The less talked about, though hardly ignored, aspect of the Supreme Court’s recent Obamacare decision is the fact that the court struck down the requirement that state’s expand Medicaid coverage up to 133 percent above the federal poverty line (some states do so already), or lose their federal Medicaid funding.  The court ruled that while the federal government can provide strings for accepting new federal dollars, it cannot threaten to revoke already granted dollars if new strings are not adhered to.  The latter is deemed coercive on the part of the federal government, and thus an unconstitutional violation of state sovereignty. The ruling essentially cuts in half the number of uninsured which the law was supposedly going to give coverage.

While the court was right to strike the provision, the scope of the decision was insufficient and the distinction offered is strained and unworkable. Congress must retain the power to revisit the law creating Medicaid, as one Congress cannot legally bind a future Congress, which means there is no real mechanism to prevent them from changing the requirements on states to receive Medicaid dollars. The error of the court is in not acknowledging that all federal dollars to states are coercive, whether they come with only carrots or include an explicit stick. All federal carrots eventually turn to sticks.

Transferring federal dollars to states erodes state sovereignty, undermines one of the primary benefits of federalism (competition and innovation in policy approaches) and reduces democratic accountability. No such grants should be allowed, period.

As I previously wrote on the subject:

A fifty-five mph speed limit, promptly ignored by most motorists, was dictated to the states by passage of the 1974 Emergency Highway Energy Conservation Act.  Although the national speed limit was later repealed in 1995, numerous federal standards remain, such as the minimum ages for drinking and smoking. The federal government has largely accomplished this power grab by opening the spigot of federal dollars, then threatening to cut off any state that doesn’t kowtow to Washington’s demands.

So when a number of governors of both parties balked at taking federal money for unemployment insurance, knowing that they would be stuck with the bill of an expanded government welfare mandate when the federal funds expired, it should come as no surprise that the beltway response was to attempt to denigrate and browbeat the rogue states into compliance. Democratic Senator Charles Schumer responded to their rejection of federal funds by admonishing governors for playing “political games,” then boldly declared, “whether the governors want to or not, they can be forced to take the whole thing.” This astonishing declaration strikes at the heart of our federalist system.

…Aside from the eventual subjugation of state authority, funneling federal dollars into the states also leads to significant waste. No longer dependent on their constituents for financial support, the states become rent-seekers looking to game the federal system. This is why 250,000 Washington State residents recently received a $1 check in the mail.  As a reward for this wasteful spending, the federal government will pump into the state millions in new welfare funds. This seemingly irrational and grossly wasteful spending is encouraged by the present system, where states have financial incentives to meet federal bureaucratic rules that allow them to qualify for more funding.  The impact on the taxpayer is simply not important to the state in this calculus.

When states are offered federal dollars, it’s a lose-lose situation. Their citizens are already paying the taxes, and if one state refuses while another accepts, it means tax money is being redistributed from the more fiscally prudent state to big spending states. States, moreover, are only ever offered bribes to increase spending and regulation, but never to reduce either. In other words, it is a taxpayer funded incentive for bigger government. States that accept federal money, meanwhile, are then placed at the mercy of a federal government which can cut off funds at any time, leaving local politicians to either pick up the slack (by reducing other spending or racing taxes) or face the consequences at the polls.

Which leads to my next point. Collecting funds through federal mechanisms to be spent by states reduces politically accountability. Who do voters blame for poor results, the federal taxers or the state administrators? And what keeps either focused on the interests of voters? The goal of state lawmakers is to please the federal lawmakers that keep the money flowing, while the federal lawmakers just point to state government’s as the source of any mismanagement.

This is completely backwards from the concept of America at its founding. Taxes should be collected as locally as possible and sent up, rather than down, the political ladder. If state and local governments collected the bulk of taxes, for instance, and then had to “buy in” to the federal government, federal lawmakers would be held accountable by state governments that are closer to – and thus more easily held accountable by – the people.

States cannot be counted on to refuse the offer of federal dollars, and the mere fact that other states might and will accept penalizes them for refusing if they do. Nor is there hope that the federal government might decide on its own to stop engaging in the practice. Politicians will always seek to expand their power, which for the federal government means encroaching upon the sovereignty of the states. The cash spigot is simply too useful a tool in the pursuit of federal power to ever be turned off, and explains why the prevalence of such programs has exploded in recent decades.

The fact that the federal government can offer it at all is the problem, and the ideal solution is thus to prohibit all federal grants to states. But unless the Court can be convinced that any federal dollars are necessarily and inherently coercive to states, its Obamacare ruling will have minimal impact on the practice. A Constitutional amendment is the only real solution I see available.

For more on this issue, see this great summary by Cato’s Downsizing the Federal  Government, and related blog posts here and here.