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Lamar Alexander, who served two terms as governor of Tennessee
and twice ran for president, came to the U.S. Senate a couple
of years ago hoping to advance the cause of devolution and
states’ rights. It has been a lonely occupation. “I’ve
been disappointed,” Alexander admits, “to find so
few voices in the United States Senate who respect the prerogatives
of governors and mayors to make their own decisions. The conservatives
are just as bad as liberals at passing new programs and expecting
someone else to pay for it.”
That’s not a bad description of politics in Washington
as George W. Bush’s second term opens. Federalism is
being treated these days a little like the burgeoning federal
deficit: It’s important — but not as important as
six or eight other things that policy makers care more about.
Even diehard devolution advocates such as Alexander concede
that the ability of states and localities to shape domestic
policy — or even to preserve their existing leverage
over local spending and taxation priorities — is on the
downhill slide.
Four years ago, the picture looked considerably different.
In the 1990s, states had taken the lead in dealing with critical
policy issues that Congress discussed but didn’t address,
such as health care and utility regulation. A governor who
decried federal power grabs was about to take office as president,
joined by a Republican Congress whose members were fond of
asserting that the most effective levels of government were
those closest to the people — states, counties and cities.
That seems like a long time ago, in more ways than one. In
the years that have passed since the September 11, 2001, terrorist
attacks, more and more Americans have come to see centralization
of government as the best route to future security. As a result,
federal standards have been imposed on state and local activities,
major and minor — including, in the most recent session
of Congress, the provision of driver’s licenses. “The
trend is absolutely toward less respect for state initiatives,
rather than more,” says Douglas Kendall, of Community
Rights Counsel, a public interest law firm, and co-author
of a new book on federalism.
Even beyond security-related issues, however, the first half
of the current decade has seen an unusual amount of aggressive
federal intervention. The No Child Left Behind Act, signed
into law in 2002, may be the most prominent case, imposing
strict federal penalties on local school systems whose pupils
are unable to pass standardized tests. But there have been
many others, in central areas such as health care, the environment
and social issues.
Remarkably, all of these and other centralizing federal initiatives
have been launched by a conservative Republican president
and Congress whose previous rhetoric tended to support devolution
and states’ rights. “The ardor for devolution and
federalism among Republicans has cooled considerably,”
says Michael Greve, director of the Federalism Project at
the American Enterprise Institute. “People don’t
even pay lip service to it anymore.”
Not too many years ago, Congress was full of subcommittees
devoted specifically to the subject of intergovernmental affairs
— the relations among the national, state and local governments.
Today, it’s hard even to find individual members who
take these concerns seriously.
There’s not much institutional support for federalism
outside of Congress, either. The old U.S. Advisory Commission
on Intergovernmental Relations in its heyday attracted senators
and cabinet secretaries to its meetings — even the president
on occasion — but the organization became politicized
and, after it died in 1996, nothing emerged that could take
its place. The National Academy for Public Administration
has just launched a forum for federalism discussions, but
it’s very much in the early stages.
SIGN UP — OR ELSE
Increasingly, the people whose job it is to lobby for
states and localities in Washington feel that when the Republican
majority decides something has to be done about an issue,
such as homeland security, education or safe drinking-water
standards, state and local governments have little choice
but to get on board in some fashion or other. They can’t
remain significant players if they simply oppose any federal
role. “We try to protect things we’ve been protecting
for 20 years,” says Ray Scheppach, executive director
of the National Governors Association. “The world is
shifting, and we have to recognize that. There are not a lot
of people on the Hill recently who have shown a lot of interest
in federalism. We’re on the defensive now.”
The biggest fights loom in the area of taxes. Many state
rates are tied to the federal code, so states will be losers
assuming, as everyone in Washington does, that the biggest
recent cuts in income and estate taxes are made permanent.
And there is major buzz around the idea of saving the federal
government money by eliminating or reducing the federal deduction
for state income tax. “There’s very serious sentiment
in the Republican Party for doing that because it has the
incidental benefit of hammering mostly high-tax, Democratic
states and that can’t be unwelcome,” says the AEI’s
Greve.
On the spending side, the 1995 law barring Congress from
imposing new mandates on the states without committing to
pay for them remains on the books. But it has had minor practical
effect, especially in the past several years. Congress has
found it remarkably easy to structure laws that force lower
levels of government to do things without creating a mandate
in a technical sense. Most of the time, these create programs
in which states and localities are asked to participate voluntarily
— but at the risk of losing large amounts of federal
funding if they decline. Or new federal programs carry with
them the promise of future funding to defray state and local
costs but the money does not appear.
To help pay for the No Child Left Behind requirements, the
feds upped their share of total education spending, to about
8 percent, but with the law just three years old, they’re
already more than $25 billion behind in their payments to
states and local school districts. Similar shortfalls are
bedeviling special education, despite passage of a new law
promising full funding. “Under the new federalism,”
says Donald Borut, executive director of the National League
of Cities, “you have new mandates where a small amount
of money is defining and leveraging how the larger amount
of money is being spent.”
More arrangements of this sort seem inevitable in the near
future, given the massive deficits that exist at the federal
level. Federal revenues, measured as a share of the gross
domestic product, have reached their lowest point since the
1950s. Given President Bush’s stated desire to cut the
federal deficit in half, coupled with his desire for more
tax cuts, enormous pressure is going to fall on those domestic
programs that are largely carried out in the form of grants
to state and local governments. There is hardly an area of
their budgets — on either the revenue or the spending
side — that will not be adversely affected by upcoming
decisions in Washington.
Intergovernmental aid formulas drawn up by Congress in more
generous times have kept the number of federal dollars flowing
to states and localities high by historical standards during
the past couple of years. But the rate of growth in funds
for domestic programs other than entitlements has slipped
during every year of the Bush presidency, and the flow of
dollars in absolute terms has already slowed in many parts
of the fiscal 2005 budget. The one entitlement that Congress
can turn to for major budget savings is the one where cuts
stand to cost states the most money: Medicaid. The joint state-federal
health care program will soon surpass education as the largest
single expenditure at the state level, even though more than
half the program’s cost currently comes out of federal
accounts. The Bush administration proposed in 2003 to convert
Medicaid into a block grant, with more flexibility for states
but limited funding, and while that proposal went nowhere,
the administration may try again. Failing creation of a block
grant, significant targeted cuts in Medicaid seem inevitable.
Similar shortfalls may soon befall welfare programs, which
were turned back to the states in 1996 (in what was seen as
a landmark achievement of the devolution era), with Washington
sending block grant funds. The welfare law has been extended
eight times since expiring in 2002 and will come due again
in March. Whenever a new law finally makes it through, the
block grants are virtually certain to shrink.
With federal assistance to the states decreasing, and increasing
portions of state budgets going to make up for the absent
federal dollars, it is inevitable that states will re-examine
policies toward their own local governments as a way of saving
money. Aid to local government has already been reduced more
than any area of state budgets in recent years, aside from
higher education.
And cities and counties certainly can’t count on much
direct help from the feds. The Bush administration has already
attempted to phase out several programs that assist urbanites,
such as Community Development Block Grants and the Section
8 and Hope VI housing programs. Aid to poor families through
the tax code is likely to taper off as well. “It’s
hard to think of urban constituencies to whom the Republicans
owe anything,” says Greve. “If you figure there’s
only so much money to go around and attention to be lavished,
even without someone saying let’s go out and punish Chicago
and Manhattan and L.A. and San Francisco, the lack of attention
is enough to have that effect.”
THE URGE TO PREEMPT
As worrisome as the coming round of budget austerity may
be to state and local advocates, it does have a cyclical quality
to it. Federal deficits rise and fall; federal formulas are
stingier in some years than they are in others. The 1960s
and ’70s were periods of relative generosity toward states
and localities; the ’80s were a period of retrenchment;
the prosperity of the ’90s loosened things up again.
Eventually, situations do change. What is more worrisome for
the long run is the increasing interest of federal governing
majorities in preempting state power altogether: lifting whole
areas of policy out of the hands of state governments and
centralizing them at the national level. This is a strategy
that much of the business community and its lobbying organizations
have come to endorse.
It used to be a given that many industries preferred to be
regulated in state capitals, where their political influence
was greater and the assertiveness of legislators was much
weaker. But that has changed. In the past couple of decades,
many state legislators, governors and other officials have
turned into activist regulators across a broader range of
policy, from health care to finance to pollution. New York
Attorney General Eliot Spitzer is only the most prominent
among a whole new generation of state policy makers imposing
demands on corporations and industries that used to enjoy
relatively lenient treatment at the state level.
As a result, business groups — which are themselves
increasingly national or global in reach — are turning
to Congress for relief from state-level regulation that not
only tends toward strictness but also differs from one jurisdiction
to another in its details. And Congress, although dominated
by Republicans nominally suspicious of federal power, has
been quicker than in the past to preempt state regulation,
often arguing that national uniformity is necessary.
This has been happening whether it’s a major issue,
such as time limits on welfare, or a relatively minor one,
such as blocking unwanted telemarketers. The fiscal 2005 budget
passed by Congress, for example, preempts any state or local
requirement that hospitals, insurance companies or health
providers provide abortion services or referrals. (California’s
attorney general plans to challenge these strictures in court.)
The Bush administration, meanwhile, regularly has challenged
state authority on other social issues, from medical marijuana
to assisted suicide.
These trends are accelerating fast, in part because rapid
communication among activists can quickly move an idea that
blossoms in one state — a ban on state contractors sending
work overseas, say — to legislatures in 30 or 40 capitals.
Almost as quickly as new state regulations are passed, businesses
and trade associations are in Washington arguing that they
can’t comply with a chaotic flurry of regulatory legislation
whose fine print may not be the same in any two states. The
bottom line is that much of organized business now prefers
to deal with a single 800-pound gorilla, rather than 50 monkeys.
A prime example of the change in strategy is insurance regulation.
Insurance companies have always been regulated solely by the
states, but most now argue that they need a regulatory framework
in Washington to compete with banks and other financial service
entities that have been given more flexibility by the feds.
There are two proposals on Capitol Hill right now. One would
set up a dual charter, similar to what banks have, under which
an insurance company could choose whether to be regulated
by states or the federal government. The other would keep
the states as primary regulators — but only if they change
their rules to satisfy congressional demands within three
years. “It’s a very interesting debate as to whether
that is more of a jab at states’ rights than an optional
federal charter,” says Gary Hughes, of the American Council
of Life Insurers.
Hughes adds that states have tried to be responsive to his
industry, but that it’s still a cumbersome process for
any insurer to win multi-state approval quickly enough to
move new products to the market in competition with other
financial services. “Even if you get 50 state regulators
to agree on a course of action,” he asks, “can you
get their 50 state legislatures to agree to do the same thing?”
It’s possible that no insurance bill will move through
Congress anytime soon, given the abuses in the industry recently
exposed by Spitzer in New York — but it’s also possible
that proponents of centralization will use the controversy
as proof that the federal government needs to step up its
role. Regardless, this question of differing state policies
is a factor in an increasing number of areas. The governors
and the American Association of Motor Vehicle Administrators
led a cooperative effort to get state DMVs to agree to a uniform
policy of driver’s license security requirements, in
order to stave off a federal intervention. More than 40 states
quickly got on board, but the handful of stragglers left a
big opening for the feds to fill with new standards included
in the intelligence reform bill passed last month.
Despite the difficulties, it’s possible that such voluntary
efforts offer the best strategy for state and local governments
to use at a time of increasing pressure to centralize. All
the major state and local groups met with telecommunications
companies last month in hopes of arriving at a mutually agreeable
set of tax rates for that industry, before Congress takes
away states’ telecom taxing authority altogether.
Scheppach of the governors’ association says that in
some areas states should be pushing for hybrid models, in
which the feds would set regulations but states would enforce
them. A model could be the Streamlined Sales Tax Project,
under which 21 states have agreed to standardize their sales
tax codes in hopes of being allowed to collect taxes on electronic
purchases. The U.S. Supreme Court has ruled in the past that
the diversity of state sales tax codes would present an unreasonable
burden on electronic and catalog sellers. A standardized code
might lead to the relaxing of this restriction — although
states still need congressional approval before they can make
any tax mandatory on interstate commerce.
It’s also possible that, in the end, the streamlined
sales tax will merely serve as a prelude to a national sales
tax. Federal officials have found that they like flexing their
muscles in areas where state and local governments used to
dominate. Taxes are unlikely to be different. And once the
feds do move in, it’s difficult to imagine a future in
which they might choose to move out, whether the subject is
taxes, education, public safety or the environment. “Whether
Bush thinks he’s doing it or not, he’s redefining
federalism,” says Bruce Katz, director of the Brookings
Institution’s metropolitan policy program. “Cities
and states will have to deal with the consequences. What they’re
going to hope for is, ’You’re going to cut our budgets,
but please don’t tie our hands.’ ”
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