The State-Federal Tug of War: July/August 1999 

In This Article

 

U.S. Capitol

The balance of power between the states and federal government is constantly shifting.

By Carl Tubbesing

It's the federalism equivalent of "The Twilight Zone." You go to the attic, determined to clean it up. You start with the old New Yorkers, Field and Streams and Reader's Digests. But, what's this? It's a collection of State Legislatures magazines.

You thumb through the first one-the very first one, dated June/July 1975. You hear eerie, familiar music. The first issue is replete with state-federal stories. Here's one on federal no-fault automobile insurance. There's one calling for flexibility in the way states spend federal money. Another points out that the federal deficit has grown too large. Another mentions the need for state legislatures to oversee block grant money, while a later paragraph urges Congress not to bypass states in distributing education funds for disabled students.

What year is it anyway? Have you stepped into a Rod Serling time warp? The cover says 1975, but aren't these turn-of-the-millennium issues? Didn't you just read about a bill that would preempt state no-fault laws? Didn't NCSL just win
a major battle to keep the federal government from earmarking tobacco settlement money? Did it really take a quarter century to eliminate the federal budget deficit? When was it, 1995 or 1996, that state legislators made sure that they would be able to appropriate the new welfare reform block grant? Isn't there legislation pending now that would create an education block grant for local school districts?

Is this dé-jà vu all over again? Has your attic become the setting for "Yogi Berra Meets the Twilight Zone?"

The first edition of State Legislatures featured an interview with author Neal Peirce who noted: "The whole question of the assignment of responsibilities between the federal and state governments has been talked about for years; yet it remains one of the most important unfinished agenda items for American federalism. It will never be totally solved."

Maybe you're not in "The Twilight Zone" after all. More likely, you've just been reminded of the natural dynamics of the federal system.

The period since NCSL's founding in 1975 has been characterized by repeated efforts to sort out responsibilities, with the federal government in ascendance at times or over some issues, and the states in charge at other times or over other issues.

Over the past 25 years, state legislatures have perfected their techniques and improved their influence over federal issues. New York Senator Jim Lack says legislatures have won respect from Congress. He argues that it was not only because state legislators became better lobbyists, but also because they were taking care of business in their own legislative chambers.

"State legislatures," says Lack, "became more professional and developed more capacity in the past 25 years. Time and again, they demonstrated their ability to innovate." In other words, there was a direct link between the modernization of state legislatures that began in the late 1960s and their successes in Washington, D.C.

NCSL's first quarter century in the nation's capital featured nine defining issues. Each tested the influence of state legislatures with national decision makers and helped move the country toward a sharper definition of federalism at the end of the 20th century.

NCSL's first major state-federal challenge in 1975 was attempting to preserve general revenue sharing. The century is concluding with the organization's efforts to pass a federalism bill that would curtail federal preemption of state authority. In between, state legislatures contended with entitlement programs, several block grant initiatives, unfunded federal mandates, deductibility of state taxes, devolution and protection of state legislative appropriation authority, and the tobacco settlement.

General Revenue Sharing

President Richard Nixon made general revenue sharing a centerpiece of his New Federalism initiative. It was in part a reaction to the growth of federal programs and spending during President Johnson's Great Society. The State and Local Assistance Act, passed in 1972, was straightforward. The federal government would turn over a portion of revenues to state and local governments, who would be free to allocate the money to pressing priorities. There were no matching requirements and very few restrictions on how they could spend the money.

Proponents liked it because it decentralized government and placed decisions in the hands of elected officials closer to voters.

Tom Jensen, NCSL's second president, remembers that revenue sharing was linked to formation of the organization. In 1974, Jensen was House minority leader in Tennessee and a strong proponent of creating the National Conference of State Legislatures. During a meeting in Albuquerque intended to ratify the new organization, Jensen and others got a call from President Gerald Ford asking them to come to Washington to meet with him about the first reauthorization of revenue sharing. The legislators declined to go, recalls Jensen, because making sure the new organization was created "was just too important."

President Ford evidently held no hard feelings. In a message at the first NCSL annual meeting in 1975, the president argued, "General revenue sharing in many cases represents the margin of difference in making basic and essential services available. I am convinced it should be continued."

Congressional opponents to renewal, though, raised objections that were echoed in debates throughout the next quarter century. Massachusetts Congressman Robert Drinan, a Democrat, wanted to place restrictions on how states could spend the money. Others advocated requirements for ensuring citizen participation in funding decisions.

And unlike categorical programs, which had strong natural constituencies, general revenue sharing suffered in the appropriations process each year. Revenue sharing funds increased by only 3 percent per year compared with a 14 percent annual increase in categorical programs.

Reagan's New Federalism: Categoricals Into Block Grants

Histories of the early years of the Ronald Reagan presidency emphasize the debate over supply-side economics and deep tax cuts. Equally compelling for state legislators, though, were two initiatives the former California governor advanced to sort out state and federal responsibilities and reform federal funding programs. The sorting out proposal failed, despite intense negotiations involving state legislators, governors and federal officials. Reforms of federal aid programs largely succeeded.

One of the legacies of the Great Society and the following decade was a complex array of federal grant programs targeted to specific issues and problems. In 1980, NCSL and the National Governors' Association made a strong case for block grants, calling for "consolidation of related federal categorical programs into block grants that provide flexibility for governments to target funds where they will do the most good."

Reagan and his budget guru, David Stockman, then combined a sweeping block grant proposal with the administration's first budget, one that attempted substantial reductions in domestic spending.

The block grant proposals were "generally supported" by most state legislators and governors who liked the flexibility they promised, but were wary of the budget cuts that came with them. The administration argued that states would save in administrative costs in the transition from categorical programs to block grants. Skeptical legislators, such as New York Speaker Stanley Fink, responded, "There just isn't that much overhead."

Opposition came from the beneficiaries of the categorical programs, such as children's groups and the elderly, who apparently were willing to accept spending cuts rather than see them consolidated into block grants. Many local officials also opposed the block grants, especially if they were to be administered by state officials.

In the end, the Reagan administration, with the help of state legislators and governors, prevailed. The budget reconciliation bill, passed in the summer of 1981, created block grants for social services, community development, preventive health, maternal and child health, and substance abuse and mental health. These, with some revisions and more strings, remain in place today.

The Big Swap

The other major component of President Reagan's New Federalism was a proposed sorting out of entitlement programs. First announced in his 1982 State of the Union Address, the complex proposal boiled down to an exchange. The federal government would take over complete responsibility for Medicaid, the joint state-federal health program for the poor. States would assume the design and funding of welfare and food stamp programs.

A decade later, with health costs skyrocketing, state leaders wondered why this deal wasn't a no-brainer. At the time, however, legislators and governors worried that welfare expenses would actually grow more than Medicaid costs.

Some, like Massachusetts House Majority Leader Jack Murphy, thought the proposal "raised more questions than it answered."

A special February 1982 meeting of the NCSL executive committee approved a resolution that "encouraged" the New Federalism effort. The resolution fell considerably short, though, of an endorsement of the specifics of the Reagan plan. Despite some congressional interest, the swap proposal failed, at least in part for lack of strong support from state legislators and governors.

Deductibility of State Sales Tax

A new NCSL publication, National Tax Reform: Options and Consequences for the Nation's State and Local Governments, argues that "state and local governments have retained their vital roles in our federal system, in part because they maintain fiscal autonomy from the national government."

That autonomy was threatened during the tax reform negotiations of 1986. Before that, federal taxpayers were able to deduct state sales, income and property taxes from their federal tax liability. State officials argued that these deductions were necessary. Otherwise, they said, taxpayers would be taxed twice-once by the federal government and once by the state government-on the
same money.

Federal budget negotiators in 1986 considered a proposal to eliminate the deductibility of all three state and local taxes. State legislators, governors and local officials rallied in opposition. Eliminating deductibility, they argued, would have a chilling effect on their ability to raise taxes.

Losing this fiscal autonomy would move the country toward a unitary governmental system, in which the national government would raise most of the revenues and set spending priorities. Budget negotiators chose to preserve deductibility of income and property taxes. Desperate for revenue, they chose to eliminate deductions for sales taxes.

Unfunded Mandates

In October 1993, President Bill Clinton signed Executive Order 12875, which told federal agencies to stop imposing unfunded mandates on state and local governments.

NCSL President Robert Connor, a Delaware state senator, was part of the small group of state and local officials who attended the cabinet room ceremony. During the introductions, Connor handed the president a copy of NCSL's Mandate Monitor, a chronicle of the many unfunded mandates then under consideration. After reading through the publication for a few minutes, President Clinton turned back to Senator Connor and exclaimed, "So this is what we're doing to you!"

Indeed, by then the federal government had imposed hundreds of unfunded mandates on state and local governments at a cost of billions of dollars. Stopping them had become a battle cry among legislators and other elected officials.

As early as 1978, Florida Representative Richard Hodes had urged legislators to "draw attention to the fiscal mandates in federal programs." As the deficit began to escalate in the mid-1980s, the federal government chose to initiate new programs and continue old ones by compelling state and local governments to fund them.

Ohio Senator Richard Finan called it "exporting the federal deficit to the states." The more the federal government resorted to unfunded mandates, the more it distorted state funding priorities, and the more upset legislators became.

In 1993 and 1994, NCSL and other state and local organizations began negotiations with a bipartisan group in Congress to craft legislation to limit the use of unfunded mandates in Congress and the executive agencies. The legislation almost passed in the waning days of the 103rd Congress. The 1994 elections brought Republican majorities to both houses. Still with bipartisan support, the Unfunded Mandate Reform Act was the first major bill to pass in the new Congress. Ohio Senator George Voinovich called it "one of the greatest legislative victories ever for state and local governments."

Devolution 

In 1992, Arkansas Governor Bill Clinton campaigned for president by promising to "end welfare as we know it." In 1994, the Republican campaign to take over Congress-symbolized by the Contract with America-pledged to balance the federal budget and shift responsibilities for many programs to state governments.

Pushed by state legislators and governors, the president and Congress two years later agreed to a massive revamping of the nation's welfare system, the reform that has come to symbolize the movement toward devolution.

With roots in the Reagan reforms of the early 1980s, devolution features block grants, greater flexibility and fewer mandates. Proponents of devolution emphasize its increased accountability and responsiveness. Opponents worry about a race to the bottom in the delivery of services.

The hallmark of welfare reform was substitution of a very large block grant-Temporary Assistance for Needy Families-for the old AFDC entitlement program. Congress followed passage of welfare reform in 1996 with several other initiatives that also shifted responsibilities to state officials, lifted mandates and gave them greater flexibility. They included renewal of the Safe Drinking Water Act, a collection of Medicaid reforms, the new surface transportation program (TEA-21), work force training and Ed Flex.

Legislative Authority over Federal Funds

Substitution of a welfare block grant for the AFDC entitlement program raised a serious institutional question for state legislators: Who in the states would decide how the block grant money would be allocated?

Early drafts of welfare reform bills, including one by Senate Majority Leader Bob Dole, ceded this authority to governors. State legislators mobilized to guarantee that the block grant money would be subject to the appropriations process in each legislature. Colorado Senator Hank Brown was the chief sponsor of the amendment.

The issue galvanized legislators and staff. States passed resolutions. Senate presidents signed a petition. NCSL leadership met with congressional leaders. State legislators appealed to the institutional loyalties of members of Congress, arguing that they would not want to relinquish similar authority to the president.

There really had never been a campaign quite like it in NCSL's first 20 years. In the end, the language was included in all of the
ajor welfare reform proposals, and the so-called Brown amendment is now law.

Preemption

Preemption is devolution's "evil twin." There have been pressures throughout NCSL's first quarter century to transfer some responsibilities to the states and to centralize others at the national level. The trend toward preemption-spurred by changes in technology, the economy and even campaign fund raising-appears to have accelerated in the past decade.

The list of recent proposals to preempt state authority is almost endless: banking, insurance, product liability, managed care, taxing the Internet, property rights, electric utilities and child care are among the more prominent.

"All of us should be concerned about the cumulative and long-term effects of federal preemption of state law, for the simple reason that it undermines the effectiveness of state or local government," argued North Carolina Representative Dan Blue at the time.

State legislators have been working recently with a bipartisan group of congressmen to develop legislation to reduce preemption iin Congress and the executive branch. The legislation, with its emphasis on information and process, will be modeled after the unfunded mandates legislation of 1995.

The Tobacco Settlement

Money often is at the center of the tensions in American federalism. Big money creates big tensions. The settlement achieved in November 1998 between state attorneys general and the tobacco industry included $246 billion for state governments over the next 25 years.

The Clinton administration claimed the states owed the federal government over half the money because of an old provision in Medicaid law. The president signaled that he was willing to deal. The federal government would not take the money, but it would require the states to spend the money on certain programs, particularly smoking cessation and prevention.

Legislators and governors went to work. They felt they were in the best position to determine how the money should be used. They were joined by a group of U.S. senators and House members, led by Texas Senator Kay Bailey Hutchison, Florida Senator Bob Graham and Florida Congressman Michael Bilirakis.

Senator Hutchison tacked an amendment denying the federal government's claim to the tobacco money onto an emergency appropriations bill. The Senate convincingly rejected an attempt on the floor to earmark a portion of the money. A barrage of calls, letters and other contacts from legislators and governors helped keep the amendment alive.

The House and Senate approved the conference report May 20, and despite his objections to the Hutchison amendment, President Clinton signed it the next day. NCSL President Dan Blue called it a "stunning affirmation of the states' place in our federal system."

Themes Remain Consistent

The details and nomenclature may have changed in 25 years, but the themes have been noticeably constant.

State legislatures, working through NCSL, have opposed federal preemption of state laws and they have fought against unfunded federal mandates. They have supported maximum flexibility for legislatures to be innovative and responsive. They have been vigilant about their prerogative to appropriate federal money, oppose federal intrusions into state revenue systems and
resist restrictions on spending.

All of the specific battles have had a cumulative effect and have provided both implicit and explicit answers to Neal Peirce's question, "What is the appropriate division of responsibilities between the state and federal governments?"

Carl Tubbesing is NCSL's deputy executive director.

Nine Defining Issues: Where Are They Now?

General revenue sharing: Each reauthorization of general revenue sharing became more difficult. The money shrank. Restrictions were added. States lost their share of revenue sharing in 1980, although local governments continued to receive it for another four years. Finally, in 1984, the program ended, a victim of tight federal budgets and changing priorities. Support continued, however, for providing federal money to the states relatively unencumbered by restrictions and conditions. In some ways, the Reagan block grants of the early 1980s and the welfare block grant of 1996 were direct descendants of general revenue sharing.

The Reagan block grants: The block grants adopted in 1981 are more or less intact. They have been vulnerable to budget cutting and have collected a variety of conditions and restrictions during their various congressional reauthorizations. Three years ago Congress renewed the Substance Abuse and Mental Health block grant, but split it into two smaller grants. It also added a long list of mandates that caused some observers to wonder whether they were really block grants any longer.

The Reagan swap: Hindsight is remarkably acute. If legislators and governors had known that health care costs would climb exponentially in the late 1980s and early 1990s, they no doubt would have taken the welfare for Medicaid deal. The devolution movement of the 1990s continued the sorting-out debate highlighted during the Reagan swap discussions.

Deductibility of state sales taxes: States suffered another loss four years after Congress eliminated the deductibility of state sales taxes. Congress' decision to cap all Form 1040 deductions eroded the value of the deduction for state and local income and property taxes. Both debates could be the precursors of even more fundamental discussions about how federal, state and local tax systems will respond to a rapidly changing world economy. An NCSL-sponsored publication dramatized this issue in 1998, Is the New Global Economy Leaving State and Local Tax Structures Behind?

Unfunded federal mandates: Adoption of the Unfunded Mandate Reform Act in 1995 clearly helped diminish new unfunded mandates on state and local governments. Since then, very few bills containing unfunded mandates have reached the floor of either the Senate or House. Even fewer have passed. NCSL currently is supporting legislation that would expand the definition of unfunded mandate to include proposed caps or reductions in federal entitlement spending.

Devolution: New Ed Flex legislation approved earlier in 1999 shifted waiver authority for some education programs from the federal government to state agencies. This continues the devolution movement, albeit modestly. Recent experiences with TANF remind legislators of how vulnerable block grants are in the appropriations process. State legislators had to mobilize quickly in March to prevent the Senate from cutting $350 million from the FY 2000 TANF appropriation.

Legislative authority over federal funds: Since the successful battle to insert the Brown amendment into welfare reform legislation, NCSL has also added it to other new laws, including the child care development block grant, welfare to work and work force training.

Preemption: Throughout 1999, NCSL has been involved in productive negotiations in the House and Senate over the contents of a federalism bill that would curtail preemption. Although the draft legislation has bipartisan support, chances of passage this year are uncertain. The 1999 negotiations, though, should set the stage for additional movement over the next several months.

Tobacco settlement: Denying the recoupment claim was a major victory for state legislators and governors and once again demonstrated their clout when they are united and galvanized. Knowing that states now will be getting the tobacco money, however, may tempt members of Congress to reduce spending on state programs. Texas Senator Kay Bailey Hutchison told a group of legislators in May that the recoupment victory is only the first of many money battles that state officials will have to fight.

Constitutional Federalism: At a Crossroads

NCSL's work in Washington over the past 25 years has not focused exclusively on Congress and the executive branch. The courts have also been a target.

In fact, the U.S. Supreme Court in the 1990s has been more sympathetic to the concerns of state officials than any branch of federal government. In a series of important decisions, the Court has given new life to 10th and 11th Amendment protections of federalism.

From the late 1930s to 1990, the Court reached a series of decisions that expanded the federal government's Commerce Clause authority and upheld federal initiatives to protect civil and privacy rights. Important cases in the 1980s-especially Garcia vs. San Antonio Transit Authority and South Dakota vs. Dole-appeared to solidify the Court's support for federal over state authority.

Then in 1992, with its decision in New York vs. United States, the Court changed direction, striking down as a violation of the 10th Amendment a federal statute regarding nuclear waste. A couple of years later, in United States vs. Lopez, the Court ruled against the Gun Free School Zones Act, finding for the first time since the 1930s that Congress had exceeded its Commerce Clause authority by intruding into a policy area traditionally reserved for the states. The Court took another dramatic step in 1996 in Seminole Tribe vs. Florida by reviving the doctrine of state sovereign immunity under the 11th Amendment. Finally in Printz vs. United States, the Court abrogated provisions of the Brady Gun Law as 10th Amendment violations. The federal government, said Justice Antonin Scalia, may not command state and local officers to administer, at states' expense, a federal regulatory program.

Despite this string of state victories, the Court remains divided on federalism questions. Most of the pro-state decisions have come with slim 5-4 majorities. And it is unclear at this point whether swing voters such as Justice Anthony Kennedy will continue to favor the states as more difficult cases are presented.

The current term of the Court may offer some indication of its future direction. Olmstead vs. L.C. and E.W. pits questions of costs and unfunded mandates for states against civil liberties for the disabled. The court will also decide three important 11th Amendment cases: Alden vs. Maine, Florida Prepaid Post-Secondary Education Expense Board vs. College Savings Bank and College Savings Bank vs. Florida Prepaid Post-Secondary Expense Board.

NCSL and state legislatures participate in these federalism cases through their support of the State and Local Legal Center, a project of NCSL, the National Governors' Association, the National League of Cities, the Council of State Governments, the National Association of Counties, the International City and County Management Association, and the U.S. Conference of Mayors.

-William T. Waren, NCSL