpret—to ARPA’s Offset
Provision. 1 To Arizona, the inherent limitations on
Congress’s power to “lay and collect Taxes” and “provide
for the . . . general Welfare of the United States,” U.S. Const.
art. I, § 8, cl. 1, create constitutionally-imposed and
enforceable criteria that “contractual” funding offers from
the federal government must meet. When Congress does not
meet one of these criteria, and say, extends a federal grant
with ambiguous or coercive terms to the States, Arizona
contends that this offer offends state sovereignty and gives
rise to a cognizable injury in fact. We agree. We are mindful
of the longstanding principle that federal courts “are without
jurisdiction” to adjudicate “abstract questions of political
power, of sovereignty.” Massachusetts v. Mellon, 262 U.S.
447, 484–85 (1923). But intangible harms can be concrete,
Spokeo, 578 U.S. at 340, and here, Arizona has alleged
sufficiently concrete and particularized harms to its ability
to exercise its sovereign prerogatives, intangible as those
prerogatives may be. Just as a contract can be challenged
under state law for containing ambiguous terms or being a
product of duress, so too do we think that the quasi-
contractual funding offer at issue here can be challenged by
Arizona at the outset for offering conditions that are
unconstitutionally ambiguous or coercive. States have
standing when an allegedly unconstitutional funding offer is
made to them, and they do not need to first violate a

1
Whether Arizona’s Spending Challenge is facial or as applied was
not briefed by the parties, and we suggest that they brief this issue before
the district court.
 STATE OF ARIZONA V. YELLEN 23

condition of an allegedly unconstitutional contract to have
standing to challenge it.

In rejecting Arizona’s theory of injury based upon
having a right to an unambiguous funding offer from the
federal government, the district court concluded that the
Spending Clause requires Congress to be unambiguous
about the existence of a condition, not what the condition
requires. Whether or not the district court is correct that
Congress “fulfilled its duty” in making the existence of the
Offset Provision known, this analysis examines whether the
condition is ambiguous, and not whether being offered
ambiguous terms is a cognizable injury. Similarly, in
rejecting Arizona’s theory of injury based upon being
coerced into accepting the Offset Provision, the district court
pointed to Arizona’s delay in accepting funds and the lack of
evidence of any financial strain to conclude there was not
standing. This analysis, however, evaluates the merits of
whether ARPA is coercive instead of evaluating whether
being coerced is a cognizable injury. A district court should
be cautious not to confuse perceived “weakness on the
merits with absence of Article III standing.” Ariz. State
Legislature v. Ariz. Indep. Redistricting Comm’n, 576 U.S.
787, 800 (2015) (quoting Davis v. United States, 564 U.S.
229, 249 n.10 (2011)).

At this early juncture, we must take Arizona’s
allegations to be true. See Warth, 422 U.S. at 499–502. The
federal government and the district court discredit Arizona’s
interpretation of the Offset Provision, but differences in what
the Offset Provision means and how it may be enforced go
to the merits of Arizona’s claims, and not to whether a court
has jurisdiction to hear these claims. See Cath. League for
Religious & C.R. v. City & Cnty. of San Francisco, 624 F.3d
1043, 1049 (9th Cir. 2010) (en banc); City and Cnty. of San
24 STATE OF ARIZONA V. YELLEN

Francisco v. Trump, 897 F.3d 1225, 1236 (9th Cir. 2018).
In City and County of San Francisco v. Trump, the parties
“disputed the scope of the challenged measure,” but we held
it was enough for standing purposes that if the plaintiff’s
interpretation of the statute was correct, it would “suffer
serious consequences.” 897 F.3d at 1236. Here, Arizona has
demonstrated that if the Offset Provision is as ambiguous
and coercive as it alleges, it will face serious consequences
in losing control over its taxing policies and being held to a
funding offer that it does not understand. Whether there is
merit to these feared consequences is a separate matter, but
for today, we hold that the district court erred in dismissing
Arizona’s claim for lack of subject matter jurisdiction.

III.

Concluding that Arizona has standing to bring its
challenge to ARPA, both on its theory of realistic danger of
enforcement, and alternatively, on its theory of injury to
sovereign rights, we decline to turn to the merits of
Arizona’s constitutional claims. We think it is a better
procedure to have the district court make a ruling on the
merits in the first instance, as the district court’s views can
only help our court to resolve the difficult issues presented. 2
We reverse the district court’s ruling on standing and
conclude that the district court has subject matter jurisdiction
to hear this case. We remand for the district court to consider
the merits of Arizona’s Spending Clause and Tenth
Amendment claims.

2
We also note that, after we heard argument in this case, the
Treasury Department published a final rule implementing ARPA and the
Offset Provision. Coronavirus State and Local Fiscal Recovery Funds,
87 Fed. Reg. 4,338 (Jan. 27, 2022). In considering the merits, the district
court also will have the benefit of that final rule implementing ARPA.
 STATE OF ARIZONA V. YELLEN 25

CONCLUSION

Because standing “in no way depends on the merits,”
Warth, 422 U.S. at 500, our decision today should not be
construed as commenting in any way on the merits of
Arizona’s case. We limit our decision to the narrow issue of
standing and hold that the district court has subject matter
jurisdiction to hear this challenge to ARPA.

REVERSED AND REMANDED.

R. NELSON, Circuit Judge, concurring:

I agree that Arizona has standing to challenge the Offset
Provision on its theory of sovereign injury and concur in
Section II of the majority’s opinion.

I disagree, however, with the majority’s conclusion that
Arizona has alleged “an intention to engage in a course of
conduct arguably affected with a constitutional interest, but
proscribed by a statute.” See Susan B. Anthony List v.
Driehaus, 573 U.S. 149, 159 (2014) (quoting Babbitt v.
Farm Workers, 442 U.S. 289, 298 (1979)). Arizona never
alleged that it has taken (or would take, if not for fear of
enforcement) action proscribed by the Offset Provision. The
lack of such an allegation dooms Arizona’s argument for
standing on this basis.

Article III of the Constitution limits our jurisdiction to
“Cases” and “Controversies.” U.S. Const., art. III, § 2. “The
doctrine of standing gives meaning to these constitutional
limits by ‘identify[ing] those disputes which are
appropriately resolved through the judicial process.’”
Driehaus, 573 U.S. at 157 (alteration in original) (quoting
26 STATE OF ARIZONA V. YELLEN

Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992)).
“To establish Article III standing, a plaintiff must show
(1) an ‘injury in fact,’ (2) a sufficient ‘causal connection
between the injury and the conduct complained of,’ and (3) a
‘likel[ihood]’ that the injury ‘will be redressed by a
favorable decision.’” Id. at 157–58 (alteration in original)
(quoting Lujan, 504 U.S. at 560–61). Generally, the injury-
in-fact requirement is satisfied by an injury that has already
occurred. But we also recognize that threatened
enforcement of a law can create an injury in fact. Id. at 158.
In those circumstances, we may consider pre-enforcement
challenges “under circumstances that render the threatened
enforcement sufficiently imminent.” Id. at 159. A mere
possibility of future enforcement will not do; the likelihood
of future enforcement must be “substantial.” California v.
Texas, 141 S. Ct. 2104, 2114 (2021) (quoting Driehaus, 573
U.S. at 164); see also Massachusetts v. Mellon, 262 U.S.
447, 488 (1923) (“The party who invokes the power [of
Article III courts] must be able to show, not only that the
statute is invalid, but that he has sustained or is immediately
in danger of sustaining some direct injury as the result of its
enforcement . . . .”).

Likelihood of enforcement is substantial when a plaintiff
alleges (1) “an intention to engage in a course of conduct
arguably affected with a constitutional interest,” (2) “but
proscribed by a statute,” and (3) “there exists a credible
threat of prosecution thereunder.” Driehaus, 573 U.S. at 159
(quoting Babbitt, 442 U.S. at 298). In Driehaus, for
example, two advocacy organizations challenged an Ohio
statute prohibiting “false statements” in political campaigns.
Id. at 151. The law allowed any person with knowledge of
a purported violation to file a complaint with the State. Id.
at 164. One organization had already been subject to
enforcement proceedings, initiated after a candidate filed a
 STATE OF ARIZONA V. YELLEN 27

complaint about the organization’s attempts to display a
billboard stating that the candidate “voted FOR taxpayer-
funded abortion.” Id. at 154. After losing the election, the
candidate moved to withdraw his complaint. The plaintiff
organizations challenged the state law, alleging that they
“intend[ed] to engage in substantially similar activity in the
future” and “face[d] the prospect of [their] speech and
associational rights again being chilled” by future
complaints. Id. at 155 (second alteration in original).

The Supreme Court held that the organizations had
standing to bring a pre-enforcement action. The
organizations alleged “specific statements they intend[ed] to
make in future election cycles” that would be prohibited. Id.
at 161. The text of the statute covered the plaintiffs’
intended speech (“concerning the voting record of a
candidate,” id. at 152), and the statute had been enforced
against one of the plaintiffs, id. at 162. The Court did not
require plaintiffs “to confess that [they] will in fact violate
th[e] law” and held that the organizations had established
that their intended future conduct would be proscribed by the
statute because it would subject them to future enforcement
proceedings. Id. at 163.

The Court held that the final requirement—a substantial
threat of future enforcement—was satisfied for three
reasons. First, there was a history of past enforcement
because one organization had been the subject of prior
enforcement proceedings. Id. at 164. Second, the credibility
of the threat was bolstered by the fact that any person could
file a complaint. Id. Because “the universe of potential
complainants [was] not restricted to state officials who
[were] constrained by explicit guidelines or ethical
obligations,” there was a substantial risk of complaints from
a multitude of parties, including political opponents. Id.
28 STATE OF ARIZONA V. YELLEN

Finally, the Court noted that enforcement proceedings were
frequent and the commission “ha[d] not disavowed
enforcement if petitioners make similar statements in the
future.” Id. at 165.

We have followed a similar approach in this Circuit. In
Real v. City of Long Beach, we held that a plaintiff had
standing to challenge a city’s zoning ordinance when he
alleged an intent to open a tattoo shop without the required
permit. 852 F.3d 929, 934–35 (9th Cir. 2017). Like the
advocacy organizations in Driehaus, the plaintiff in Real had
alleged a specific intent to engage in conduct proscribed by
the challenged ordinance. Id. And, as in Driehaus,
enforcement proceedings had happened in the past (albeit
against non-plaintiffs). Id. The City vigorously enforced its
zoning ordinances and told the plaintiff that he would be
subject to enforcement proceedings. Id. The plaintiff had
standing to challenge the ordinance because it appeared
“likely that the City would take action against [him] if he
opened a tattoo shop.” Id. at 935.

More recently, we held that a trucking trade association
had standing to challenge a new California law that codified
a test for classifying workers as either employees or
independent contractors. Cal. Trucking Ass’n v. Bonta, 996
F.3d 644, 649 (9th Cir. 2021). The trade association
established a “concrete plan” to violate the law by alleging
that its members actively maintained policies that were “in
conflict with” California law. Id. at 653. The association
also established a substantial likelihood of enforcement
proceedings because the state had refused “to disavow
enforcement” against association members and declared its
“intention to enforce” the new law. Id. Because the law was
relatively new, we noted that the history of enforcement
carried “little weight.” Id. Even so, the State had done more
 STATE OF ARIZONA V. YELLEN 29

than declare its intentions; it had sent letters to businesses
notifying them that they were subject to the law and had
commenced several prosecutions against businesses for
violating the law. Id.

On the other hand, we found standing lacking in cases
like Safer Chemicals, Healthy Families v. EPA, 943 F.3d
397 (9th Cir. 2019). In Safer Chemicals, we held that
plaintiffs challenging agency rules do not have standing
when “it is not even clear what [agency] procedures will be,
let alone whether [the agency] will employ them in a way
that injures” the plaintiffs. Id. at 415. Ambiguity in the
challenged provisions hindered our ability to “predict
whether [plaintiffs] will be harmed in the way they claim, or
whether the [government] will in fact apply the[] rules as
[plaintiffs] wish.” Id. We explained that plaintiffs might
have standing in the future, if the agency enforced the rule
in the way feared by plaintiffs. Id. But we declined to make
assumptions about how the government would enforce an
ambiguous provision to create standing based on the
plaintiffs’ allegations. Id.

There are striking differences between the allegations in
this case and the allegations in cases finding pre-
enforcement standing. The Offset Provision prohibits states
from using American Rescue Plan Act (ARPA) funds “to
either directly or indirectly offset a reduction in the net tax
revenue.” 42 U.S.C. § 802(c)(2)(A). Arizona alleged only
an intention to pass a tax cut (which it has now passed). It
did not allege a reduction in net tax revenue, nor did it make
any allegation about how a potential post-tax-cut budget
would be structured. Unlike the large number of potential
complainants in Driehaus, the universe of potential
complainants in this case is limited to “officials . . .
constrained by explicit guidelines or ethical obligations.”
30 STATE OF ARIZONA V. YELLEN

See 573 U.S. at 164. And unlike the frequent past
proceedings in Driehaus and Real, Treasury officials have
never initiated enforcement proceedings under the Offset
Provision. Indeed, Treasury has explicitly disavowed any
prohibition against states enacting tax cuts. See Real, 852
F.3d at 934–35; cf. Lopez v. Candaele, 630 F.3d 775, 788
(9th Cir. 2010) (“[C]laims of future harm lack credibility
when . . . the enforcing authority has disavowed the
applicability of the challenged law to the plaintiffs.”).

Arizona’s pleadings leave us to make a series of factual
and legal leaps to establish (1) an intention to engage in a
course of conduct arguably affected with a constitutional
interest, (2) but proscribed by the Offset Provision, and (3) a
credible threat of prosecution thereunder. See Driehaus, 573
U.S. at 159. Nowhere in its complaint does Arizona allege
that it has (or plans to) directly or indirectly offset a
reduction in net tax revenue. For Arizona to have standing
under Driehaus, we must infer that the contemplated tax cut
will not be offset by macroeconomic growth or cuts in
spending not affected by ARPA. Then we must infer that
Treasury will enforce the Offset Provision in a way that it
has explicitly disavowed and never threatened. Inventing
standing with such assumptions is inconsistent with
precedent.

A tax cut, on its own, does not fall within the Offset
Provision’s ambit. Without more, we cannot infer both (1) a
reduction in net tax revenue and (2) conduct that might count
as an “offset.” Had Arizona alleged an intent to offset a
reduction in net tax revenue in some specific way, it may
have separately established standing under its pre-
enforcement theory. But as things stand, the specter of
enforcement is too hypothetical to present a “Case” or
“Controversy” for our review.