As the March 1 sequester deadline looms, congressional conservatives should wake up to the fact that an agenda focused solely on spending cuts is a losing agenda, one that wouldn’t help matters much even if it prevailed. Our very system of government is badly malfunctioning. What’s needed at the heart of the conservative agenda in Congress is a program of structural reform that goes far beyond entitlements.
The first priority for such reform is something hardly anybody is talking about: disentangling the functions of state government from those of the federal government. The intermingling of state and federal functions through “cooperative federalism” has created the conditions for perpetual fiscal crisis and overregulation at every level of government.
Federal funds now account for about 30 percent of the typical state budget. This “assistance” doesn’t come from Mars, of course. The federal government is taxing and borrowing from all of us in order to return that money to our state governments, under onerous conditions.
According to the White House, the average federal deficit over the past 30 years amounted to 3.4 percent of GDP. The average amount of federal transfers to state and local governments during the same period was 3.0 percent of GDP.
States and localities are severely limited in their ability to borrow. And yet virtually all the expansion of the American public sector since 1950 has come at the state and local level. Almost all of the federal deficit can be accounted for by the federal government’s support of state and local governments, inflating their budgets well beyond what they could sustain on their own.
In effect, the federal government is running up huge deficits in order to purchase control of state governments. The problems that arise from this disastrous intermingling of federal and state finances are almost endless. By seizing substantial control over state governments, Congress invades areas of regulation that the Constitution recognizes as belonging exclusively to the states. Worse, Congress escapes accountability by leaving the states’ elected officials on the hook for what common voters can only assume are state programs but what really are federal programs in disguise. And so local self-government, which is at the heart of our Constitution, is shrinking.
With respect to state budgets, this “assistance” is not just unnecessary; it’s harmful. States are left at the mercy of congressional appropriations and dependent on federal bailouts every time there’s a downturn in the economy. If the federal government weren’t sucking so much money out of the private economy to pay for these programs, the states could run them more efficiently and sustainably on their own. And the whole American public sector would be leaner. These programs, which are meant to equalize income disparities among the states, actually exacerbate them, especially through the tactic of matching funds. For example, under Medicaid, rich states can afford bloated Medicaid programs and are rewarded with federal matching funds. Poor states are penalized.
Under more than 600 federal spending programs, mainly for health, education, and transportation, Washington sends money to the states on condition that the states do what Washington wants. The conditions on this “assistance” are increasingly complex, intrusive, and suffocating, making state governments little more than instruments of Congress. If your state wants approval for federal Medicaid matching funds, for example, it has to meet about 100 different conditions on matters that in principle should be the state’s prerogative.
Every time a state legislature meets, its most difficult task is to find wiggle room inside the straitjacket of conditions on federal funds. That wiggle room is shrinking.
One reason these programs exist is that regulation-heavy states want to eliminate the competitive advantage of regulation-light states, and they form coalitions in Congress to do just that. In 1926, faced with rampant inheritance-tax competition among the states, Congress adopted a federal inheritance tax with offsets for inheritance-tax payments at the state level. The immediate effect of this law was to eliminate state competition for rich retirees and to incentivize all states to raise their inheritance-tax rates.
What conservative scholars call “competitive federalism” is a basic feature of our Constitution, as Michael Greve argues in The Upside-Down Constitution (2012). Competitive federalism exerts strong downward pressure on government power at every level. But through the disastrous fusion of state and federal finances, that pressure is not only defeated but reversed, leading to the unsustainable expansion of government spending at every level.
The conditions that Congress imposes on its assistance to the states are policies that it would have no power to impose on the states directly. That would be federal “commandeering” of state agencies, which is unconstitutional under New York v. United States (1992) and Printz v. United States (1997).
The Supreme Court is only just beginning to appreciate that conditional federal assistance allows Congress to commandeer the states as effectively as if it had commanded them directly. Last summer, the Court ruled that the continued flow of preexisting federal Medicaid funds can’t be conditioned on the states’ expanding their Medicaid programs under Obamacare. But even under that ruling, states that refuse to expand their Medicaid programs will still be subsidizing the Medicaid expansion of other states. That’s not a carrot. It’s a stick — and it’s commandeering.
Almost as harmful as the intermingling of federal and state finances is the intermingling of federal and state regulatory activities. The problem here arises when the federal government gives states “permission” to implement federal rules as long as they meet a myriad of conditions. If a state fails to meet any of the conditions, the federal government preempts the field and implements the rules itself.
The state insurance exchanges under Obamacare are a perfect example. To gain federal approval, state exchanges have to meet so many conditions that state flexibility in the matter is a fiction. States that set up their own exchanges are merely allowing themselves to be deputized as instruments of the federal government. But if states let the federal government come in and establish the exchanges itself, it could do so in a way that punishes local interests. For the states, it’s a lose-lose proposition.
This “conditional preemption” strategy, which is essential to the Clean Air Act and other EPA programs, also allows Congress to extend its control beyond the Constitution’s intended limits. Congress deputizes state agencies while escaping accountability, by leaving state officials liable for the success or failure of what are really federal programs.
The Supreme Court has a name for this blurring of the finances and regulatory activities of state and local governments: “cooperative federalism.” That’s the label the Court uses when it rubber-stamps the manifold backdoor schemes through which Congress seizes control of state governments while escaping accountability for the results.
The Supreme Court’s acceptance of “cooperative federalism” is based on the fallacy that states retain the freedom to accept or reject what are supposed to be voluntary “cooperative” federal programs. But there is always a penalty. States that refuse to participate in a federal spending program lose the money their residents have already contributed to fund the program, and all of it goes to other states. States that refuse to implement federal regulations must watch the federal government take over yet another area of state policy.
Washington should be forced to pay for, and be accountable for, the implementation of its own policies.
Sometimes the cooperation of federal and state authorities is clearly beneficial — for example, in the response to a major fire or hurricane. In such situations, the federal government can provide resources on a scale far beyond what an individual state would be able to muster, but it does so as an equal partner with the state that is directly affected. It does not use the crisis to insinuate itself into the inner workings of state governments.
States are not threatened when federal and state officials coordinate as equals, but it is a different matter when states must give up their autonomy because the federal government presents them with an offer they can’t refuse.
Congressional conservatives should make this a mantra: Congress needs to mind its own business, and let the states mind theirs.
— Mario Loyola is director of the Center for Tenth Amendment Studies at the Texas Public Policy Foundation. His article “The Federal-State Crack-Up” appears in the current issue of The American Interest.