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Appeals court rejects New York highway funding penalty tied to driver's licenses

Appeals court rejects New York highway funding penalty tied to driver's licenses

Rule Changes

The Second Circuit set aside $73.5 million in withheld federal highway money, ruling that the rules in force did not require commercial license expiration dates to match drivers' immigration documents.

Today: Appeals court sets aside the penalty

Overview

Updated 1 hour ago

New York issues commercial driver's licenses to drivers who live outside the United States for up to five years, and renews them for eight. In April 2026, the Transportation Department withheld $73,502,543 — 4% of the state's federal highway money — saying an audit found 53% of 200 sampled license records stayed valid past the driver's immigration paperwork. On November 13, a three-judge panel of the Second U.S. Circuit Court of Appeals set that penalty aside.

The court did not say New York's licensing was ideal. It said the regulations on the books when the licenses were issued never required the two expiration dates to match, so the agency could not penalize the state for missing a rule it had not written. The ruling covers one funding determination; it sets no date for the money to be released and does not decide who qualifies for a license under later federal rules.

Why it matters

A federal agency can only withhold a state's highway money under rules it actually published, not an interpretation it adopted after the fact.

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Key Indicators

$73.5M
Highway funding withheld
Federal highway money the Transportation Department blocked in April 2026.
4%
Share of New York's federal highway dollars
The withheld amount as a portion of the state's fiscal 2027 federal highway and transportation funding.
53%
Sampled records that failed the federal audit
107 of 200 reviewed license records, according to the Transportation Department.
32,600
Non-domiciled license and permit holders
New York holders as of July 2025, about 7% of the state's active commercial licenses and permits.
$147M
Additional annual funding threatened
Future-year highway money the department said it could withhold.

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People Involved

Kathy Hochul
Kathy Hochul
Governor of New York
In office; co-plaintiff in the challenge to the funding cut
 Letitia James
Letitia James
New York Attorney General
In office; brought the challenge for New York
 Sean P. Duffy
Sean P. Duffy
U.S. Secretary of Transportation
In office; his department's determination was set aside
 Derek Barrs
Derek Barrs
Administrator, Federal Motor Carrier Safety Administration
In office; agency's determination was vacated

Organizations Involved

U.S. Department of Transportation (USDOT)
U.S. Department of Transportation (USDOT)
Federal Agency
Lost the funding determination on appeal

The federal department that withheld New York's highway money and saw the penalty set aside.
Federal Motor Carrier Safety Administration
Federal Motor Carrier Safety Administration
Federal Agency
Its final determination was set aside

The Transportation Department agency that audits state commercial licensing and issues the compliance findings behind funding penalties.
U.S. Court of Appeals for the Second Circuit
U.S. Court of Appeals for the Second Circuit
Federal appeals court
Ruled for New York on November 13, 2026

The federal appeals court that reviews challenges to Transportation Department decisions affecting New York, Connecticut and Vermont.

Timeline

December 2025 November 2026

5 events Latest: Today
Tap a bar to jump to that date

  1. Appeals court sets aside the penalty

    Today Legal

    The Second Circuit grants New York's petition, finding the rules in force did not require the license and immigration expiration dates to match.

  2. Federal lawyers defend the cut at the Second Circuit

    Legal

    The Transportation Department tells the appeals court it was within its rights to penalize New York.

  3. New York sues to restore the money

    Legal

    Attorney General Letitia James and Governor Kathy Hochul challenge the cancellation, saying the licenses were lawfully issued.

  4. Federal government withholds $73.5 million

    Funding action

    The Transportation Department blocks $73,502,543, about 4% of New York's federal highway funding, and threatens $147 million more annually.

  5. Federal deadline set for New York

    Statement

    Transportation Secretary Sean Duffy gives New York 30 days to come into compliance after the license audit.

Scenarios

1

Transportation Department releases the $73.5 million and drops the fight

Possible Resolves by Q2 2027

Discussed by: New York state officials, who sought restoration of the full funding

The Second Circuit set aside the determination rather than ordering payment on a schedule. The department could accept the ruling and release the fiscal 2027 money, ending this dispute while leaving its broader audit of state licensing in place. No further appeal would be filed.

2

Administration asks the Supreme Court to revive the penalty

Uncertain Resolves by Q3 2027

Discussed by: Legal observers tracking the string of transportation funding rulings against the administration

The Justice Department could seek review by the full Second Circuit or petition the Supreme Court. Reversal would turn on whether the agency's reading of its own regulations deserves deference, and would affect how much leeway federal agencies get when they reinterpret rules midstream.

3

Agency writes an explicit rule, then reopens the penalty

Possible Resolves by End of 2027

Discussed by: Transportation officials, who said the license dates should match immigration documents

Rather than fight the ruling as written, the department could publish a regulation that plainly requires commercial license expiration dates to match supporting immigration documents, then apply it going forward. That would avoid the fair-notice problem the court identified but would take months of rulemaking and would not reach licenses already issued.

Historical Context

2 moments from history that rhyme with this story — and how they unfolded.

2026

Hudson Tunnel funding fight (2026)

The Transportation Department moved to halt payments for the $16 billion rail tunnel connecting New York and New Jersey. A court ordered the department to keep the money flowing while the dispute proceeded.

Then

Payments continued, and the tunnel project stayed funded.

Now

The case became one of several in which courts checked the department's use of withheld transportation money.

Why this matters now

It shows the pattern this ruling fits: courts stepping in when the department halts approved transportation funding during a policy dispute.

March 2026

Chicago rail funding freeze (2026)

A judge ordered the Transportation Department to unfreeze about $3 billion for Chicago rail projects after the department canceled at least $9.5 million in reimbursements from previously approved grants.

Then

The funds were ordered released.

Now

The city's claim that the suspension was political retaliation remains part of a broader set of challenges to the department's funding decisions.

Why this matters now

The New York ruling adds to a run of decisions limiting how the department can use approved transportation money as leverage over states and cities.

Sources

(7)
+1
Investing.com Edit USA Reuters (via StreetInsider) New York State Office of the Attorney General Office of the Governor of New York CBS New York Law360