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September 2014 Policy Study, Number 14-4


A Citizens Introduction to Federalism: Federalism and the Future of Constitutional Government


Part VI: Can Federalism Be Restored?



Some of the challenges to federalism today are serious public policy problems. States such as Arizona and Texas are struggling to fight the major issue of illegal immigration and are growing frustrated with the failure of leadership and responsibility from the federal government. Many states are concerned with the implications of illegal immigration. As mentioned above, several states are resisting the pressure to expand Medicaid under the Affordable Care Act, because of the fiscal implications and the costly federal mandates states have to comply with already.


Colorado and Washington have moved the nation closer to the unfortunate legalization of marijuana. Many states are slowly moving in this direction by allowing marijuana to be used for medical purposes, but Colorado now allows recreational use of the drug. This brings up questions of federal drug laws that clearly conflict with various state laws. The issue of marriage is another concern. Many states have passed laws or constitutional amendments declaring that marriage is between one man and one woman, but other states are allowing same-sex marriages. The courts are also getting involved and many state defense of marriage laws have been ruled unconstitutional. A divide exists in our nation over what constitutes a marriage. The marriage debate is very complicated, because states recognize other states driver’s licenses, but some states will not recognize same-sex marriage licenses. What happens when a same-sex couple moves from one state that recognizes their marriage to another state that prohibits such a marriage?  The solution by many is to allow each state to decide or get the government out of marriage completely, but most likely the marriage outcome will have to be settled either by amending the United States Constitution to protect traditional marriage or allow across-the-board same-sex marriages.  


Education is another issue that is at the forefront of the federalism debate. The nation is facing a crisis in education and although education is a state and local issue, the federal government continues to get more involved in regulating education. This is especially true with No Child Left Behind and the current debate over Common Core, which interestingly enough was a proposal out of the National Governors Association, “with no federal involvement, but the Obama administration made participation a criterion for federal education grants.”[239]  The good news for education is that several states are improving education by implementing school choice policies, which are creating more competition and improving opportunities in education.


The out-of-control spending in Washington is also influencing the debate on federalism. Chris Edwards, Director of Tax Policy Studies at the Cato Institute, wrote that “aid to the states accounts for 13 percent of spending.”[240] Edwards notes that “it is delivered through more than 1,100 programs for health care, highways, education, housing, and many other things. Medicaid is the largest aid-to-state program.”[241] The consequence of the reckless spending also impacts states:


Unlike most states, the federal government is not constrained by a Balanced Budget Amendment and can print money.  Unfortunately, a few states have followed the lead of the federal government and racked up billions of dollars of unfunded pension liabilities. In addition, many states are now reliant on federal funding in order to balance their budgets. In fact, federal grants make up 35 percent of state revenues on average (some states approach 50 percent). With this amount of federal funds flowing to the states, it is easy to see how states have been forced to take such a subservient role to the federal government.[242]


In addition, the debt crisis and the unfunded entitlement liabilities, unless resolved, will generate national economic problems, just as with the Great Depression or the Great Recession. Poor national economic policy also hurts, states and the current slow economic recovery from the Great Recession demonstrates this by the record number of individuals depending on government assistance programs and the continual high unemployment. This also includes monetary policies from the Federal Reserve that are causing inflation and putting the value of the dollar at risk.


President Reagan clearly understood the importance of cutting federal spending and limiting government, which is not only good for federalism, but also for national economic policy. Chris Edwards argues that “federal aid is an inefficient way to fund state and local activities”:[243]


It encourages overspending by the states, comes with complex federal regulations that stifle innovation, and generates bureaucracies at all levels of government. Americans would have more frugal, transparent, and responsible government if aid programs were eliminated. There are no advantages of funding state and local activities with federal dollars, but there are many disadvantages to the economy and to sound governance.[244]


Richard Epstein and Mario Loyola described the impact of federal assistance to the states when they wrote:


Federal ‘assistance’ to the states currently accounts for 30 percent of state budgets, on average. Since the early 1980s, the federal government has transferred about 15 percent of its budget to the states, which is almost as much as the federal deficit in an average year. Why does the federal government borrow so much money, only to transfer it to the states? Do the states really need that much help?  They don’t. States have their own taxing authority. The real reason for federal ‘assistance’ lies in the conditions that come attached to it, which allow the feds to dictate state policies and even what the states do with large chunks of their own money. The result is a massive increase in real federal control and real federal spending — entirely behind the scenes. States like Texas, Florida, and New Hampshire pride themselves on having no state income tax on individuals. But that is only literally true of the 60 or 70 percent of their budgets that comes from state revenue. With respect to the portion derived from federal sources, Washington in effect imposes a high state income tax, which it collects on their behalf. States have no choice about that. Their only viable option is to accept on bended knee the sovereign’s offer to return their money back, in exchange for their obedience. It’s a fair bet few Americans understand what is really going on behind the façade of federal assistance.[245]


The states can also do a better job at administering programs such as welfare. One example of this is the war on poverty, which as noted earlier, President Johnson declared in 1964. Robert Rector, a Senior Fellow at The Heritage Foundation, wrote that the “War on Poverty has been a catastrophic failure. After spending more than $20 trillion on Johnson’s war, many Americans are less capable of self-support than when the war began.”[246] Rector stated:


The federal government runs over 80 means-tested welfare programs that provide cash, food, housing, medical care and targeted social services to poor and low-income Americans. The government spent $916 billion on these programs in 2012; roughly 100 million Americans receive aid from at least one of them, at an average cost of $9,000 per recipient. (These figures do not include Social Security or Medicare.)[247]


It is true that the hardships resulting from the Great Recession have caused more people to become dependent on some form of government assistance because of unemployment or being under-employed, but the evidence remains that the massive cost of welfare spending since the Great Society has not helped to solve poverty. Spending more money and initiating more programs on public policy problems at all levels of government does not necessarily mean the problem will be solved. Welfare, education, and healthcare are prime examples:


When the federal government nationalizes an inherently state or local issue, it ensures that whatever policy it produces will fail to solve the problems. We know from the welfare reforms in the 1990s that a policy solution in one state may not work well in another state, which demonstrated the importance of states maintaining the flexibility and authority to tackle issues as they saw fit.[248]


Writing in The Atlantic, Richard Epstein and Mario Loyola argue that Americans have “overlooked” the issue of federalism.[249] They argue that “the separation between federal and state government” is “fast disappearing, owing to a relentless expansion of federal power.”[250] As Epstein and Loyola explain:


Programs like Medicaid, Common Core, the Clean Air Act, and the federal highway system enjoy popular support because they appear to allow the federal government to accomplish things all Americans want, at least in the short run. But those programs often turn states into mere field offices of the federal government, often against their will, in turn creating a host of structural problems. Federal officials exert enormous influence over state budgets and state regulators, often behind the scenes.[251]


Under this “new federalism replaces the ‘laboratories of democracy’ with heavy-handed, one-size-fits all solutions,” argued Epstein and Loyola.[252] The result of this, as President Reagan warned, is that the states are turned into administrative districts of the federal government.


It is often stated that state and local governments are growing in size, and this is certainly true, especially as symbolized by the fiscal crisis many states such as California and Illinois are currently confronting. As Mario Loyola wrote:


It is no coincidence that this administrative and fiscal expansion at the state and local level resulted chiefly from an expansion in federal power. With federal and state power overlapping, both federal and state officials developed an enormous incentive to expand government power at both levels. The story was one of collusion among politicians of every party at every level. Federal officials discovered that by deputizing state officials, they could expand their own power just as effectively, while escaping accountability. Meanwhile, under the umbrella of heavy federal regulation, state officials learned to exploit their citizens, and the citizens of other states, chiefly through the formation of government backed monopolies and cartels.[253]


Coercion by the federal government forces states to comply with federal intervention into various public policies because they are rewarded. In regard to Common Core, Epstein and Loyola write that “states that comply are rewarded in part from taxes collected in states that buck Common Core — the familiar coercion at the heart of federal grants.”[254] This is one of the dangers of cooperative federalism:


Federal conditions shape most state policies, chiefly because they are almost impossible for state officials to resist as a matter of political reality. The blandishment of hard tax dollars, which if rejected will go to other states even if raised from citizens of the refusing state, plus the specter of unfriendly federal regulators stepping in if state regulators refuse to comply, are usually more than enough to force the hands of state officials.[255]


Cooperative federalism, explains Epstein and Loyola, has led to the “integration of federal and state governments under federal control:”


One result has been the integration of federal and state governments under federal control, a process that abounds with hidden problems, starting with accountability. When Americans vote in state and local elections, they think they are voting on state and local policies. But often they are just deciding which local officials get to implement the dictates of distant and insulated federal bureaucrats, whom even Congress can’t control. Federal-state integration also creates strong incentives to expand government power at every level. State officials get to claim credit for 30 percent more spending than they raise in taxes without having to pay any political price for higher taxation. Meanwhile, federal officials claim credit for addressing national problems through the largely hidden use of state resources. Medicaid might never have passed Congress if proponents of the bill hadn’t been able to shift the program’s true costs to state budgets.[256]


One solution to undermining cooperative federalism is not only resurrecting the Tenth Amendment, but also pushing for competitive federalism. Matt A. Mayer, President of Opportunity Ohio, wrote that “the key to this debate is getting people to understand that there is no check on the growth of Washington’s power anymore.”[257]  Mayer supports the concept of competitive federalism as a solution:


To rebalance the powers and honor our constitutional heritage, Americans should embrace competitive federalism. Properly defined, competitive federalism is the powerful harnessing of our tripartite sovereignty system that allows states to compete with each other over a broad range of issues to provide citizens with the best value goods and services at the lowest cost. Unlike other federalism proposals, competitive federalism involves far more than rejecting a specific law; rather, competitive federalism requires the full decentralization of issues properly controlled by the states.[258]


Competitive federalism is already working as symbolized by the economic growth of low tax states in the aftermath of the Great Recession. Stephen Moore, Chief Economist at The Heritage Foundation, described the economic growth occurring in low tax states:


Arthur Laffer and I have examined the data back to 1970. No matter what 10-, 20- or 30-year period we reviewed, we found that the nine states with no income tax — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming — outperform the nine highest income-tax states, including California, Hawaii, New Jersey and New York. Job growth in no-income-tax states is typically double and sometimes triple the pace of the states with the highest taxes on work and small businesses… But taxes are indisputably a major factor in determining where businesses and capital and families locate. Consider the evidence from states that have adopted an income tax in the last 50 years. Since 1960, they've numbered 11, including Illinois, New Jersey and Connecticut. Every one of them has experienced slower growth than the rest of the country after adopting the income tax, and each lost income and population relative to the national average. Does anyone really believe that happened by chance?[259]


Epstein and Loyola argue that states “with high taxes, tough zoning laws, and restrictive labor laws tend to lose out to those with a lighter footprint — witness the tens of thousands of people — especially poor people — moving to Texas every year.”[260]  Competitive federalism allows “people to choose between state options,” which deteriorates “the case for federal control of markets.”[261]




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