DOT threatened $73.5 million under a requirement its old rules didn’t contain

The U.S. Transportation Department threatened New York with a $73.5 million cut in federal highway money because the state refused to rescind credentials the agency said remained valid beyond the lawful-presence documents presented at issuance. On Friday, the Second Circuit set the agency’s determination aside for a basic reason: the federal rules governing those licenses at the time did not contain that matching requirement.

The April determination said the Federal Motor Carrier Safety Administration would withhold $73,502,543—4 percent of two federal highway-funding programs—in fiscal 2027, with later penalties potentially reaching 8 percent. The agency’s own document acknowledged that the transactions under review were governed by the pre-September 2025 text of the regulations, not the tighter final rule that took effect in March 2026.

Under those older rules, applicants for non-domiciled commercial licenses had to show unexpired evidence of lawful presence when they applied, and states could make a license valid for no more than eight years. New York used the same default periods it used for other commercial licenses: five years for an initial license and eight years after renewal. The court said FMCSA conceded that the old regulatory text never required a state to make the license expire on the same date as the immigration document.

That textual failure does not erase the audit. FMCSA reported that 101 of 200 sampled credentials lasted beyond the lawful-presence documents presented at issuance. It also flagged six records that appeared to lack proper status verification. New York later supplied documentation supporting five of those six cases, according to the agency’s determination. The ruling did not adjudicate those separate verification questions, and they could not supply the missing expiration-matching rule on which the funding decision rested.

The agency’s public case was explicitly political as well as regulatory. Transportation Secretary Sean Duffy accused New York’s leaders of dangerous, anti-American policies and said the cut would protect families; FMCSA Administrator Derek Barrs said the state’s refusal undermined safety. After the ruling, the department told the Associated Press that licenses should not remain valid for years beyond a foreign driver’s legal presence and said its newer rule had put a stop to that practice.

FMCSA had power to change the rule, and it did. A final rule published in February and effective March 16, 2026, expressly tightened eligibility and required credential validity to track specified lawful-status documents. The Second Circuit did not invalidate that current rule. It held only that the agency could not impose the highway-funding consequence for violating an expiration-matching requirement that was absent from the earlier regulations.

That distinction matters beyond commercial licensing. Agencies can identify a real policy problem and pursue a stronger rule prospectively. What they cannot do is treat the desired policy as though it had already been written into an older rule, then use federal transportation money as leverage against a state. The court’s answer was direct: rulemaking first, fiscal punishment second.

The ruling also does not establish that every New York credential was properly issued, that every driver remained authorized to work, or that the government may never regulate these licenses. Nor does it mean money had already been transferred away and is now being returned. It means the April determination—the legal basis for the threatened fiscal 2027 withholding—has been set aside.

The central accountability question is therefore narrower than the partisan fight around immigrant drivers: when the executive branch threatens a state’s infrastructure funds, will it be held to the rule actually on the books? In this case, a unanimous three-judge panel said yes, while leaving the government free to enforce the newer rule through ordinary legal channels.