Mario Loyola has a new essay on America’s broken federalism, a subject I find supremely interesting. According to Loyola, Congress has effectively commandeered state governments with the sweet lure of borrowed money:
The dramatic expansion in the American public sector since World War II has occurred almost entirely at the state level: As a share of GDP, Federal revenue has remained steady while state revenue (not including Federal assistance, which has exploded in recent years) has nearly tripled and has almost pulled even with Federal revenue. [Michael] Greve is almost certainly correct that this expansion has been due to the collusive intermingling of state and Federal finances. Worse, the collusion readily lends itself to the formation of state fiscal cartels in Congress—cartels designed to diminish regulatory competition and diversity among the states and impose the preferences of uncompetitive states on everybody. In 1926, for example, Congress adopted a Federal inheritance tax coupled with an offset for state inheritance taxes. This not only neutralized the competitive advantage of states with low tax rates but also strongly incentivized states to raise their rates. Among the effects of this whole arrangement is the exacerbation of inequalities between rich states and poor states (especially through the vehicle of matching funds) and the amplification of cyclical state fiscal crises. And when this fiscally fueled takeover of state governments runs into the political limits of what Congress can tax, Congress does what no state can do: It borrows to the tune of trillion-dollar deficits.
The increase of state revenue as a share of revenue might look like an indication of the robust exercise of local autonomy. Rather, state governments have been seduced by the prospect of “free” federal money to finance the expansion of new programs over which they have only very limited control. The federal government tightly prescribes what this programs can and can’t do, yet it’s relatively rare that Washington demands a rigorous accounting of how effectively money is spent.
Moreover, these voluntary programs are in practice very coercive:
The distinction between the Federal commandeering of state governments, which is prohibited, and cooperative Federal programs that states are theoretically free to turn down, which is allowed, is an utterly illusory one because in either case there is a penalty. If officials disobey a legal requirement, they may be dismissed, and are subject to writs of mandamus and criminal penalties. But if they don’t accept “voluntary” Federal grants (and comply with the attached conditions), there is also a penalty: The tax revenue their citizens have already contributed to the program will be transferred to other states and they will lose all use of it. And if states don’t accept Congress’s invitation to implement Federal law “voluntarily”, the Feds take over, diminishing the state’s regulatory autonomy. [Emphasis added]
This is the impetus for Greve’s proposal that residents of states that opt out of cooperative Federal programs be given tax rebates the reflect the value of the Federal grants.