The United State of America

Washington is expanding its power by turning state governments into instruments of federal policy.
Noah Gordon/The Atlantic

The tug of war between the president and Congress is steadily escalating. The most recent sign of incipient institutional breakdown is House Speaker John Boehner’s suit against President Obama for rewriting laws and stepping on Congress’s turf.

But lurking in the wings is a second separation-of-powers issue, just as important, that Americans have mostly overlooked—the separation between federal and state government. In many areas, that vital divide is fast disappearing, owing to a relentless expansion of federal power. And both political parties share the blame.

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. The new federalism replaces the “laboratories of democracy” with heavy-handed, once-size-fits-all solutions. Uniformity wins but diversity loses, along with innovation, local choice, and the Constitution’s necessary limits on government power. 

Take Medicaid. On the surface, it looks like a federal matching-grant for state health care programs targeted at the needy. In fact it is the opposite: a way to rope states into match-funding a federal program. Federal Medicaid funds come with so many strings attached that states have little room to deviate from federal dictates—except by expanding their programs to fiscally unsustainable levels, which Medicaid actually encourages the states to do.

A state’s participation in Medicaid is supposed to be voluntary. The Supreme Court has insisted in such cases as New York v. United States (1992) that the federal government can’t command the states to regulate according to federal instructions. But if a state rejects Medicaid and decides to establish its own program for the needy, there is a huge penalty: It loses its share of Medicaid funds, but its citizens still have to pay Medicaid taxes, meaning state residents end up paying twice for the same services. That means less money for schools and roads and other things they need.

Facing this penalty, states have little choice but to comply and be essentially deputized into federal service. In the 2012 decision NFIB v. Sebelius, the Supreme Court held that states couldn’t be threatened with the loss of their existing Medicaid funds just because they refused to comply with the Medicaid expansion required by Obamacare. That was “a gun to the head,” said the Court—coercion, pure and simple.

But the Court failed to see that even losing new Medicaid funds also imposes a double tax, albeit on a smaller scale. Virtually every federal program of assistance to the states involves intrusive conditions and coercive penalties. States lose Medicaid funds if they refuse to comply with intricate requirements of the Medicaid program itself. They lose federal highway funds if they drop their drinking age below 21. They lose Common Core funds for not complying with Common Core. Yet their residents have to pay for the programs either way. The amount of money involved shouldn’t make any constitutional difference; the question is one of principle, not degree. Whether a robber says, “all your money or your life,” or merely “five dollars or your life,” it’s coercion just the same.

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.

Federal dominance is often justified as the only way to secure uniform laws. But states don’t need coercion to achieve that end. The Uniform Commercial Code of 1962, for example, was a marked improvement over the old state common law of contracts, and it greatly facilitated interstate commerce. Every state has adopted it, with the partial exception of Louisiana, which kept its old French civil code for sales. The American law of contracts was successfully modernized and harmonized without any federal involvement, under a scheme that gave free rein to diversity and local choice.

Similarly, Common Core was originally an initiative of the National Governors Association, with no federal involvement, but the Obama administration made participation a criterion for federal education grants. That’s where many states cry foul. 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. 

Money isn’t the only lever the feds use to increase their influence over state governments. Formally, the federal government can’t require states to implement federal regulations. But environmental regulations show how easy it is to get around that constraint. The Clean Air Act allows the states to issue federal permits—but only under federally approved state implementation plans, or SIPs. Those plans must meet a dizzying number of conditions; otherwise, the EPA trumps with a federal implementation plan, or FIP.

When EPA comes in with its FIP, it often comes to “crucify” local industries, as former EPA Regional Administrator Al Armendariz boasted at a closed-door meeting early in the Obama administration. The crucifixion takes the form of costly added requirements and endless delays. The federal government basically says to uncooperative states, “Implement our regulations for us, or we’ll do it ourselves, and your constituents will be sorry.” Predictably, constituents pressure state officials to protect them from the dire prospect of EPA implementing its own regulations, as we saw when Texas at first resisted implementing EPA’s new greenhouse gas regulations.

These problems have their roots in a major constitutional transformation that began a hundred years ago. In 1913, the 16th Amendment was ratified, allowing Congress to institute a real income tax for the first time. Later that year the 17th Amendment provided for direct election of senators. These two changes made the government much bigger and more “national.” That era also gave birth to the modern administrative state, which has steadily absorbed the rule-making functions of Congress. Then came President Franklin D. Roosevelt’s New Deal, with its insistence on intrusive regulations of labor and agriculture that were clearly outside Congress's constitutional power to regulate commerce “among the several states.”


The Supreme Court at first mounted some resistance, but then, starting in 1937, it dramatically backed down. In Steward Machine Co. v. Davis the Court allowed the government to attach pretty much any condition to a federal tax rebate. Five years later, in Wickard v. Filburn, the Court allowed the federal government to regulate virtually any activity of an economic nature. These rulings opened the door to the “great consolidation of Government” that the Constitution’s original opponents had warned of during the ratification debates.

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Richard A. Epstein is the Laurence A. Tisch Professor of Law at New York University. He is the author of The Classical Liberal Constitution: The Uncertain Quest for Limited Government.

Mario Loyola is a senior fellow at the Texas Public Policy Foundation.

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