Nudge, but don’t push, the Supreme Court tells the federal government about the states. The new Congress this month moved straight to shoving with all its might, and Ohio pushed back last week with a lawsuit that could set an important precedent for federalism.
Congress passed the American Rescue Plan Act of 2021 with an eleventh-hour Easter egg, authored by Senate majority leader Chuck Schumer (D., N.Y.), that prohibits the states from using any money from the Act to directly or indirectly reduce a state’s net tax revenue. The federal government is authorized under the Act to claw back money from states that offend this proviso.
Now, Ohio does not have any legislative tax cuts in the hopper. (Even supply-siders need to remember that both ends of the Laffer curve have a value of zero: Somewhere along that curve, lower tax rates produce lower tax revenue, and a rate of zero produces zero.) But Schumer’s Easter egg is a big one and full of surprises. It would affect not only Ohio’s tax policy but also economic development and job-creation efforts through tax credits and abatements, decisions by the Ohio tax commissioner, and perhaps even enterprise zones.
Ohio’s argument with the federal government is not about cutting taxes; it is about whether the federal government may use its disbursal of funds to dictate state policy — about this or any other subject that is not the province of the federal government under the Constitution.
The Supreme Court has held that, when the federal government wants to attach strings to the money it sends back to the states, a few thin strings are okay; coercion is not. So what are a few strings?
In the early 1980s, each state set its own drinking age, which varied from 18 to 21. Drunk driving was a major cause of auto accidents and death, and young drivers died more frequently than any others. The federal government wanted a national drinking age but clearly did not have the authority to mandate it. So, reasoned the clever lawyers in D.C., why not simply condition federal highway money on a state’s raising the age to 21?
It was controversial at the time. Politicians called it “Little Prohibition” and charged that it was federal overreach. President Reagan expressed reservations.
But over time, Reagan — ever mindful of practical politics — came around. In 1984, the New York Times noted that in dropping his opposition to the measure, Reagan said he was persuaded by the evidence that raising the drinking age could save lives. In addition, some of Reagan’s reelection strategists made no secret of their hope that the issue would help the president’s standing among voters.
“It’s a grave national problem, and it touches all our lives,” Reagan said as he signed the bill in 1984. “With the problem so clear-cut and the proven solution at hand, we have no misgiving about this judicious use of federal power.’’
A lawsuit ensued. The Supreme Court, in South Dakota v. Dole, held that the drinking-age requirement did not offend the Constitution, including the Tenth Amendment, noting that only 5 percent of highway funds would be withheld for noncompliance — a mere inducement, not coercion.
During the Obama administration, the federal government threw away the pretense of attaching thin strings and went for the heavy rope. Under the Affordable Care Act, a state that wanted to continue to receive federal funds for the Medicaid program had to dramatically expand Medicaid, which would cost the states billions of dollars. The Supreme Court held in NFIB v. Sebelius, 7–2, that the mandatory Medicaid expansion of Obamacare was unconstitutionally coercive.
The Schumer Easter egg — the federal tax mandate — is the same thing, and it’s why Ohio went to court.
Ohio will receive $5.5 billion under the American Rescue Plan Act, more than 7 percent of the state’s entire expenditure last year. Critics say, “If you don’t like it, don’t accept the money.” But that was the same argument in NFIB — a choice that the Supreme Court likened to a “gun to the head.”
The money to be distributed through the Act is not sitting in a coffee can behind the Treasury secretary’s desk. It will be borrowed, and the people of Ohio will be on the hook to repay that money, whether it “accepts” the money or not. To not accept the money is to accept a penalty of $5.5 billion, plus interest, against the state.
This is not the mere inducement to a partnership, as described in South Dakota v. Dole. The tax mandate in the American Rescue Plan Act uses the federal spending power to compel state tax policy, effectively enacting a tax floor though 2024.
But state tax policy is inherently a state prerogative. And it is one of the clearest examples of the strengths of federalism: Some states today have low overall burdens and fewer services. Others have higher tax burdens and more services. Some states tax income; others, consumption. People are moving from some of these state “laboratories of democracy” to others.
Federalism is a safeguard against a fatal mistake. When I was a lawyer in private practice, I advised clients to incorporate different business units as separate entities, so that a mistake in one did not sink the entire enterprise. Military commanders compartmentalize information on a “need to know basis” for the same reason.
Federalism limits the bad effects of ill-advised experiments to the states that enact them. Positive results can be and are implemented in other jurisdictions.
Federalism protects conservative states against domination by progressive federal governments; it protects progressive states from domination by conservative federal governments.
Ohio’s lawsuit will set a marker on the limits of federal power and protect the safe space in which states may operate. Attorneys general of both parties should support this effort. We’re making the argument to protect red and blue states alike.