Malo periculosam, libertatem quam quietam servitutem.

federalism Archive



October 2013



Notable Quotations

Written by , Posted in Big Government, Liberty & Limited Government

Chris Edwards, “Budget Battles Highlight Importance of Federalism:”

Outside of the military, the federal government is mainly just a giant cash transfer machine, vacuuming up taxpayer earnings and redistributing them to individuals, businesses, nonprofit groups, and state/local governments through more than 2,000 subsidy programs.


Brink Lindsey, “Kludgeocracy’s Lessons for Libertarians:”

The sad truth – sad, that is, for people like me – is that small-government rhetoric is much more popular than actual small-government policies. American public opinion, I’m sorry to say, is pretty comfortable with big government; it’s just not very comfortable with how comfortable it is.


Niall Ferguson, “Krugtron the Invincible, Part 3

“For too long, Paul Krugman has exploited his authority as an award-winning economist and his power as a New York Times columnist to heap opprobrium on anyone who ventures to disagree with him. Along the way, he has acquired a claque of like-minded bloggers who play a sinister game of tag with him, endorsing his attacks and adding vitriol of their own. I would like to name and shame in this context Dean Baker, Josh Barro, Brad DeLong, Matthew O’Brien, Noah Smith, Matthew Yglesias and Justin Wolfers. Krugman and his acolytes evidently relish the viciousness of their attacks, priding themselves on the crassness of their language.”



September 2013



End the Federal Subsidy for Big State Governments

Written by , Posted in Big Government, Liberty & Limited Government, Taxes

The relationship between federal and state governments – the division of power between the two levels being known as federalism – is an integral part of the American constitutional system. Federalism uses separate and competing spheres of sovereignty to check the growth and power of government as a whole.

Unfortunately, that system has been steadily eroded by a series of policies that have empowered the federal government, weakened states, made states dependent upon the largess of Washington, or encouraged excessive growth of state governments. As Curtis Dubay of the Heritage Foundation writes in a recent Issue Brief, the latter is accomplished in part through a federal deduction for state and local taxes that shields residents in high tax states from feeling the full cost of their bloated local governments.

Dubay writes:

The tax code allows taxpayers to deduct certain state and local taxes, including income taxes, sales taxes for residents of states that (wisely) go without an income tax, real estate taxes, and personal property taxes. State and local income taxes makes up about 95 percent of all state and local tax deductions.

…The harmful unintended consequence of the deduction is that it encourages state and local governments to raise their taxes. Higher taxes allow state and local governments to grow larger because they spend up to the maximum amount of revenue they can collect.

The deduction encourages state and local governments to raise their taxes because it transfers a portion of their tax burdens from their residents to the federal government. For instance, for every dollar a state taxes a family paying the 33 percent federal marginal tax rate, the family effectively pays only $0.67 of the state tax, because the deduction on the family’s federal taxes reduces their federal tax bill by $0.33.

This reduction in the “price” of the state’s taxes encourages states to raise their taxes higher than they otherwise would, because taxpayers offer less resistance since they do not pay the full cost of the higher taxes. Taxpayers are more willing to accept higher taxes because of the deduction in the same way consumers are more willing to buy a product or service when prices fall.

Dan Mitchell has similarly pointed to the faults in the state and local tax income tax dedication, as well as potential wrong headed solutions to its distortions:

Under current law, state and local income taxes are fully deductible, but state and local sales taxes are only temporarily deductible. The right policy is to get rid of any deductibility for any state and local tax…

Not surprisingly, the crowd in Washington doesn’t take this approach. Instead, they want to extend deductibility for the sales tax. And they may even be amenable to raising other taxes to impose that policy.

…This is a very misguided policy. It means that greedy politicians such as Governor Brown of California or Governor Cuomo of New York can raise tax rates and tell voters not to get too upset because they can deduct that additional burden. This means that a $1 tax hike results in a loss of take-home pay of as little as 65 cents.

But you don’t cure one bad policy with another bad policy. A deduction for state and local sales taxes just augments the IRS-enforced preference for bigger government at the state and local level.

Dubay further explains how eliminating the deduction would benefit tax competition and limited government:

These data show that while taxpayers in high-tax states pay a hefty amount of state and local taxes, they also see that burden reduced the most because of the deduction. If tax reform eliminated the deduction, these taxpayers would see the biggest increase in their effective state and local taxes. They would likely put the most pressure on their state and local governments to stop tax increases and apply the most pressure on those governments to reduce their high taxes.

Like Mitchell, he also notes that offsetting elimination of the deduction is essential to reform:

Eliminating the state and local tax deduction should be done only within the context of overall tax reform. Congress should not eliminate it (for instance, through “loophole closing”) without other offsetting tax changes. To do so would be an unnecessary tax increase.

The state and local tax deduction is just one of many policies distorting the federalist system and encouraging excessive government growth. Federal mandates, grants, handouts and other tax preferences also undermine tax competition and need reform.



August 2012



The Other Problem of Dependence

Written by , Posted in Big Government, Liberty & Limited Government

A lot has been said about the growing dependence of American citizens on the federal government, including in this great CF&P Economics 101 video narrated by Emily O’Neill. But there’s another kind of growing dependence about which we need to be concerned, and that’s the degree to which states are being made dependent on the federal government.

This is an issue in which I take a particular interest, considering how important our federalist and competitive system is in protecting freedom and promoting prosperity. At the time the stimulus was passed, I noted that “funneling federal dollars into the states … leads to significant waste.” I’ve also defended federalism against attack from central planners, and explained how federalism helps preserve tax competition and the ability to flee confiscatory tax rates.

Most recently, I took a rather pessimistic view of the impact of Supreme Court’s Obamacare ruling on federalism, despite it overruling the federal government’s attempted Medicaid bullying. Now Veronique de Rugy, writing in the Washington Examiner, makes a powerful case of her own:

In light of the Supreme Court’s ruling upholding the Affordable Care Act, many claim that the choice of states’ ability to opt out of Medicaid expansion requirements without losing all Medicaid funding was a big victory for federalism. That may be true, but federalism is still seriously in jeopardy.

…[T]the federal government is pouring billions of dollars each year into the states’ coffers.

…This money isn’t free. It comes with strings attached — mandates and rules dictating how the states should spend their money, what services they should provide and how they should provide it.

…These requirements weaken states’ independence, especially since the federal government can bully states into doing what it wants by threatening them with “cross-over sanctions.” The classic example was the threat to withhold highway grants for states that failed to adopt a national drinking age above 21, or adopt federal clean air requirements.

And if the funding is temporary but the requirement permanent, this “aid” becomes even more expensive. Using data from 50 states over a 13-year period, a 2010 paper by economists Russell Sobel and George Crowley shows that temporary grants from the federal government to state and local governments cause the latter to increase their own future taxes by between 33 and 42 cents for every dollar in federal grants received.

Limiting the combined state and federal size of government will require returning to a strong federalist model, where states are again autonomous bodies responsible for the bulk of governance, and more importantly thus constrained by the forces of tax competition. The current trend toward greater and greater state reliance on the federal gravy train to administer federally mandated programs is politically, fiscally and economically untenable.



July 2012



Medicaid and Federalism

Written by , Posted in Big Government, Health Care, Welfare & Entitlements, Liberty & Limited Government, The Courts, Criminal Justice & Tort

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.



February 2012



Federalism vs. Eminent Domain

Written by , Posted in Big Government, Legislation, Liberty & Limited Government

The issue of eminent domain and the outrageous Kelo decision are what first drove me to start blogging. The idea that government goons could legally force people off their property for the benefit of private entities was enough to get my blood boiling – and still does. Thankfully, most states reacted to the troubled decision by enacting eminent domain protections, though not all were effective and many problems still remain.

Being debated before Congress today is the Private Property Rights Protection Act of 2012, a bill with bipartisan support which would prohibit a state “from exercising its power of eminent domain … over property to be used for economic development … if the state or political subdivision receives federal economic development funds during any fiscal year in which the property is so used or intended to be used.” Sounds wonderful, right? Well, not really.

I’ve written many times about both the benefits of federalism and the dangers of granting the federal government the right to use the disbursement of dollars to force states into specific policy choices. Such use of taxpayer money undermines the idea of separate jurisdictions of government authority, and the benefits we derive from it (the separation of powers between state and federal governments is equally as important as that between the executive, legislative and judicial branches), rendering the states as little more than regional magistrates of a central authority on which they are financially dependent. Ideally, the federal government should be sending no money to the states.

Without the jurisdictional competition of federalism, most people would see the majority of political decisions impacting their lives as being made in a far off Capitol completely out of touch with the challenges they face on a daily basis. The bill also “prohibits the federal government from exercising its power of eminent domain for economic development,” which I wholeheartedly support, but it is not the place of the federal government to force states to do the same. That is the responsibility of the citizens and elected bodies of the respective states.



November 2010



A Sign of the Times

Written by , Posted in Big Government, The Nanny State & A Regulated Society

Management of roads used to be the business of local governments – that is, until the federal government dangled its grant money over the states as leverage.  Now, thanks to this usurpation of authority, we have stories like this:

…[T]he Federal Highway Administration is ordering all local governments — from the tiniest towns to the largest cities — to go out and buy new street signs that federal bureaucrats say are easier to read.

The rules are part of a tangle of regulations included in the Manual of Uniform Traffic Control Devices.

The 800-plus page book tells local governments they:

– Should increase the size of the letters on street signs from the current 4 inches to 6 inches on all roads with speed limits over 25 miles per hour. The target date for this to be completed is January 2012.

– Install signs with new reflective letters more visible at night by January 2018.

– And whenever street name signs are changed for any reason, they can no longer be in ALL CAPS.

Why is the federal government ordering local governments, already strapped for cash, to waste millions on unnecessary sign changes? This might have something to do with it:

Whether or not requiring cities and towns to replace all their street signs improves safety, it would undoubtedly be a windfall for the multi-billion-dollar-a-year sign industry.

The American Traffic Safety Services Association — which represents companies that make signs and the reflective material used on them — lobbied hard for the new rules.  And at least one key study used to justify the changes was funded by the 3M Corporation, one of the few companies that make the reflective material now required on street signs.

Contrary to the claims of statists, it is big government and not the free markets which favors big business. Without a centralized authority capable of making such dictates, rent seeking sign makers would have had to successfully lobby every local government in the nation to achieve this same payout, a feat they would not have been able to accomplish.



July 2010



LeBron's Migration Mirrors That Of The Broader Public

Written by , Posted in Economics & the Economy, Taxes

Basketball is not my sport of choice, so I had no vested interest in the outcome of the recent drama surrounding LeBron James.  Even though I still consider Florida my home state, I don’t care that he’s chosen to play in Miami.  I am, however, struck by the degree to which LeBron’s decision mirrors that of so many ordinary Americans and businesses.  Namely, I note that he’s spurned high tax jurisdictions for income-tax free Florida.

Obviously, LeBron made his decision on more than just economic factors, though it’s fair to say that pay and other monetary factors mattered to some degree.  Although the sports community narrative involves James joining basketball super stars Wayne and Bosh – as well as some cries about the fairness of this team construction – the fact that all came together in Florida shouldn’t come as any surprise.  From 1999-2008, more Americans have migrated to the zero-income-tax-having Sunshine State than any other.  Meanwhile, the other states involved in the LeBron saga – Ohio, Illinois and New York – are 3 of the bottom 6 in net migration, with more Americans fleeing New York than any other state in the union.

These patterns should not come as any surprise when you contrast Florida’s lack of an income tax with the top marginal rates of Ohio (7.93%), Illinois (3.0%) and New York (12.62%).  But perhaps more importantly is the degree to which businesses are motivated by the same considerations.  Corporate taxes and regulatory environments shape corporate decisions every day, with states like New York and California increasingly driving businesses away as they look for more favorable environments.  This kind of tax competition is an important check on bad government policy, but it can be painful when you’re in one of the states being driven into the ground by short-sighted politicians.  While LeBron James just might have considered these factors in his decision, that ordinary Americans and businesses do is without question – and the consequences for high tax jurisdictions are as clear as Cleveland’s outrage.



June 2010





March 2010



State Legislators Standing Up For Federalism

Written by , Posted in Health Care, Welfare & Entitlements

The president of the Utah Senate and the speaker of the Utah House of Representatives recently took to the pages of the Washington Post to lay out a “modest proposal.” While their ideas are modest in a historical context, the sad irony is that what they propose is quite radical for the modern era. Simply put, they want the federal government to butt out and let Utah take care of Utah.

The two Utah legislators, Michael G. Waddoups and David Clark, propose to have the state take over completely several programs, such as education and Medicaid, which are currently influenced by both state and federal policy.  They argue that the strings which come with federal dollars for these programs are onerous and promote inefficiency.  They’d rather those dollars be kept in the state to begin with, instead of first being funneled through federal bureaucracies, only to return with strings that threaten state sovereignty.

Hear, hear.

I’ve written in the past about the destructive consequences of allowing the federal government to abuse its tax and spending power in order to cajole states into adopting its preferred policies. Such a system wastes money, distances tax payers from their local governments, and undermines the federalist system which has served us so well.

Utah isn’t the only state talking about restoring federalism. Alabama Governor Bob Riley recently signed a resolution reaffirming the long-ignored Tenth Amendment. While not legally binding, the resolution ought to serve notice that the states are not longer rolling over to federal demands.  Other states have similar measures at various stages of the legislative process.

It’s about time that state lawmakers stand up and say that they’d rather not take federal dollars at all. They deserve support, because this is not an easy position to take. Too often the states are complicit in the erosion of their own authority as they run hat-in-hand to the federal government for more money. Perhaps now they are realizing that sacrificing long-term governing authority for immediate political expediency is a bad bargain.



December 2009



Expanding Entitlements Does Not Save Money

Written by , Posted in Health Care, Welfare & Entitlements

An incredible story out of West Virginia contends that expanding Medicaid will save money.

West Virginia’s health-care system could save up to $2.2 billion a year beginning in 2014 with an aggressive expansion of Medicaid and other health reforms, according to an actuarial report presented to state legislators Monday.

How will this magic happen? Everything will work out because the Fed’s are footing the bill!

States will eventually be asked to pay for Medicaid expansion, and that is likely to cost West Virginia nearly between $40 million and $50 million a year, Bryant said. But the federal government would pick up the tab for the first two years.

“It is remarkable the amount of money that the federal government is considering putting into the expansion of Medicaid,” he told lawmakers at an interim legislative meeting.

Saying that this will “save” West Virginia money is an accounting trick.  The (temporary) money coming in from the federal government has to come from somewhere, and that somewhere is the taxpayers.  This includes, obviously, West Virginians.

This is another example of the destructive influence of federal dollars on state policy.