O'Toole, Laurence J., and Robert K. Christensen. (2013). American Intergovernmental Relations
19. For the -15 17-Foundations, Perspectives, and Issues. Washington, DC: CQ Press. Chapter 14
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Budgetary Federalism in the United States of America
Author(s): Laurence Claus
Source:
The American Journal of Comparative Law
, Autumn, 2002, Vol. 50,
Supplement: American Law in a Time of Global Interdependence: U. S. National Reports
to the 16th International Congress of Comparative Law (Autumn, 2002), pp. 581-592
Published by: Oxford University Press
Stable URL: https://www.jstor.org/stable/840890
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LAURENCE CLAUS
Budgetary Federalism in the
United States of America
The United States Constitution creates a federal government
with broad powers to tax and spend, but purports to limit that gov-
ernment's regulatory power to a modest series of subjects.l Foremost
among those subjects is a power "[t]o regulate Commerce with foreign
Nations, and among the several States, and with the Indian Tribes."2
From the New Deal to the nineties, the commerce power was con-
strued by the United States Supreme Court through the prism of an
expansive "effects" enquiry to confer almost plenary regulatory au-
thority upon the United States Government.3 For so long as that in-
terpretation persisted, the potential for indirect regulation via the
exercise of federal fiscal powers seemed somewhat superfluous. As
one commentator observed: "If the front door of the commerce power
is open, it may not be worth worrying whether to keep the back door
of the spending power tightly closed."4
The world changed in 1995, when the Supreme Court struck
down a federal law prohibiting firearm possession near schools as not
authorized by the federal power to regulate interstate and foreign
commerce.5 Three days after the Court's decision was delivered, Pres-
ident Clinton signaled that the federal government would seek to
achieve precisely the same regulatory result via conditional pay-
ments to the states.6 Of little interest for more than half a century,
the constitutionality of conditions on federal spending was suddenly
interesting again.
In the meantime, federal payments to state and local govern-
ments had risen exponentially. In 1943, such payments totaled $991
million. In 1993, they exceeded $195 billion.7 All federal spending is,
LAURENCE CLAUS is Assistant Professor, University of San Diego School of Law.
1. U.S. Constitution Art.I ? 8.
2. U.S. Constitution Art.I ? 8 cl. 3.
3. See, for example, Wickard v. Filburn 317 U.S. 111 (1942).
4. Rosenthal, "Conditional Federal Spending and the Constitution," 39 Stan. L.
Rev. 1103, 1131 (1987).
5. United States v. Lopez, 514 U.S. 549 (1995).
6. Todd S. Purdum, "Clinton Seeks Way to Retain Gun Ban in School Zones,"
N.Y. Times, Apr. 30, 1995, at Al.
7. See Baker, "Conditional Federal Spending after Lopez," 95 Colum. L. Rev.
1911, 1918 n. 24 (1995), citing Bureau of the Census, U.S. Dept. of Commerce, Histor-
581
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THE AMERICAN JOURNAL OF COMPARATIVE LAW
as it must be, conditional, for the constitutional obligation to spend
only "in Consequence of Appropriations made by Law"8 contemplates
that spending will always have an articulated subject. But in view of
the Court's since-reaffirmed resolve to craft effective limits upon Con-
gress's power of direct regulation,9 what limits there may be upon
Congress's power of indirect regulation via taxing and conditional
spending matters much more than it once did. In particular, it mat-
ters more than it did when the Court last considered the question.10
An increasing federal dependence upon federal-state fiscal relations
to achieve federal regulatory goals makes constitutionality of condi-
tions on taxing and spending a salient issue for American federalism
in the twenty-first century.
I. FEDERAL TAXATION AND ITS LIMITS
The national powers to tax and spend derive from the following
constitutional text:
Congress shall have Power To lay and collect Taxes, Duties,
Imposts and Excises, to pay the Debts and provide for the
common Defense and general Welfare of the United States;
but all Duties, Imposts and Excises shall be uniform
throughout the United States[.]11
The taxing power so conferred is largely concurrent with that of the
state governments. The federal government is, however, prohibited
from imposing export duties, and the state governments' power to im-
pose import or export duties is strictly limited.12 Under contemporary
doctrine, the two levels of government are, to different degrees, pre-
cluded from taxing each other, and the current major sources of fed-
eral revenue must be raised by measures which are relevantly
"uniform throughout the United States."
A. Intergovernmental immunity
Under the principles set forth in Supreme Court's taxation im-
munity decisions since New York v. United Statesl3 and its neighbor-
ing cases,14 the federal government enjoys the benefit of an absolute
prohibition of state taxes the legal incidence of which would fall upon
ical Statistics of the United States, Colonial Times to 1970, Pt. 2, at Y20410 (1975)
and Bureau of the Census, U.S. Dept. of Commerce, Statistical Abstract of the United
States, 1994, at 279 (table 432) (114th ed. 1994).
8. U. S. Constitution Art.I ? 9 cl.7.
9. See United States v. Morrison, 120 S.Ct. 1740 (2000).
10. South Dakota v. Dole, 483 U.S. 203 (1987).
11. U.S. Constitution Art.I ? 8 cl.1.
12. U.S. Constitution Art.I ?? 9 cl. 5 and 10 cl. 2.
13. 326 U.S. 572 (1946).
14. Helvering v. Gerhardt, 304 U.S. 405 (1938); Graves v. New York; ex rel.
O'Keefe, 306 U.S. 466 (1939).
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BUDGETARY FEDERALISM
it. That immunity has been upheld consistently since M'Culloch v.
Maryland.15 Prohibition of state taxes the legal incidence of which
falls upon others in respect of, or by virtue of, dealings with the fed-
eral government is now confined to instances where state taxes single
out those others for discriminatory taxation on the basis of their rela-
tionship with the federal government. The Court has also recognized
that the federal government has authority, as an implication of the
supremacy clause,16 to enlarge or diminish the scope of immunity
from state taxation on itself or those with whom it deals, and so effec-
tively may immunize those with whom it deals even from nondiscrim-
inatory state taxes which would otherwise be applicable in respect of
their dealings with it.
State immunity from federal taxation is limited to the two limbs
emerging from New York v. United States-an absolute prohibition of
discriminatory federal taxes, whether their legal incidence be on the
states or on those with whom states deal on the basis of those deal-
ings, and a prohibition of federal taxes which in the Court's view
would actually have the effect of impairing the states' existence or
capacity to function. These principles were most recently set forth by
the Court in South Carolina v. Baker,17 in which a majority upheld
nondiscriminatory federal taxation of interest earned on state and lo-
cal government bonds, overruling Pollock v. Farmers' Loan & Trust
Co. 18 That case had escaped earlier burial only because at all times
since the New Deal, when those earning income under other kinds of
contract with state governments had been divested of immunity from
nondiscriminatory federal taxation, state bond interest had enjoyed
federal statutory exemption from such taxation.19
Most post-New York tax immunity decisions have concerned fed-
eral tax immunity, and in them the Court has considered whether
particular state tax regimes had their legal incidence on the federal
government, or merely on persons with whom it dealt, and if the lat-
ter, whether the tax regimes discriminated against those persons on
the basis of their dealings with the federal government.20 In Wash-
15. 4 Wheat. 316 (1819).
16. U. S. Constitution Art. VI ? 2.
17. 485 U.S. 505 at 518 n.11, 523 (1988) per Brennan, J. (majority opinion of the
Court). Brennan also suggested that the second limb of New York could never extend
to taxes levied on those with whom state governments dealt: 523 n. 14.
18. 157 U.S. 429 (1895).
19. Baker, 485 U.S. 505, 523 (1988).
20. See Oklahoma Tax Commission v. Texas Co, 336 U.S. 342, 362-366 (1949);
United States v. City of Detroit, 355 U.S. 466 (1958), United States v. Township of
Muskegon, 355 U.S. 484 (1958), and City of Detroit v. Murray Corporation, 355 U.S.
489 (1958); United States v. County of Fresno, 429 U.S. 452, 453 (1977); United States
v. New Mexico, 455 U.S. 720, 733-737 (1982); Davis v. Michigan Department of Trea-
sury, 489 U.S. 803 (1989); California State Board of Equalization v. Sierra Summit,
490 U.S. 844 (1989).
2002]
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THE AMERICAN JOURNAL OF COMPARATIVE LAW
ington v. United States,21 for example, Justice Rehnquist's majority
opinion upheld a state tax imposed exclusively on the sale of building
materials to contractors engaged in construction projects on federal
land. In respect of construction projects on other land, a tax at the
same rate was imposed on the landowner by reference to the project's
cost to that owner. "The net result," his Honor observed, "is that for
federal projects the legal incidence of the tax falls on the contractor
rather than the landowner, and the tax is measured by a lesser
amount than the tax on nonfederal projects, because the contractor's
labor costs and markup are not included in the tax base."22 The fed-
eral government argued that the tax on federal contractors was dis-
criminatory because it applied to no one else. The Court responded
that in determining whether such a tax had a discriminatory charac-
ter, it could not be considered in isolation. There had to be "an exami-
nation of the whole tax structure of the state,"23 because "[t]he State
does not discriminate against the Federal Government and those
with whom it deals unless it treats some one else better than it treats
them."24 The rationale for the prohibition on discrimination was de-
scribed by the Court as fairness to the federal government:
A "political check" is provided when a state tax falls on a
significant group of state citizens who can be counted upon
to use their votes to keep the State from raising the tax ex-
cessively, and thus placing an unfair burden on the Federal
Government. It has been thought necessary because the
United States does not have a direct voice in state
legislatures.25
This reasoning really suggested that the federal government's
constitutional immunity from State taxes imposed directly upon it
should be confined to circumstances of discrimination. The majority
did not dispute that the federal government in fact enjoys a blanket
immunity, to which the no-discrimination-against-contractors rule is
a mere corollary. Surely the point of that corollary is to prevent pre-
cisely what the State of Washington was trying to do, namely, to im-
pose a tax on persons with whom the federal government dealt
specifically to effect an imposition upon the federal government
which, but for federal immunity, would have been effected directly.
The purpose of intergovernmental immunity is not to promote "fair-
ness," but to reduce the risk of state taxation undermining relational
imperatives of the federal system. If the majority thought that risk
insufficient to warrant absolute federal immunity, then they should
21. 460 U.S. 536 (1983).
22. Id. at 539-40.
23. Id. at 542, 545 (quoting Tradesmens National Bank v. Oklahoma Tax Com-
mission, 309 US 560, 568 (1940)).
24. Id. at 544-545.
25. Id. at 545.
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BUDGETARY FEDERALISM
have said so directly, rather than subverting the immunity
indirectly.26
Justice Blackmun's dissent, joined by White, Marshall and Ste-
vens, JJ., refused to take the "total structure of taxation" approach to
the question of discrimination. For them the legal incidence of the
particular tax under challenge was all that mattered:
[H]ere, contractors for the Federal Government are singled
out for a special tax that applies to no other contractor
within the State ... It necessarily follows that the tax vio-
lates the Supremacy Clause ... To hold otherwise, by mea-
suring the perceived economic burden, demeans the
principle of McCulloch v Maryland.27
In their view "[t]he Supremacy Clause does not merely guarantee
equality; it absolutely immunizes the contractors and lessees of the
United States from discriminatory state taxation."28
In relation to state immunity from federal taxation, Justice
Brennan's majority opinion in South Carolina v. Baker29 recounted
the two limbs recognized in New York v. United States,30 but declined
to affirm their ongoing vitality. In two footnotes he implicitly cast
doubt on at least the second limb of the New York principle, which
condemns nondiscriminatory federal taxes that actually do what the
first limb no-discrimination rule is meant to stop, namely interfere
unduly with state sovereignty. "To some," Brennan opined, "Garcia v
San Antonio Metropolitan Transit Authority, 469 US 528 (1985), may
suggest further limitations on state tax immunity. We need not, how-
ever, decide here the extent to which the scope of the federal and
state immunities differ or the extent, if any, to which States are cur-
rently immune from direct nondiscriminatory federal taxation."31
26. In North Dakota v. United States, 495 U.S. 423, 445 (1990), Justice Scalia
observed: "As a matter of principle, if (as we recognized in Washington) the Federal
Government has a constitutional entitlement to its immunity from direct state taxa-
tion, then it seems to me the State cannot require it to 'pay' for that entitlement by
bearing the burden of an indirect tax directed at it alone. And as a matter of practical-
ity, a jurisdictional issue (the jurisdiction to tax) should not turn upon a factor that is,
as a general matter, so difficult to calculate as the Federal Government's 'net'
position."
27. Id. at 548.
28. Id. at 554.
29. 485 U.S. 505 (1988).
30. 326 U.S. 572 (1946).
31. 485 U.S. 505, 518 n. 11 (1988). See also 523 n. 14: "We need not concern our-
selves here, however, with the extent to which, if any, States are currently immune
from direct federal taxation.... For our purposes, the important principle New York
reaffirms is that the issue whether a nondiscriminatory federal tax might nonetheless
violate state tax immunity does not even arise unless the Federal Government seeks
to collect the tax directly from a State." In Massachusetts v. United States, 435 U.S.
444 (1978), Justice Brennan wrote a plurality opinion upholding imposition of a fed-
eral aircraft registration tax upon a state in respect of its police helicopters. Factors
held relevant to the Court's decision were that the tax was nondiscriminatory, apply-
2002]
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THE AMERICAN JOURNAL OF COMPARATIVE LAW
Garcia eliminated a constitutional limitation upon application to
state governments of federal regulations enacted under the commerce
power,32 and has since in turn been partially overruled.33
B. Uniformity throughout the United States
The current major sources of federal revenue, notably federal in-
come taxes, are subject to the constitutional requirement of uniform-
ity throughout the United States. "Direct" taxes are not subject to it,
for the Constitution requires of them a different kind of uniformity,
namely uniformity of amount per counted person.34 In Pollock v.
Farmers' Loan and Trust Co.,35 the Supreme Court distinguished be-
tween taxation of income derived from property (that is, taxation of
rents, dividends and interest), which it held to be "direct", and taxa-
tion of income derived from activity ("professions, trades, employ-
ments, or vocations"36), which it held to be indirect. The Court had
recognized as early as 1796 that compliance with the apportionment
requirement was a formidable obstacle to direct taxation,37 and the
breadth Pollock gave to "directness" prompted the sixteenth amend-
ment.38 Chastened, the Court decided to treat all federal income
taxes as "indirect" and therefore subject to the uniformity require-
ment of Art. 1 ? 8 c.1..39 This outcome was consistent with Justice Ire-
dell's view in 1796 that if a federal tax did not neatly fit within the
Constitution's "direct" category nor within the terms "duty", "impost"
or "excise", then a background principle of uniformity, expressed in
respect of duties, imposts and excises, would apply.40
What does uniformity require? In 1983 a unanimous Court con-
cluded: "the Uniformity Clause requires that an excise tax apply at
the same rate, in all portions of the United States where the subject
of the tax is found."41 The Court proceeded to uphold a tax exemption
for oil produced "(1) from a reservoir from which oil has been pro-
duced in commercial quantities through a well located north of the
ing to private and federal aircraft too, and that it was not excessive in relation to the
cost of benefits accruing to all aircraft users from federal supervision of the airways.
32. See National League of Cities v. Usery, 426 U.S. 833 (1976).
33. New York v. United States, 505 U.S. 144 (1992); Printz v United States, 521
U.S. 898 (1997).
34. See Art.I ? 2 cl.3 and Art.I ? 9 cl.4.
35. 157 U.S. 429 and 158 U.S. 601 (1895).
36. 158 U.S., at 637.
37. See Hylton v. United States, 3 U.S. (3 Dall.) 171 (1796), particularly the opin-
ions of Paterson and Iredell, JJ.
38. "Congress shall have power to lay and collect taxes on incomes, from whatever
source derived, without apportionment among the several States, and without regard
to any census or enumeration."
39. Brushaber v. Union Pacific Railroad Co., 240 U.S. 1, 18-19 (1916). For back-
ground commentary, see Ackerman, "Taxation and the Constitution," 99 Colum. L.
Rev. 1, 40-41 (1999).
40. Hylton v. United States, 3 U.S. (3 Dall.) 171, 181 (1796).
41. United States v. Ptasynski, 462 U.S. 74, 84 (1983).
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BUDGETARY FEDERALISM
Arctic Circle, or (2) from a well located on the northerly side of the
divide of the Alaska-Aleutian Range and at least 75 miles from the
nearest point on the Trans-Alaska Pipeline System."42 In a decision
which the Court has never cited since, it endorsed this explicit tax
discrimination in favor of a region of one state (plus some rather
chilly territorial waters) on the ground that Congress had been moti-
vated by "neutral factors"43 and did not thereby accomplish "actual
geographic discrimination."44
But of course Congress did. To be sure, earlier cases had not set-
tled what distinctive physical features of territory could "neutrally"
enter the subject of taxation. (Could "proximity to a Grand Canyon"
be a valid criterion of liability?) But the distinctive physical feature of
falling within specified location coordinates on the earth's surface is
the minimum that geographical definition can mean. If Congress can
validly define its subject of taxation by reference to the geographical
location of that subject's incidence, then calling the Constitution's re-
quirement of uniformity "geographical" makes no sense at all.
If Ptasynski is not to deconstruct the uniformity clause com-
pletely, the case must be authority that geography is not a protected
aspect of the states' identities for purposes of the clause. Congress
had clearly departed from geographical uniformity, but this did not
violate a requirement of uniformity "throughout the United States."
What, then, really defines state identity for purposes of the uniform-
ity clause? The Ptasynski Court did hint at an answer. The discrimi-
natory exemption at issue was, the Court observed, "not drawn on
state political lines."45 The Court implied that the evil which the uni-
formity clause precludes is discrimination by reference to a state's
political identity.
What is a state's political identity? The bundle of policies it con-
stitutionally chooses to maintain, from its name and flag down to its
arrangements for education, healthcare, policing et cetera. What
states do is who they are. Whatever the merits of Ptasynski's disre-
gard of geographical uniformity, the case supports a conclusion that
Congress may not insert a state's policies among criteria for liability
to federal taxation. Of course, place names are just policies, but are
sufficiently immutable to serve as reliable proxies for other place
characteristics. The Court held that states or parts of states may be
explicitly picked out by Congress for different tax treatment, so long
as the Court is satisfied that the different treatment is rational and
not prompted by those states' political identities. But if the criterion
for different treatment is location, and the courts cannot find any
42. 26 U.S.C. ? 4994(e), defining "exempt Alaskan oil" (exempted by 26 U.S.C.
? 4991(b)(3)). See 462 U.S. at 77.
43. 462 U.S., at 85
44. Id.
45. Id. at 78.
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THE AMERICAN JOURNAL OF COMPARATIVE LAW [Vol. 50
"neutral" basis for the different treatment, then discrimination is ei-
ther irrational or based on states' political identities.
For a prohibition of taxing by reference to state political identity
to enjoy any efficacy, it must preclude not only conditions which ex-
plicitly reference state policy, but also any other fact conditions ex-
plicitly referenced to state identity (conditions in the form "in states
which .. ."46). Taxation of any legitimate subject is possible without
explicit reference to the subject's location in a state. The only reason
for resort to such a form of condition is to introduce to the subject of
taxation an unrelated factual proxy for state policy.
This reading of Ptasynski does produce some inconsistency with
earlier authority, notably the Court's validation of federal tax credits
for state taxes paid.47 The outcome in Ptasynski is, however, irrecon-
cilable with earlier authority on any reading,48 and a plausible inter-
pretation of the case which affords the uniformity clause some
substance is to be preferred to an interpretation which affords it
none.
If Congress cannot impose different tax rates on states or their
citizens by explicit reference to state policy, it follows that Congress
cannot afford rebates to taxpayers by reference to state policy. But if
state policy conditions cannot be attached to the return of tax pro-
ceeds through rebates, can they be attached to the return of tax pro-
ceeds through spending programs?
II. FEDERAL SPENDING AND ITS LIMITS
The national power to spend derives from the Constitution's au-
thorization of taxation "to pay the Debts and provide for the common
Defence and general Welfare of the United States."49 What limitation
upon federal spending is imposed by the requirement that it be for
46. I am indebted to Nick Quinn Rosenkranz for this description of the prohibited
form.
47. See Florida v. Mellon, 273 U.S. 12 (1927).
48. See Knowlton v. Moore, 178 U.S. 41 (1900).
49. U.S. Constitution Art.I ? 8 cl.1. See South Dakota v. Dole, 483 U.S. 203, 207
(1987). For an argument that the power to spend beyond the subjects of federal regu-
latory power actually has its home in Article IV ? 3 cl. 2 ("The Congress shall have
Power to dispose of and make all needful Rules and Regulations respecting the Terri-
tory or other Property belonging to the United States; and nothing in this Constitu-
tion shall be so construed as to Prejudice any Claims of the United States, or of any
particular State.") see Engdahl, "The Basis of the Spending Power," 18 Seattle L. Rev.
215 (1995). Professor Engdahl argues that Art. I ? 8 cl.1 only confers a power to tax,
but even if he is right that the provision just requires taxation to have the purpose of
paying the debts and providing for the common defense and general welfare of the
United States, the provision is breached if the proceeds of taxation are not so spent.
Moreover, authors of the antecedent Articles of Confederation deployed the same lan-
guage of common defense and general welfare to qualify an unambiguous power to
spend, which supports resolution of Article I's ambiguity in favor of a similarly-lim-
ited power to spend. See Articles of Confederation, Art. VIII: "All charges of war, and
all other expences that shall be incurred for the common defence or general welfare,
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BUDGETARY FEDERALISM
the "common Defence and general Welfare of the United States"?
Under current doctrine, none. The Court in South Dakota v. Dole re-
lied on Justice Cardozo's analysis in Helvering v. Davis for the pro-
position that "courts should defer substantially to the judgment of
Congress,"50 and added a footnote in which it said: "The level of defer-
ence to the congressional decision is such that the Court has more
recently questioned whether 'general welfare' is a judicially enforcea-
ble restriction at all."51 The Court upheld the validity of federal legis-
lation52 which directed the Secretary of Transportation to withhold
5% of federal funds otherwise payable for highway construction from
any state "in which the purchase or public possession ... of any alco-
holic beverage by a person who is less than twenty-one years of age is
lawful."
I have argued elsewhere that the Dole Court misread Justice
Cardozo's reasoning in Helvering v. Davis53 and Steward Machine
Co. v. Davis,54 and that the Court's decisions in those earlier cases
are entirely consistent with a constitutional requirement that federal
spending be common and general in the same sense as that in which
taxation is uniform.55 Given the obverse relation of taxing and spend-
ing, a requirement not to discriminate by reference to a particular
prohibited criterion when taking through taxation is eviscerated by
freedom to discriminate by reference to that criterion when giving
back through spending. If the uniformity required of taxation pre-
cludes explicit state policy conditions, then an inference is invited
that the commonality and generality required of spending precludes
explicit state policy conditions. If explicit state policy and factual
proxy ("in states which"...) conditions are unconstitutional, Congress
could still achieve substantial regulatory effects through its spend-
ing, but not upon any subject factually unrelated to the spending.
This argument was not made to the Dole Court, and the limitations
upon federal spending which that Court did recognize had their vacu-
ity proved by the outcome of the case.
After expressing an unremarkable clear statement rule,56 the
Dole Court indicated that conditions on spending had to relate "to the
federal interest in particular national projects or programs,"57 that
other constitutional provisions might impose "an independent bar to
and allowed by the united states in congress assembled, shall be defrayed out of the
common treasury ... ."
50. 483 U.S. at 207.
51. Id. at 207 n. 2.
52. 23 U.S.C. ? 158.
53. 301 U.S. 619 (1937).
54. 301 U.S. 548 (1937).
55. See Claus, "'Uniform throughout the United States': Limits on taxing as lim-
its on spending," 18 Constitutional Commentary (forthcoming).
56. 483 U.S. 203, 207. Cf. Gregory v. Ashcroft, 501 U.S. 452, 460-64 (1991).
57. Id. 207-08 (quoting Massachusetts v. United States, 435 U.S. 444, 461 (1978)).
589
20021
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THE AMERICAN JOURNAL OF COMPARATIVE LAW
the conditional grant of federal funds,"58 and that some conditions
might shift some spending from permissible persuasion to (appar-
ently) impermissible coercion.59
The "relatedness" requirement was treated by the Court as an
enquiry into whether conditions on spending address the same sub-
ject as the spending.60 Disagreement between the majority and Jus-
tice O'Connor turned on the necessary degree of congruence between
the subject of the condition and the subject of the spending.61 The
majority's tolerance of explicit state policy conditions left no coherent
line to draw, and so, unsurprisingly, the majority did not find any
line transgressed. The original source of a "relatedness" spending
principle is Steward Machine Co. v. Davis,62 and the context in which
Justice Cardozo spoke of relatedness there reveals that he was ad-
dressing more than congruence of subject matter. He questioned the
constitutionality not of a condition on federal spending unrelated to
the subject of the spending, but of a condition "unrelated in subject
matter to activities fairly within the scope of national policy and
power."63 In other words, Cardozo questioned conditions unrelated in
subject matter to activities fairly within the scope of what the na-
tional government both plans to do (national policy) and can do (na-
tional power). The relation required by Cardozo was to whatever the
national government is doing. The national government may condi-
tion its implementation of a program upon whether states would
rather implement the program themselves in conformity with na-
tional policy. What the national government should not be able to do
is condition benefit to the people of a state upon their state govern-
ment implementing a federal proposal. States may volunteer to be
deputized to collect taxes and dispense benefits in accordance with a
federal program, but it must be a federal program, which is going to
be implemented for the benefit of the citizens whether their state gov-
ernments choose to be involved or not. Thus Cardozo's relatedness
requirement stands guard against federal conditions which make
benefit to the citizens of a state turn on state policy. Such conditions
would deprive citizens of non-compliant states of their share of fed-
eral benefits, and so destroy the generality of federal spending.
58. Id. at 208.
59. Id. at 211.
60. The Court framed the enquiry as concerning the extent to which conditions
relate to the purpose of spending (id. at 208 n. 3) but it must have meant the subject of
spending, as a purpose enquiry has nowhere to look but to the conditions on which
spending is offered, and affords no basis for privileging the conditions concerning how
the money is to be spent over other conditions on payment. The latter may well ex-
press the primary purpose of the whole exercise.
61. Id. at 208 n. 3, 213-18.
62. Id. at 212-13 (O'Connor, J., dissenting).
63. 301 U.S. at 590 (emphasis added).
590 [Vol. 50
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BUDGETARY FEDERALISM
As to the Dole Court's reference to other constitutional provisions
potentially imposing "an independent bar to the conditional grant of
federal funds," the Court failed to explain adequately why the tenth
amendment was not implicated.64 If Congress denies the people of a
state a benefit because of the way in which their state government
exercises a power reserved to it by the tenth amendment, why is that
amendment not violated? The Court cited earlier decisions for the
proposition that "a perceived Tenth Amendment limitation on con-
gressional regulation of state affairs d[oes] not concomitantly limit
the range of conditions legitimately placed on federal grants."65 Limi-
tations on the spending power certainly have nothing to do with
state-immunity doctrine, but neither does the tenth amendment.
Subsequently, in Washington Airports v. Noise Abatement Citizens,66
Justice Stevens, for the majority, wrote: "Nothing in our opinion in
Dole implied that a highway grant to a State could have been condi-
tioned on the State's creating a 'Highway Board of Review' composed
of Members of Congress."67 If conditional spending cannot be used to
circumvent the separation of powers, why can it be used to circum-
vent the tenth amendment? The Court's answer in the later case was
effectively that the separation of powers matters more than
federalism.68
After adverting to the straw man of coercion, the Dole Court had
little difficulty knocking it down. On the facts of Dole, the threatened
loss of 5% of the federal highway funds otherwise payable did not
make a state's choice to keep its drinking age under 21 impossible.
But it did discriminate against the people of that state on the basis of
a policy which their state government was constitutionally entitled to
maintain. The Dole Court's signal that a federal spending program
which really did compel compliance with its conditions would be inva-
lid seems misconceived. In the federal spending context, degrees of
duress derive not from the nature of attached conditions, but from
the extent of a state's need for proffered funds. Genuine need of fed-
eral funding is surely the paradigm case for federal spending. It
makes little sense to say that the same condition leaves spending
constitutional if the payment does not promote Defence and Welfare
much, but renders spending unconstitutional if the payment pro-
motes Defence and Welfare a lot. Moreover, if illegal duress is given
the conceptually coherent definition of a forced choice between legal
64. The tenth amendment to the United States Constitution reads: "The powers
not delegated to the United States by the Constitution, nor prohibited by it to the
States, are reserved to the States respectively, or to the people."
65. 483 U.S. at 210.
66. 501 U.S. 252 (1991).
67. Id. at 271.
68. Id.
2002]
591
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592 THE AMERICAN JOURNAL OF COMPARATIVE LAW [Vol. 50
rights, then conditional federal spending is never illegally coercive,
because Congress has no legal duty to spend at all.
CONCLUSION
The constitutionality of explicit state policy conditions on federal
spending, whether that spending take the form of payments to the
states or of payments to their citizens, is set to become the next great
subject of federalism litigation in the United States of America.
Doubtless the Supreme Court will be invited to reconsider its cursory
treatment of the issue in Dole, and may well accept the invitation
when it hears the case that has yet to be made to it.
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The Federal Role in State Fiscal Stress
Author(s): Steven D. Gold
Source:
Publius
, Summer, 1992, Vol. 22, No. 3, The State of American Federalism, 1991-
1992 (Summer, 1992), pp. 33-47
Published by: Oxford University Press
Stable URL: https://www.jstor.org/stable/3330250
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The Federal Role in
State Fiscal Stress
Steven D. Gold
State University of New York, Albany
This article examines the extent to which the federal government's policies were responsible for the
fiscal stress experienced by most state governments in the early 1990s. Federal policies have contributed
considerably to recent state fiscal stress, particularly through the Medicaid program-the fastest
growing part of state budgets-and the recession, which depressed revenue and increased welfare and
Medicaid spending. Federal aid reductions have not been an important source of recent state fiscal
stress. The real value ofper capita federal aid other than for welfare programs fell considerably in the
1980s, but the reductions were much greaterfor local governments thanforstates. The largest reductions
were in the early 1980s. Federal policies have affected state finances in several other ways-through
tax policy, unfunded mandates, and the federal failure to cope effectively with problems like health and
poverty. Federal court rulings have also caused budget problems (as have state court decisions). In some
respects, state fiscal problems are not a federal responsibility. Rising school enrollments, new
corrections policies, and inelastic tax systems have createdfiscal stress for many states. Excessive state
spending in the 1980s has contributed to recent fiscal problems in some states, but not generally.
States suffered more fiscal stress in 1991 than in any other year since 1983. Some
members of the press and state political leaders have attributed a large share of the
responsibility for state fiscal problems to the federal government. To what extent
is that assessment correct? If the federal government is responsible, in what sense
is it?
Eleven factors may have played a role in causing stress:
* Federal aid reductions
* Medicaid
* Federal tax policy
* Mandates
* Failure of the federal government to cope effectively with such
problems as health, poverty, and immigration
* Recession
* Court decisions
* Growing school enrollments
* Corrections policies
* Inelastic tax systems
* Excessive state spending in the 1980s
AUTHOR'S NOTE: Research support was provided by the Federalism Data System, funded by a grant
from the Henry Luce Foundation. The views expressed are solely the author's and should not be attributed
to the Rockefeller Institute, SUNY, or the Henry Luce Foundation.
Publius: The Journal of Federalism 22 (Summer 1992)
33
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34 Publius/Summer 1992
The federal government is involved in the first seven factors-federal aid cuts,
Medicaid, tax policy, mandates, domestic policy failures, the recession, and the
courts-but it is not responsible for the other four. States are not monolithic; the
relative importance of each of these eleven factors differs from one state to another.
Some of them, such as excessive state spending in the 1980s, do not apply in many
states. Others, such as federal mandates, are much more important in some states
than in others.
Court decisions as a cause of state fiscal stress are difficult to characterize for two
reasons. First, both federal and state courts are involved; and second, they do not
involve the president and the Congress, as do the other six federal policy areas. In
this article, court decisions will be discussed with nonfederal sources of state fiscal
problems.
Two general points should be noted about the scope of this article. Although
much of its focus is on fiscal stress in 1991, it considers a longer period of time-
discussing both the growth of fiscal stress in the 1980s and the outlook for stress in
the remainder of the 1990s. Second, the subject is federal influences on state, not
local, governments. Although many points are common to both, that is not always
the case.
FISCAL STRESS IN 1991
There is no generally accepted indicator of fiscal stress. States may be said to have
short-term stress when spending exceeds the resources available to pay for it.' This
can be distinguished from long-run stress, which results when a state is so poor that
it cannot afford to provide a level of services that most members of society would
regard as acceptable.2 This article is concerned with the first problem, short-term
stress.
The most commonly used measure of stress is the year-end balance in general
funds and Rainy Day funds as a proportion of annual general-fund spending.
According to preliminary estimates reported by the National Association of State
Budget Officers (NASBO), at the end of fiscal year 1991, twenty-two states had
balances below 1 percent of spending; six states, 1 to 2.9 percent; five states, 3 to
4.9 percent; and seventeen states, 5 percent or more. Average balances were 1.5
percent, the lowest since 1983.
A serious problem with year-end balances as an indicator is that they are usually
reported on a cash basis and reflect accounting gimmicks and "quick fixes" that may
'Two qualifications should be added: (1) good budgeting requires holding some funds in reserve for
unexpected contingencies-stress exists when those reserves are at less than the desired level; (2) if
spending exceeds revenue because of capital investments, that is not necessarily a sign of stress.
2Short-term stress entails difficulty in balancing a budget. Long-run stress implies inability to meet
citizen needs. Helen Ladd and John Yinger developed measures of long-run stress for large cities in
America 's Ailing Cities (Baltimore: Johns Hopkins University Press, 1989).
3Marcia Howard, Fiscal Survey of the States: October 1991 (Washington, D.C.: National Governors'
Association and National Association of State Budget Officers, 1991), p. 18. The estimate of total
balances nationally was almost the same as that reported in Corina Eckl, Anthony Hutchinson, and Ronald
Snell, State Budget and Tax Actions-1991 (Denver: National Conference of State Legislatures, 1991).
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Federal Role in State Fiscal Stress 35
obscure a large deficit. For example, many states deferred state-aid payments or
other outlays until the next fiscal year; numerous states accelerated tax collections;
some states borrowed money, took idle balances from funds other than the general
fund, or sold assets; and many cut contributions to pension funds.
In April 1991, the National Conference of State Legislatures (NCSL) reported
the results of a survey of prospective deficits facing the states, for fiscal years 1991
and 1992. Deficits were reported in about thirty states, with the total deficit in fiscal
1992 exceeding $30 billion. These figures were useful indicators for many states,
but they were of little value for comparative analyses because the methodologies
used by the states in projecting deficits are inconsistent. States with big deficits
often assume large increases in current services spending (in the 14 percent to 15
percent range). Deficit estimates in some states assume that temporary tax
increases will not be extended.
The National Income and Product Accounts (NIPA) are often used by econo-
mists as an indicator of state fiscal stress. The deficit on a NIPA basis in 1991 was
very large, considerably bigger than it had been in the early 1980s. This indicator,
however, has some serious shortcomings. For one, it does not separate states from
local governments. It also consolidates all funds, including infrastructure accounts,
which sometimes gives it a negative bias because capital outlays are counted as
spending but the borrowing used to finance them is not counted as revenue.
Changes in the NIPA balance over time, however, may provide some valid
indications of whether fiscal conditions are improving or worsening.4
Several kinds of actions suggest how widespread stress was in 1991: (1) twenty-
nine states cut back spending for fiscal 1991 below the level originally appropri-
ated; (2) twenty-three states provided no across-the-board increases in employee
salaries; (3) twelve states laid off employees; and (4) seventeen states cut welfare
benefits in absolute dollars, and only ten prevented inflation-adjusted Aid to
Families with Dependent Children (AFDC) benefits from declining.s
In addition, approximately thirty-four states raised taxes, with total tax increases
approximating $14.4 billion. In nominal dollars, this was the largest increase ever
enacted in a single year, but that is misleading for three reasons. First, approxi-
mately two-thirds of the increase occurred in two states-California and Pennsyl-
vania. Second, in inflation-adjusted dollars, the tax increases in 1971 and some
years in the 1960s were higher than in 1991. As a proportion of total state tax
revenue, the 1991 increases were about 4.8 percent, the same as in 1983 and only
about half as big as the increases in 1971. Third, only twelve states raised taxes by
an amount equal to at least 5 percent of their total revenue; this is only about half
as many as did so during 1983 and the last two months of 1982, the last time states
4Steven D. Gold, "State Government Fund Balances, Financial Assets, and Measures of Budget
Surplus," in U.S. Department of the Treasury, Federal-State-Local Fiscal Relations: Technical Papers,
vol. 2 (Washington, D.C.: U.S. Government Printing Office, 1986).
sHoward, Fiscal Survey of the States; Eckl et al., State Budget and Tax Actions--1991. On cutbacks
affecting the poor, see Isaac Shapiro et al., The States and the Poor: How Budget Decisions in 1991
Affected Low Income People (Washington, D.C.: Center on Budget and Policy Priorities and Center for
the Study of the States, 1991).
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36 Publius/Summer 1992
had to grapple with the effects of a recession.6
The recession severely depressed the yield from taxes. Revenue during the
twelve months ending in June 1991 rose only 3.4 percent. This made it very difficult
to balance budgets at a time when Medicaid spending was soaring by more than 20
percent, corrections spending was growing rapidly, and school enrollments were
increasing.
To summarize, states did experience considerable fiscal stress in 1991. It was,
however, not uniformly distributed. The fiscal problems in the Northeast and
California were more severe than those in most other places. The region with the
least stress was the Rocky Mountains, which was also the region where the
recession was least severe.
FEDERAL AID
It is common to conclude that federal-aid reductions are an important source of
recent state fiscal stress, but the evidence does not support that view. Aid reductions
have hurt state and local governments, but the major impact on states was in the
early 1980s. Local governments have been harmed much more than states.
Federal aid to state and local governments was $137 billion in fiscal 1990. The
lion's share goes to states, which received 86 percent of the total. As Table 1 shows,
aid to states fared far better than aid to local governments in the 1980s. In 1990,
federal aid to states was nearly twice as high as it was a decade earlier in nominal
dollars, while aid to localities was 13 percent lower.
Relating aid to personal income shows how it has risen or fallen relative to the
national economy. In comparison with personal income, aid to states in 1990 was
about 10 percent lower than it was in 1980, but it was actually higher than in 1982
and in most of the intervening years. By contrast, aid to local governments per $100
of personal income was about 60 percent lower than in 1980.
Table 1 shows that the 1980s were radically different from the 1970s. From 1970
to 1978, federal aid to local governments skyrocketed, increasing more than
threefold relative to personal income, while aid to states rose much less. This
illustrates two important points. First, the aid most vulnerable to cutbacks in the
1980s was in the relatively new direct federal-local programs that had grown
rapidly in the 1970s. These programs incorporated the Great Society initiatives of
President Lyndon B. Johnson and the New Federalism programs of President
Richard M. Nixon. Second, the peak year for federal aid was 1978. It was President
Jimmy Carter, not President Ronald Reagan, who turned the tide away from
growing federal support for state and local governments.
Two important caveats have to be noted about these trends. First, the differing
paths of aid to state and local governments in the 1980s are somewhat overstated
because the Reagan block grants converted some direct federal-local aid to federal-
state aid, with states passing through the aid to school districts, cities, and counties.
6Steven D. Gold, "How Much Did State Taxes Really Go Up in 1991?" State Tax Notes, 30 December
1991, pp. 623-626.
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Federal Role in State Fiscal Stress 37
TABLE 1
Federal Aid to State and Local Governments, 1970-1990
(in millions)
Fiscal Per $100 of personal income
year Total State Local Total State Local
1990 $136,843 $118,352 $18,490 $3.13 $2.70 $0.42
1989 125,824 108,235 17,588 3.10 2.67 0.43
1988 117,602 100,478 17,124 3.13 2.68 0.46
1987 114,996 95,463 19,533 3.27 2.71 0.56
1986 113,099 92,666 20,433 3.41 2.79 0.62
1985 106,193 84,469 21,724 3.42 2.72 0.70
1984 97,052 76,140 20,912 3.42 2.69 0.74
1983 89,983 68,962 21,021 3.38 2.59 0.79
1982 86,945 66,026 20,919 3.46 2.63 0.83
1981 90,294 67,868 22,427 4.01 3.01 0.99
1980 83,029 61,892 21,136 4.08 3.04 1.04
1979 75,164 54,548 20,616 4.15 3.01 1.14
1978 69,592 50,200 19,393 4.34 3.13 1.21
1977 62,575 45,938 16,637 4.31 3.17 1.15
1976 55,589 42,013 13,576 4.23 3.20 1.03
1975 47,054 36,148 10,906 3.89 2.99 0.90
1974 41,831 31,632 10,199 3.80 2.87 0.93
1973 39,256 31,353 7,903 4.00 3.19 0.80
1972 31,253 26,791 4,462 3.50 3.00 0.50
1971 26,146 22,754 3,391 3.14 2.73 0.41
1970 21,857 19,252 2,605 2.83 2.49 0.34
SOURCE: U.S. Department of Commerce, Bureau of the Census, Government Finances in (yearj; U.S.
Advisory Commission on Intergovernmental Relations, Significant Features of Fiscal Federalism, vol.
2 (Washington, D.C.: ACIR, 1991), pp. 28-29; U.S. Department of Commerce, Survey of Current
Business (Washington, D.C.: U.S. Government Printing Office, 1991), p. 30.
Second, the composition of federal aid to states must be considered; otherwise, one
may receive a misleading impression of federal generosity from Table 1.
Table 2 breaks federal aid to states into six major categories and shows how they
fared in relation to personal income between 1970 and 1990. The most important
message is that Medicaid represents an increasing proportion of federal aid,
growing from 22 percent in 1980 to 33 percent in 1990. During the same period,
aid for education, highways, non-Medicaid welfare programs, and miscellaneous
purposes fell sharply relative to personal income, while aid for health programs and
hospitals was relatively stable. It is important to recognize, however, that the
cutbacks were primarily in the early 1980s. Except for welfare programs, no
category had a significant decrease between 1983 and 1990.
The growth of federal aid for Medicaid is not primarily a sign of how much the
federal government is helping states, but rather of how it is causing them to bear a
heavy fiscal burden. On the average, state and local governments pay 43 percent
of the total cost of Medicaid, while the federal government pays 57 percent.
One important aspect of the 1980s cutbacks is the virtual elimination of no-
strings-attached federal aid. In 1979, for example, state and local governments
received $17.4 billion of general support, primarily from General Revenue
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38 Publius/Summer 1992
TABLE 2
Federal Aid to States per $100 of Personal Income, 1970-1990
Health
Fiscal Other and Miscel-
year Total Medicaid welfare Highway hospitals Education laneous
1990 $2.71 $0.90 $0.46 $0.32 $0.13 $0.49 $0.42
1989 2.67 0.83 0.45 0.35 0.12 0.48 0.43
1988 2.68 0.79 0.48 0.36 0.11 0.48 0.45
1987 2.71 0.76 0.52 0.37 0.11 0.48 0.48
1986 2.79 0.74 0.52 0.42 0.11 0.50 0.51
1985 2.72 0.71 0.54 0.41 0.11 0.49 0.46
1984 2.68 0.70 0.55 0.37 0.11 0.49 0.46
1983 2.58 0.70 0.54 0.33 0.11 0.49 0.41
1982 2.62 0.68 0.57 0.33 0.10 0.52 0.42
1981 3.00 0.71 0.57 0.41 0.12 0.62 0.57
1980 3.04 0.67 0.55 0.44 0.11 0.63 0.65
1979 3.01 0.66 0.57 0.39 0.11 0.59 0.69
1978 3.12 0.65 0.59 0.39 0.11 0.61 0.76
1977 3.16 0.66 0.63 0.44 0.11 0.62 0.71
1976 3.20 0.65 0.63 0.48 0.09 0.66 0.68
1975 2.99 0.57 0.61 0.43 0.09 0.65 0.63
1974 2.87 0.66 0.54 0.41 0.07 0.61 0.58
1973 3.19 0.61 0.78 0.47 0.06 0.65 0.61
1972 3.00 0.67 0.70 0.54 0.07 0.67 0.34
1971 2.73 0.54 0.61 0.58 0.06 0.66 0.29
1970 2.49 0.50 0.51 0.57 0.07 0.59 0.25
SOURCE: U.S. Department of Commerce, Bureau of the Census, State Government Finances in [yearl;
Health Care Financing Administration; U.S. Advisory Commission on Intergovernmental Relations,
Significant Features of Fiscal Federalism, vol. 2 (Washington, D.C.: ACIR, 1991), pp. 28-29; U.S.
Department of Commerce, Survey of Current Business (Washington, D.C.: U.S. Government Printing
Office, 1991), p. 30.
Sharing, Anti-Recession Fiscal Assistance, and, to some extent, from the Compre-
hensive Employment and Training Act (CETA) and Economic Development
Administration local public works grants. The first two of these programs were
eliminated, and the other two were trimmed or replaced by the Jobs Training
Partnership Act (JTPA). According to Federal Funds Information for States, the
cuts in these programs (counting JTPA as a replacement for CETA) represented a
loss of $16.4 billion in real dollars in 1991.7
The federal budget provides another useful way of understanding federal aid by
dividing it into grants for payments to individuals, such as Medicaid and welfare,
and other grants. In inflation-adjusted dollars, federal aid other than payments to
individuals fell 34 percent between 1980 and 1991. The major reductions occurred
in 1981 and 1982. From 1982 to 1991, the drop was only 9.5 percent."
The size of federal aid cutbacks varied nationwide. Table 3 shows the inflation-
adjusted per capita changes for state and local governments between 1980 and 1990,
excluding welfare. In real dollars, only six state governments did not experience
7Vic Miller, Federal Actions Increasing Stress on State and Local Governments, 1981-1991
(Washington, D.C.: Federal Funds Information for States, 1991).
8U.S. Office of Management and Budget, Budget of the United States Government, Fiscal Year 1992,
p. 7-132.
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Federal Role in State Fiscal Stress 39
a reduction in per capita aid." Local governments in every state lost ground. In this
analysis, Medicaid is included in the welfare category, along with income mainte-
nance and other programs for the poor. As the discussion above suggests, the
growth of welfare and Medicaid aid has been more of a problem than a help for
states, because their own spending had to increase in proportion to the federal aid.
TABLE 3
Change of Real Per Capita Federal Aid to State and Local Governments,
Excluding Welfare, 1980-1990
State Local State Local
New England Southeast (Cont.)
Connecticut 18.0% -46.9% Florida -26.0% -62.2%
Maine -39.6 -57.6 Georgia -15.9 -55.3
Massachusetts -42.3 -60.9 Kentucky -30.3 -58.9
New Hampshire -32.8 -64.0 Louisiana -19.3 -54.0
Rhode Island -3.0 -56.1 Mississippi -29.7 -27.6
Vermont -30.0 -55.5 North Carolina -24.8 -58.0
Mid Atlantic South Carolina -19.1 -43.1
Delaware -30.0 -70.9 Tennessee -16.2 -58.1
Maryland -20.2 -57.9 Virginia -28.3 -52.0
New Jersey 17.9 -55.5 West Virginia -43.2 -65.0
New York -22.3 -52.2 Southwest
Pennsylvania 17.2 -42.9 Arizona -30.6 -47.3
Great Lakes New Mexico -21.4 -39.3
Illinois -13.8 -56.5 Oklahoma -15.4 -60.4
Indiana 26.3 -57.1 Texas -1.1 -50.8
Michigan -21.2 -75.5 Rocky Mountain
Ohio -15.8 -51.5 Colorado -16.7 -48.8
Wisconsin -18.8 -55.9 Idaho -12.2 -39.0
Plains Montana -35.2 -34.4
Iowa -6.4 -32.6 Utah -16.8 -44.3
Kansas -11.6 -76.0 Wyoming 19.8 -46.1
Minnesota -10.5 -33.6 Far West
Missouri -38.2 -63.7 California 3.2 -58.7
Nebraska -11.9 -48.1 Nevada -47.5 -37.6
North Dakota -8.8 -32.9 Oregon -9.1 -41.9
South Dakota -10.7 -42.5 Washington -13.8 -48.7
Southeast Alaska -40.5 -24.5
Alabama -14.2 -54.3 Hawaii -17.6 -57.1
Arkansas -37.1 -58.3 United States -14.5 -55.0
NOTE: Inflation is measured by Implicit Deflator for State and Local Governments. Calendar Years were
averaged to estimate Fiscal Year price level.
SOURCE: U.S. Department of Commerce, Bureau of the Census, Government Finances in 1980 and
Government Finances in 1990 and State Population and Household Estimates (Series P-25 Population
Estimates and Projections; data reflects revisions made after the 1990 Census).
In the early 1990s, federal aid jumped sharply, with increases of 11.8 percent
in 1990 and 15.6 percent in 1991.10 These increases-which played an important
role in balancing many state budgets at a time when they were very stressed due to
the recession-were primarily due to an acceleration in the growth of Medicaid. As
9Aid was deflated using the implicit deflator for state and local governments, taking the average
figures for the two calendar years that generally constitute a state fiscal year.
'0David F. Sullivan, "State and Local Fiscal Position in 1991," Survey of Current Business 72 (March
1992): 37.
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40 Publius/Summer 1992
discussed in the following section, some of this growth resulted from state
maneuvers that changed the nature of the Medicaid program at federal expense.
OTHER FEDERAL IMPACTS
Although federal-aid reductions are not an important cause of recent state fiscal
stress, the federal government has played a significant role in causing state fiscal
problems in numerous ways-through the Medicaid program, mandates, tax
policy, other federal programs, and mismanagement of the national economy.
Medicaid
Medicaid is the fastest growing part of state budgets. State and local spending
for Medicaid rose 12.6 percent in 1989, 17.8 percent in 1990, and 27.8 percent in
1991. The Congressional Budget Office projects a further increase of 29.9 percent
in 1992. Such rapid increases in Medicaid by themselves are sufficient to cause
states serious fiscal problems." (Although the federal government commonly
refers to the "state share," in fifteen states, local governments pay part of Medicaid
costs. Nationally, well over 90 percent of the nonfederal share of Medicaid is paid
by states.)
There are numerous causes of the rapid increase, and their relative importance
is not fully understood. Most important is health-cost inflation, which has been
increasing at double the rate of the Consumer Price Index. Federal mandates have
also played a role, and there have been increases in participation for reasons other
than the greater eligibility resulting from federal mandates. For example, the
recession and the explosive growth of people infected with the HIV virus have both
caused Medicaid participation to increase. Although the number of senior citizens
has been increasing rapidly, this is not a major factor in growing Medicaid costs
because the poverty rate among the elderly has declined considerably.
Finally, part of the growth of Medicaid costs, especially in 1990 and 1991,
occurred because of two innovations adopted in many states. For one, states
increasingly relied on health-care taxes and "voluntary contributions" from
providers. Before the Congress tightened regulations in November 1991, many of
these taxes and contributions were shams that enabled states to obtain increased
federal aid without burdening the health-care industry. Second, states became more
adept at incorporating new and existing health programs into Medicaid, thereby
receiving federal aid for at least half of the cost. Thus, not all of the recent growth
of Medicaid spending represented a problem for states. To an extent, it was a
solution that eased their fiscal woes.
The increase in Medicaid costs has been high throughout the country, but it has
"IThe figures for Medicaid spending were provided by the Congressional Budget Office. One
econometric study of the deterioration of state fiscal conditions between 1984 and 1990 has found that
health-cost inflation was a very important explanatory variable. See Edward M. Gramlich, "The 1991
State and Local Fiscal Crisis," Brookings Papers in Economic Activity, vol. 2 (Washington, D.C.:
Brookings Institution, 1991), pp. 249-275.
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Federal Role in State Fiscal Stress 41
been greater in some states than others. Other things being equal, it has been
particularly rapid in states (many of which are in the South) that previously had less
generous programs because they have been affected more by federal mandates.
Mandates
Mandates overlap with Medicaid but can be distinguished from it as a cause of
state fiscal stress. Since the mid-1980s, the federal government has steadily
enlarged the Medicaid program by adding eligibility for new groups and by
expanding services. Many of the expansions covered children and pregnant
women, but the enhanced services also involved senior citizens and the handi-
capped. Other mandates involved child care, disabled persons, transportation, the
environment, education, and coverage of employees by Social Security.
It is impossible to quantify precisely the increased costs that states have borne
as a result of recent federal mandates. NCSL estimates that twenty new mandates
imposed during 1989 and 1990 will cost state and local governments $15 billion
over five years.2 The cost of mandates enacted during the previous Congress was
probably comparable.
Mandates enacted since the mid-1980s do impose serious costs on states, but
their importance should not be exaggerated. Many mandates are relatively
inexpensive. For example, medical care for children tends to cost considerably less
than for senior citizens. To keep matters in perspective, it should be remembered
that annual state-local tax revenue exceeds $500 billion. If recent mandates cost
$5-7 billion per year, that is burdensome but not an overwhelming factor in state
and local budgets. However, mandate calculations should not focusjust on recently
enacted mandates. The growing expense of Medicaid reflects primarily mandates
that have been around for a long time.
Tax Policy
Recent shifts in federal tax policy have affected the states in a variety of ways.
While most of the impacts are adverse, their cumulative impact is relatively small.
The federal income-tax reform enacted in 1986 had both positive and negative
effects. On the plus side, it substantially expanded the federal tax base. Because
most states tie their personal income taxes in some manner to the federal tax base,
states could either increase their revenue by maintaining their rates and applying
it to a broader tax base, or avoid this "windfall" by raising their personal exemptions
and standard deductions or by reducing their tax rates. On the other hand, federal
tax reform hurt states in several ways:
* It repealed the deduction for state and local sales taxes.
* It imposed many restrictions on municipal bonds, making them less valuable as
12Martha Fabricius, "More Dictates from the Feds," State Legislatures 17 (February 1991): 28-30.
Tim Conlan has added up the costs of mandates as estimated by the Congressional Budget Office since
1984. The U.S. Advisory Commission on Intergovernmental Relations (ACIR) emphasizes that this
provides "a partial and generally conservative portrait of the incremental costs" imposed by mandates,
in part because CBO did not prepare cost estimates for many mandates. Their 1991 cost to state and local
governments was $2.2 billion. ACIR notes that the cost of mandates had grown at an accelerating rate.
See A Decade of Change in Regulatory Federalism: Evaluating Regulatory Trends and ReliefStrategies
for the 1990s (Washington, D.C.: ACIR, 1992).
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42 Publius/Summer 1992
tools to finance infrastructure and economic development.
* It sharply reduced the federal marginal tax rate, thereby increasing the implicit cost
to itemizing taxpayers of paying state and local taxes. Over time, this (along with
repeal of sales tax deductions) could make it more difficult for state and local
governments to raise taxes.
* It made state income-tax revenue less stable because capital gains (which are
volatile) comprise a considerably larger share of the tax base.
The federal government in 1990 also raised excise taxes on tobacco products,
alcoholic beverages, and motor fuels. These federal tax increases had a small effect
in reducing consumption of these products, thereby lowering revenue from state
taxes on them.
Other Federal Programs
The federal government has also added to state fiscal problems by its policies in
other areas. In particular, it has failed to come to grips with major domestic
problems, such as 34,000,000 people without health insurance, a high level of
persistent poverty, the growing cost of treating people with AIDS, the massive
increase of homelessness, and the heavy costs associated with absorbing immi-
grants. Inadequate federal programs in these areas have forced state and local
governments to grapple with these problems. While the responses of these
governments have not solved these problems, states have expended significant
sums of money to deal with them.
In the short run, the recession is the most important cause of state fiscal problems.
The recession has depressed state revenue by at least $10 billion annually while
adding to spending for welfare and related programs. The number of families
receiving AFDC grew 24 percent between July 1989 and October 1991,'~ and
participation in general assistance programs also shot up.
There is a strong correlation between the severity of the recession and the
shortfall of state tax revenue. New England, the region with the weakest economy,
has also had the slowest revenue growth, when the effects of legislated tax increases
are eliminated from the analysis.14 The Rocky Mountain and Southwest states have
had the strongest economic growth and the least fiscal stress.
Avoidance of recessions and support for vigorous economic growth are two of
the federal government's most important functions, and it has failed in these
respects in recent years. After seven years of uninterrupted economic growth, it is
not surprising that a recession finally occurred, but the federal government's
response to the recession was unusually restrained. The rate of economic growth
from 1989 to 1991 was the weakest in any three-year period in several decades.
"October 1991 was the latest month for which figures were available. The increase before caseloads
peak will probably be higher (The New York Times, 10 January 1992, p. 1).
"4The correlation between the percentage change for each region in state tax revenue in the April-June
quarter of 1991 and the percentage change of personal income in calendar year 1990 was 0.51. Tax
revenue increases were adjusted to eliminate the effects of legislated changes in tax rates and tax bases.
Both measures were compared to their levels in the previous year during the corresponding periods.
Quarterly tax revenue changes are reported in Center for the Study of the States, State Revenue Reports.
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Federal Role in State Fiscal Stress 43
To summarize, the federal government has contributed to state fiscal problems
in many ways, especially through the Medicaid program, unfunded mandates,
inadequate responses to major domestic problems, and allowing the economy to be
so weak. Recent cutbacks in federal aid are relatively unimportant.
FACTORS INDEPENDENT OF THE FEDERAL GOVERNMENT
The federal government cannot be blamed for all of the problems bedeviling the
states. Some state fiscal stress results from demographics, court decisions, and
discretionary state policies. Although the list could be expanded, five causes are
discussed here: rising school enrollments, court decisions, corrections policies,
inelastic tax systems, and excessive spending in the 1980s.'5
Rising School Enrollments
One important difference between the state fiscal situation in 1991 and the early
1980s is that school enrollments are rising now. From 1973 to 1985, enrollments
fell about 14 percent nationally, easing the pressure on state budgets. Now they are
increasing by more than 1 percent per year.'" This is a major development because
school aid is the biggest part of state budgets, accounting for more than a third of
general-fund spending in the average state. The pressure of rising enrollments is
much more severe in some states than in others. For example, the school population
is growing much faster in California than in most other states.
Of course, higher enrollments are not the only reason school spending is going
up. Many states have committed themselves to upgrading the quality of their
education systems. While restructuring of schools is widely recognized as
necessary, more money is also needed, especially in states with low teacher salaries.
Although school spending is not growing as rapidly as Medicaid or corrections
spending, its magnitude is such that it has a major impact on the state budget.
According to NCSL, in fiscal 1992, appropriations for elementary and secondary
education were budgeted to rise 8.9 percent, in part because of deferral of some
spending from the previous fiscal year. This increase represents $8.9 billion, 64
percent of the total increase in appropriations for all programs in 1992.17
Court Decisions
Court decisions are imposing heavy burdens on many parts of state budgets, and
their impact is likely to continue to grow.
* Medicaid costs are being raised by court decisions based on the Boren Amendment,
which requires that health-care providers be reimbursed more adequately than
states have often done in the past. A common strategy for states has been to pay
"Steven D. Gold, The State Fiscal Agenda for the 1990s (Denver: National Conference of State
Legislatures, 1990).
'6Debra E. Gerald et al., Projections of Education Statistics to 2002 (Washington, D.C.: National
Center for Education Statistics, 1991).
"Eckl et al., State Budget and TaxActions-I 991, pp. 43, 49, 55. As the authors note, actual spending
patterns are likely to differ from appropriations, which are based in some cases on unrealistic projections.
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44 Publius/Summer 1992
providers considerably less than they normally receive from other sources."
* Mental health and corrections costs have been boosted by courts requiring that
conditions in state facilities be upgraded. It is reported that forty-one states are
under court orders or consent decrees in the corrections area, and a large number
of states are in a similar position regarding mental health. This situation is not new,
having existed for more than five years, but it is a continuing force pushing up state
costs.'9
* School finance systems are under challenge in more than twenty states, following
recent decisions that led Kentucky and New Jersey to increase state taxes to raise
spending in poor school districts in 1990. Texas, faced by a similar court ruling,
relied primarily on higher local property taxes to equalize resources. This was not
something that many states had to confront in 1991, but it is likely to be a major
issue in the years ahead.
* Courts are also causing fiscal problems for states in other ways, such as declaring
certain taxes unconstitutional and outlawing some gimmicks used to balance
budgets. In Nebraska, a court decision that threw out its personal property tax
precipitated the major fiscal crisis facing that state in 1991.
Corrections Policies
Corrections policies are a third source of state fiscal problems. In the 1980s,
corrections was the fastest growing area of state expenditure, nearly quadrupling in
total outlays. Although the crime rate rose during this period, a much more
important cause of higher corrections spending was "get tough on criminals"
policies that prescribed tougher sentencing standards. Those policies-along with
the "war on drugs"-required a huge increase in prison construction. Although
many experts have recommended that states reform their sentencing policies,
relatively little has been changed, resulting in a continuing rise of corrections
spending.
Inelastic Tax Systems
Inelastic tax systems are a fourth source of fiscal problems. The percentage
increase in tax revenue produced by a 1 percent growth of personal income is
referred to as the elasticity of the tax system. If elasticity is less than one, the tax
system is said to be inelastic, meaning that revenue lags behind the growth of the
economy.
The elasticity of particular taxes varies considerably.
The personal income tax usually has an elasticity considerably higher than one
(from 1.3 to 1.8), primarily because higher tax rates are usually applied as income
rises. However, the elasticity of personal income taxes fell in the late 1980s
"Robert Pear, "Suits Force U.S. and States to Pay More for Medicaid," The New York Times, 29
October 1991, p. 1.
'9National Prison Project, American Civil Liberties Union, Status Report: The Courts and Prisons
(Washington, D.C.: ACLU, 1990). According to Illinois State University's Center for the Study of
Educational Finance, there were eighteen states where litigation was pending as of July 1991. Ingo Kilitz
of the National Center for State Courts reports that nearly all states are under court order regarding mental
health and retardation programs, if a broad definition of the term is used (telephone communication, 13
January 1992).
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Federal Role in State Fiscal Stress 45
because of the trend toward less progressive tax rates.
* The typical state general-sales tax has an elasticity close to one, meaning that its
revenue tends to grow in proportion to the expansion of the economy. The tax base
ofthesalestaxhasanimportanteffectonitselasticity. Iffood istaxedbutnotmany
services, the elasticity is likely to be less than one; if food is exempt and many
services are taxed, the elasticity is likely to be at least one.
* Excise taxes, such as those on tobacco products and alcoholic beverages, tend to
have relatively low income elasticities (in the range of 0.6) because they are
usually defined in terms of quantities, so that their revenue does not respond to
inflation, as do ad valorem taxes. Demand for the taxed commodities also tends
to grow slowly.
The elasticity of a state tax system depends on the relative reliance on each of
these taxes (as well as business taxes) and the rates and exemptions of each tax. If
a state tax system has a high elasticity, it is more likely to have revenue growth that
keeps up with the growth of spending. If elasticity is low, the state will tend to have
chronic revenue shortfalls, requiring tax-rate increases or expenditure cutbacks.
States that do not impose a broad-based personal income tax or do not place
much emphasis on it tend to have tax systems with low elasticities. This was an
important reason for the fiscal stress during 1991 in states such as Florida, New
Hampshire, Tennessee, and Texas. Even heavy reliance on the income tax was not,
however, sufficient to avoid severe budget problems, as was illustrated by Califor-
nia and New York.
Excessive Spending
Excessive spending in the 1980s also has played a role in causing fiscal problems
for some states. The New England states and New Jersey enjoyed economic booms
from 1984 to 1988, resulting in extremely large revenue increases. Most of this
revenue was spent, establishing a level of expenditures that could not be sustained
once the boom collapsed. The fiscal problems of these states were especially severe
because they fell from the top to the bottom in state economic growth in the 1990s.
Connecticut, Massachusetts, and New Jersey stand out. They were among the
five states with the fastest growth of per capita personal income from 1984 to 1988,
and they ranked first, second, and fifth in per capita state-local spending increases
during those years (South Carolina ranked third and Virginia ranked fourth).20
Their per capita spending increased at rates of 51 percent, 47 percent, and 44
percent, respectively. The median state-local spending increase was 31 percent,
which was also the median increase in per capita income. The inflation rate was
18 percent.
Some commentators have argued that "a decade of runaway state spending" is
the "primary culprit" responsible for state fiscal problems.2' This view fails to take
account of the many other contributing factors discussed above. Excessive
spending did play an important role in some states, but it is far from the major source
2OLocal spending is considered as well as state spending because some of the state growth was devoted
to increased local financial aid. This was particularly true in Massachusetts, where local revenue was
severely constrained by Proposition 2 1/2. When local spending is excluded, these states still had very
large spending increases during 1984-1988.
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46 Publius/Summer 1992
of state fiscal problems.
CONCLUSION
The recession is the most important short-run cause of state fiscal difficulties, but
even if the economy were growing, many states would have experienced consid-
erable fiscal stress because of strong increases in Medicaid, corrections spending,
and school enrollments. Once the recession ends, stress will diminish but it will not
go away. The situation is much bleaker than during the early 1980s, when pressures
to increase spending were less intense.
The federal government can help states in many ways: (1) providing increased
aid for national problems, such as homelessness and absorption of immigrants or,
alternatively, attacking these problems directly with new federal initiatives; (2)
refraining from the imposition of new unfunded mandates; (3) maintaining a high
rate of economic growth; and (4) establishing a universal health-care program that
does not rely heavily on state financing. Of these four actions, the latter two-
strong economic growth and freeing states of the Medicaid albatross-are most
important.
The future of state fiscal stress does not depend solely on federal action. States
have it within their power to adopt policies that will minimize their stress in the
years ahead. Five major initiatives are needed." First, they should raise the
elasticity of their tax systems so that they generate revenue growth that is in line with
the spending increases that they consider appropriate. Second, they should reform
their spending policies by increasing reliance on market mechanisms and incen-
tives,23 targeting resources more effectively, and devoting greater attention to
accountability. Third, they should reform their policies affecting local govern-
ments, with particular attention to how responsibilities are sorted out and how aid
is provided. Reforms should permit more local revenue diversification and
eliminate mandates that interfere with accountability and raise the cost of govern-
ment in inappropriate ways. Fourth, they should reform their tax systems by
broadening tax bases and increasing reliance on underutilized taxes. Fifth, they
should attack "sacred cows" that use resources wastefully, both in spending and
taxation.24
Both the federal government and the states are responsible for state fiscal stress,
along with demographic, social, and economic trends, and court decisions over
which neither has control. Although the relative significance of the eleven factors
discussed here can be debated, there is no question about one thing: Stress is going
to be a fact of life for most states in the 1990s.
21Stephen Moore, State Spending Splurge: The Real Story Behind the Fiscal Crisis in State
Government (Washington, D.C.: Cato Institute, 1991).
22Gold, State Fiscal Agenda, chs. 5-7.
23See David Osborne and Ted Gaebler, Reinventing Government (Reading, Mass.: Addison-Wesley,
1992).
24Examples of sacred cows include sentencing policies that result in the need for major prison
construction, unwillingness to close higher education campuses or mental hospitals that are important
sources of local employment, and non-means tested tax expenditures for senior citizens.
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Federal Role in State Fiscal Stress 47
In conclusion, it is important to note that research is needed on many aspects of
the state-federal relationship, such as the cost of mandates, changes in the amount
of federal aid passed through by states to local governments, and state responses to
federal aid cutbacks."
"Research directed by Richard P. Nathan and George E. Peterson focused primarily on the first half
of the 1980s. See Richard P. Nathan et al., Reagan and the States (Princeton, N.J.: Princeton University
Press, 1987) and George E. Peterson, The Reagan Block Grants (Washington, D.C.: Urban Institute
Press, 1986).
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YOU MAY USE THIS TEMPLATE FOR THE WEEK 5 ASSIGNMENT. REMOVE THIS
INSTRUCTION AND ALL OTHER HIGHLIGHTED AREAS, INCLUDING FOOTNOTES.
Title (Bold, Centered)
Literature Review Assignment #2 for Week/Module Five
Your Name
Professor’s Name
Liberty University
PLCY 804-Your Section #-Term (like “Fall 2021”)
Date Assignment is Due Here
2
Title (Bold, Centered)
Introduction (REQUIRED)—ABOUT ONE PAGE
RECOMMENDED THAT IN THE FIRST PARAGRAPH, INTRODUCE THE READER TO
THE SUBJECT; IN THE SECOND PARAGRAPH, INTRODUCE THE READER TO THE
PAPER. FOR THE SECOND PARAGRAPH, YOU COULD WRITE SOMETHING LIKE “In
the first literature review assignment, I provided a theoretical framework for exploring this
research question: (STATE YOUR QUESTION).” In this assignment, I….”.
Findings from the Analysis (REQUIRED)—THREE TO FOUR PAGES
FOR THIS SECTION, RELY ON THE “FINDINGS” HEADING IN THE
WORKSHEET. REVIEW THE WORKSHEET INSTRUCTIONS IN THE
FOOTNOTES. INCLUDE THE CONTENTS OF THE WORKSHEET IN THIS
SECTION. YOU NEED 10 PEER-REVIEWED ARTICLES THAT ARE REPORTING
THE RESULTS OF AN EMPIRICAL ANALYSIS.
YOU MAY INCLUDE AS MANY FINDINGS THAT ARE INFORMATIVE FOR
YOUR RESEARCH QUESTION, BUT YOU MUST REPORT AT LEAST 10
FINDINGS FROM 10 ARTICLES THAT CONDUCTED AN EMPIRICAL ANALYSIS
(THE SAME 10 ARTICLES THAT ARE IN YOUR WORKSHEET).
PROVIDE A SYNTHESIS OF THE FINDINGS THAT IS ORGANIZED AROUND
YOUR RESEARCH QUESTION.
Application (REQUIRED)—ONE TO TWO PAGES
FOR THIS SECTION, RELY ON THE “APPLICATION TO QUESTION” HEADING
IN THE WORKSHEET.
IN THE ABOVE SECTION, YOU PROVIDED A SYNTHESIS OF WHAT YOU
FOUND IN THE LITERATURE, WITH THE RESEARCH QUESTION GUIDING
YOU ON WHAT TO LOOK FOR. IN THIS SECTION, SYNTHESIZE HOW THESE
WORKS INFORM YOUR RESEARCH QUESTION. ORGANIZE THIS SECTION
AROUND THE TOPIC/ QUESTION.
Conclusions (REQUIRED)—ONE PAGE OR LESS
WRITE A CONCLUSION TO YOUR REVIEW OF THE FINDINGS. SUGGESTED THAT
YOU DIVIDE IT INTO TWO PARAGRAPHS: IN THE FIRST PARAGRAPH, SUMMARIZE
WHAT YOU FOUND AND IN THE SECOND PARAGRAPH, SUMMARIZE HOW IT
APPLIES TO YOUR QUESTION.
Appendix
PLCY 804 Literature Review Worksheet—Findings from Original, Empirical Research
1. Topic:
2. Research Question:
3. Database(s) Searched:
4. Keywords Used in Search:
1
1
Put here the main keywords used in your searches. In the category “Keywords” in the spreadsheet, put the keywords that are included with the article.
2
Findings: You need at least 10 sources for this worksheet that are reporting results from an empirical analysis. Include them in the “Findings” section of the
paper. In the worksheet, report what the authors found as a result of their analysis or study. Put the information in the context of the hypothesis, question,
problem, thesis, or theory that is being tested. For example, “Smith and Jones (2021) found support for the hypothesis that as early campaign contributions
increase, the number of votes also increase, confirming their thesis that campaign contributions are an adequate bellwether for electoral support.” (OR)
“According to Potoski’s (2001) research on clean air federalism, the ‘race-to-the-bottom’ thesis is not confirmed as he found that several states not only adhered
to the federal clean-air guidelines, they exceeded them.” Note that for these examples, you can report on both what the authors confirm, but also what they fail to
confirm.
3
Application: Think about how the findings from this article inform your research question. Do the findings support your chosen federalism theory/model? Do
the findings inform your dependent variable (the effect)? Do the findings inform your independent variable? Do the findings inform on how you might approach
the study of your research question (“Smith and Jones [2020] use a variable on state abortion regulation that is compatible with my dependent variable on state
abortion regulation.” OR “Smith and Jones [2020] use a variable on state abortion regulation that is compatible with my dependent variable. However I would
have to add other criteria to the measure they created for it to be a valid measure for my analysis.”).
Author/Date
Keywords
Findings2
Application to Question3
References
4
LIST YOUR REFERENCES HERE USING TURABIAN AUTHOR/DATE STYLE. USE
ONLY IN-TEXT (PARENTHETICAL) CITATIONS. USE ONLY FOOTNOTES/ENDNOTES
TO PROVIDE ADDITIONAL INFORMATION THAT IS RELEVANT TO THE PAPER BUT
WOULD DISRUPT YOUR NARRATIVE. DO NOT USE FOOTNOTES/ENDNOTES FOR
CITATIONS
HERE ARE SOME EXAMPLES OF HOW TO LIST REFERENCES IN TURABIAN
AUTHOR-DATE STYLE:
Ablavsky, Gregory. 2019. "Empire States: The Coming of Dual Federalism." Yale Law Journal
128, no. 7: 1792-1868.
Arnhart, Larry. 1983. “Statesmanship as Magnanimity: Classical, Christian and Modern.” Polity
16, no. 2: 263–283. Academic Search Ultimate, Liberty University.
Bulman-Pozen, Jessica and Heather K. Gerken. 2009. "Uncooperative Federalism." The Yale
Law Journal 118, no. 7: 1256-1310.
Duncan, Christopher M. 2001. "The Covenant Connection: From Federal Theology to Modern
Federalism." The American Political Science Review 95, no. 3: 716-717.
Elazar, Daniel. 2001. “Religious Diversity and Federalism.” International Social Science Journal
53: 61-65.
Elazar, Daniel. 1987. Exploring Federalism. Tuscaloosa, AL: University of Alabama Press.
Hills, Roderick. 1998. “The Political Economy of Cooperative Federalism: Why State
Autonomy Makes Sense and Dual Sovereignty Doesn’t.” Michigan Law Review 96, no.
4: 813-944.
Hynes, Brittany. 2019. “Section 1332 State Innovation Waivers: Waving Goodbye to Cooperative
Federalism and Hello to Collaborative Federalism.” The Business Law Journal 27, no. 2:
329-350. Proquest, Liberty University.
Ostrom, Elinor, James Walker, and Roy Gardner. 1992. “Covenants with and without a Sword:
Self-Governance is Possible.” The American Political Science Review 86, no. 2 (June):
404-417.
O’Toole, Jr., Laurence, and Robert Christensen. 2013. American Intergovernmental Relations:
Foundations, Perspectives, and Issues. 5th edition. Washington, D.C.: Congressional
Quarterly.
Schapiro, R. A. 2006. “From Dualist Federalism to Interactive Federalism.” Emory Law Journal
56, no. 1: 1-18.
4
Unless otherwise indicated, all journal articles are from JSTOR, Liberty University.
LITERATURE REVIEW ASSIGNMENT INSTRUCTIONS
OVERVIEW
An important part of doctoral study is to base research on scholarship past and present. For the
Christian statesman, the added requirement is that the research incorporate the demands of
Scripture. To both survey the relevant scholarship and the Scripture that informs it, researchers
conduct reviews of scholarly materials to inform their research and to identify where their
research fits within the framework of scholarship. Toward that end, the student will write a series
of literature review papers that pertain to federalism and their chosen area of public policy.
INSTRUCTIONS
You will write three literature review papers pertaining to your selected research question in
Turabian Author-Date style: two short papers and one final literature review paper. The two
short assignments will provide feedback on writing the final literature review paper. All papers
will include a title page, body of paper, appendix, and list of references; the last literature review
assignment will include an abstract.
Literature Review: Theoretical Framework Assignment–Write 5-7 pages of text for
the body of the paper which includes a synthesis of the important concepts, theories, and
models that inform your research question. Post this assignment by 11:59 p.m. (ET) on
Sunday of Module 3: Week 3. Provide at least 10 sources from peer-reviewed articles and
at least one Scripture reference.
Literature Review: Findings Assignment–Write 5-7 pages of text for the body of the
paper which provides a synthesis of the important studies and the findings from those
studies that inform your research question. Post this assignment by 11:59 p.m. (ET) on
Sunday of Module 5: Week 5. Provide at least 10 new sources from peer-reviewed
articles.
Literature Review: Final Paper Assignment–Write a final literature review paper of 15
to 20 pages which include sections from the previous two papers and an additional
section that draws conclusions from your review of the literature. You will conclude with
a discussion of how your research question fills a gap in current scholarship and the
prospects of your question for your future research. Post this assignment by 11:59 p.m.
(ET) on Sunday of Module 7: Week 7. Provide at least 25 peer-reviewed articles, and at
least one Scripture reference.
GUIDELINES
Keep these areas of focus in sight when writing the Literature Review Assignments
Focus on the research question—The centerpiece of this course is the Literature
Review Assignments, and the centerpiece of the assignments is the research question,
how existing scholarship informs that question, and where your research question fits in
the body of scholarship, past and present.
Focus on peer-reviewed research—The focus of these assignments is on peer-reviewed
sources found primarily in academic journals. You need to find out where your research
fits in the framework of existing scholarship.
Focus on the endgame—Provide a discussion of the literature that demonstrates the gap
in existing research pertaining to your research question and how your research can fill
that gap.
Focus on synthesis, not just analysis—With analysis, you will review each article and
look at the different parts (research question, hypotheses, variables, findings, etc.); with
synthesis, you will use those parts and organize them to discuss how the literature
informs your research question.
Focus on organizing around concepts, not studies—Your organization for preparation
for the literature review assignments is to review one article and then the next article.
However, do not write the literature review that way. Rather, organize the major headings
around the most important concepts related to your question, not around articles. As you
organize your concepts, use the language of relationship and comparison/contrast to show
the connections within the concepts and between the concepts.
Literature Review
Literature Review Assignment #2 for Week/Module Five
Your Name
Professor’s Name
Liberty University
PLCY 804-Your Section #-Term (like “Fall 2021”)
Date Assignment is Due Here
2
Literature Review
Introduction
Elazar's model of federalism is similar to other models in that it describes how the national
and state government relate to each other as separate authorities. Where it differs from other
models is that it focuses on the dominant culture in each state. Elazar’s model of federalism is a
dualistic model. Elazar’s model focuses on the cultural values of each society and how those values
based on beliefs and practices impact the structure of federal systems of government. It emphasizes
the “dual federalism” where the central government is supreme in national matters while state
governments are supreme in local matters. In contrast to other models, this one is more focused on
linking political structure with culture. Most other scholars focus on state sovereignty as the
central feature of their models rather than state-federal relations. For example, some scholars
model federal systems as a combination of a strong central government with strong state
governments (Griffith), or strong central government with weak states (Richardson), or a weak
central government with strong subnational governments (Lowery). Other scholars tie their models
to historical periods rather than state-federal relations, such as Levy and Engeman’s model tying
their four types of federal systems to the French Revolution (Levy and Engeman).
In the first literature review assignment, I provided a theoretical framework for exploring
the research question; How does Elazar’s model of federalism compare to other leading models.”
In this assignment, I will discuss the key findings of different authors based on their models which
are comparable to Elazar’s model of Federalism. Further, the research will involve comparing
Elazar’s model to two of the most comparable model rivals to determine their similarities and
differences.
Findings from the Analysis
3
Elazar argues that the true definition of Federalism focuses on two aspects: it accentuates
the role of the national government while recognizing that some areas of policy-making are
reserved for the states; it also stresses that as a ‘crisscross movement,’ Federalism seeks to balance
state and national interest through a power-sharing arrangement. Elazar's model of federalism
divides the United States into three categories: moralistic, individualistic, and traditionalistic. In
general, he locates states that separate church and state in the moralistic category, states that place
a high value on individual rights and liberties in the individualistic category, and states whose
politics are highly tradition-bound in the traditionalistic category Boudreault (2020). There are
four main components to Elazar's approach: first, recognizing that each form of government
(national, state, and local) has three basic governmental functions - allocation, representation, and
mediation; second, classification of each function according to its dominant characteristic
(allocation can be rotation or competition; representation can be clientage or trusteeship; mediation
can be instrumental or diffusional); third, recognition of three forms of government (moralistic,
individualistic and traditional) based on the type of dominant cultural value that sustains it; and
fourth, incorporation of these different forms into traditional American political culture which
encourages acceptance of all three types as legitimate Stevenson (2019). In this model, federal
systems that have clear and distinct regional identities at the top level perpetuate regionalism by
reproducing regional patterns in lower levels of government. A moralistic political culture
associates power with goodness. Given the moral certainty that pervades this type of political
culture, strong central institutions are required to reconcile disputes that arise within it. Such a
system is distributive because it has a large number of interacting jurisdictions that are equally
powerful or equally powerless. Consociational features often may be identified in such a system.
4
One of the theories or the models comparable to that of Elazar is cooperative federalism.
Cooperative federalism is not an entirely new model, but an evolution from dual federalism. It
emphasizes a partnership between the levels of government and their relative responsibilities for
shared goals rather than separate responsibilities for separate functions. In many ways, the two
models of federalism are quite similar Young (2018). While critics of cooperative federalism may
point to it being a more ambiguous and confusing model than the separation of powers system
preferred by Elazar, some would argue that in terms of the evolution of state and federal
relationships, that is precisely the point Young (2018). Cooperative federalism represents the
changing pattern of relationships between states and the federal government; changes like those
brought about by increased intervention during the New Deal and Great Society eras. Both Elazar
and cooperative federalism involve the relationship between the state government and the federal
government. There are key differences in the way that they view this relationship. Elazar's model
identifies how the culture of a city or state can determine how they relate to the federal government
and how power is distributed over time Young (2018). Cooperative federalism is an actual model
that has been ascribed to since the New Deal days, where support from both levels of government
was seen as necessary for a sound economy.
The other comparable model is Nation-centered federalism which is defined as a theory or
study of political power that is divided between several levels of government, where the national
and state governments share sovereign power. Bedi (2021) argues that Nation-centered federalism
has been the norm of modern times. According to this understanding, nation-states are sovereign
entities that conduct their own affairs internally and enjoy the right to a full degree of independence
in the world Bedi (2021). They recognize no authority above them except those they themselves
have voluntarily created. Guillén (2019) shares a similar opinion by noting that states are held
5
together not by any external force but rather by a shared identity, a common ground of historical
experience, language, or culture. Nation-centered federalism also requires national institutions like
an army, currency, and government apparatus for internal and external affairs. Nation-centered
federalism can be compared to Elazar’s model of federalism. In contrast to the nation-centered
federalism approach, Elazar's model of American federalism stresses the importance of the many
different "federal traditions" which make up the political culture of the United States. Specifically,
Elazar identified three kinds of political culture in America: moralistic (emphasizing individual
conscience and collective decision making), individualistic (emphasizing government by law and
due process for individuals), and traditionalistic (emphasizing personal honor and deference to
authority). Thus, instead of viewing American politics as having a single set of values or beliefs
held by all Americans and embodied in our national institutions, Elazar argued that there are many
separate streams that course through our politics Cecot (2021). These streams occasionally merge,
but they have not combined into one coherent channel. Elazar's model can be viewed as an
alternative to the more traditional models of nation-centered federalism. In nation-centered
approaches, governance occurs primarily at the national level. This is known as a dual system,
with a tiered organizational structure of central and regional governments, each concerned with
their own spheres of interest. This is what Elazar's model seeks to change Guillén (2019). U.S.
federalism is chaotic and imperfect compared to other countries that utilize a dual system, however,
it also has its advantages.
While Elazar’s model of federalism is multi-state-centered federalism in which every state
is given a significant role in policy-making. States are considered to be the source of political
powers and are capable of making changes that influence regional as well as national politics. They
control a lot of policy reform, for example, healthcare, education, criminal justice, and so on.
6
Nation-centered federalism is the opposite of Elazar’s model where the national government has
more power over states and can change policies according to its wish.
Application
While governments all over the world have been consciously moving towards better
management and are trying to bring in the much-needed change to make them efficient, Elazar’s
Federal Model describes the organizational structure of such a government. The design and
structure of a federal state should also encompass the possibility that centralized and decentralized
competencies can be found in the same policy area. There should be polities with jurisdiction over
the same territory, hence the possibility of conflict. However, each polity’s policy output may be
opposed to what another wants to achieve. On the other hand, one or more polities may have
jurisdiction over fewer than a majority of the population. There should be different sources of both
vertical and horizontal legitimacy for each separated polity. Secondly, there will be mutual
recognition by elites. That is, each authority will accept –grudgingly or not– that the other
possesses jurisdiction over its respective areas. The legal system will ensure this actualization and
protect it from undue interference. Partlett (2019) contends that the main objective of any
Government is to provide services to citizens; the faster it can reach and at the less cost, the better
is the quality of services provided, and hence citizen satisfaction increases. Elazar's Federal model
presents three unique feature Partlett (2019). First, Elazar emphasized the intellectual rootedness
of his federalism studies in the US setting. Second, while he acknowledged that political power
was unevenly distributed between the center and the regions, Elazar contended that the U.S.
Constitution safeguarded equality of rights for all citizens throughout the country. Thirdly, Elazar
saw U.S. federalism as a decentralized system where local government does not have authority
7
delegated by the state government but rather it has law-making power itself Nation-centered
federalism is concerned with the protection and preservation of identity. In this model which
emphasizes a strong national government, local governments are preserved by the national
government to protect local identity. This model is found in countries such as Great Britain wherein
all citizens of that country have equal status, obligations, and rights regardless of where they live
within England. Domínguez (2021) purports that cooperative federalism on the other hand
emphasizes the interdependence of federal and state governments. This system is dependent on
shared sovereignty between the federal and local governments. At some point, there may be
overlapping responsibilities given to both levels of government resulting in confusion as to who
should provide services and to whom. Traditionally, issues regarding resources, education,
economy/trade, and welfare were placed under the sole jurisdiction of local governments.
The federal government and state governments have different roles in enacting and
enforcing laws, but each government has its own powers. Under the federal system of government,
most legislation is enacted by the national Congress rather than by state legislatures. However, in
many areas, the states and the nation share lawmaking responsibilities. Laurence (2002) theorizes
that the U.S. Constitution reserved to Congress such enumerated (itemized) powers as establishing
a uniform currency and governing interstate commerce, while all other powers were reserved to
the states or to the people (the latter by virtue of the Tenth Amendment) Laurence (2002). In recent
years, however, some of those non-enumerated powers have been asserted by Congress in such
laws as the Supremacy Clause, which permits legislation necessary for carrying into execution an
enumerated power to preempt states' conflicting laws.
Conclusions
8
Summarily, Elazar’s model of federalism described the United States as a federation and
highlighted the central role states had in American federalism, even though the judicial branch
ruled that federal power was supreme. Scholars have historically debated why the United States
retains such a strong state government. Historical scholars attribute this to the nation’s
decentralized political culture, and political scientists argue that it is strategic behavior by interest
groups and politicians Steven (1992). Other more modern theories of federalism highlight changes
in the policy areas over which government has control. Cooperative federalism refers to the way
the national and state governments work together to solve problems, but the term nation-centered
federalism became popular in recent years because it seems that the federal government often
worked with state governments to create projects Guillén (2019). Based on the Elazar's model of
federalism and the difference between cooperative and nation-centered, it is evident that in a nation
that has different people with different cultures, beliefs, interests, and even values living together,
it is imperative to have a good understanding of the various choices of governance offered. Some
of these alternatives include the unitary system, confederation, and the federal system.
It is clear that the nature of cooperative federalism is unmatched in its applicability to the
modern world. While in the past nation-centered and unit governments were critical to the well-
being of the American citizen, they have given way to a model that allows for greater cooperation
and representation of interests on all sides. As America became more populous and aggressive, it
was inevitable that we would develop our governmental systems to better reflect this need. The
United States has actually experienced all of the models in Elazar's theory of federalism. The first
model, Dual Federalism, was mainly founded upon states’ rights and what was to be known as the
separation of powers during the beginning years of our nation. The second model that is applicable
to American history is the concept of Cooperative Federalism which was a collaborative effort
9
between the state and federal governments to help one another provide for citizens in times of
need. Nation-centered federalism then took place where the federal government called for more
power and control in order to maintain a secure united country.
Appendix
PLCY 804 Literature Review Worksheet—Findings from Original, Empirical Research
1. Topic: A literature review on findings of Elazar’s Federal Model and other competitive federal models
2. Research Question: How does Elazar’s Federal model compare with cooperative federalism and Nation-centered federalism?
3. Database(s) Searched: Google Scholar
4. Keywords Used in Search: Federalism, cooperative, Nation-centered, limitations, Empirical research.
11
Author/Date
Keywords
Findings
Application to Question
Partlett,
William/2019.
Cooperative
Federalism
Criminal law and cooperative federalism take place at
the intersection of two areas of constitutional law that
are among the most closely studied, yet they frequently
aren't paid attention to by policymakers, judges, and
legal scholars.
The essence of criminal law and
cooperative federalism in
constitutional law
Young,
Ernest/2018
Cooperative
Federalism
and the USA.
Although federalism is generally understood as a
“sovereign-state system” of cooperative federalism or
competitive federalism, it could be viewed as a state
standing system.
This Article examines whether
“cooperative federalism” is also a
state standing system or, perhaps,
that “competitive federalism”
better integrates state standing
12
principles than theorists have
previously recognized
Stevenson,
Garth/2019
Political
community,
Cooperative-
Federalism,
North American federal systems have developed in
different historical and political contexts, which
influence what the constitutional designers believe
federalism could accomplish for the new country.
The journal informs of the
factors contributing to
cooperative federalism in the
North America.
Cecot,
Caroline/2021.
Effects,
Federalism
The federal government often brings enforcement
actions legal proceedings to enforce a law against
companies that seem to have violated the law.
It highlights the implications of
Federalism in a state.
Domínguez,
Francisco,
Caamaño/2021
Cooperative-
Federalism,
Constitutional,
reforms
Nation
centered
Federalism
Federalism may offer a way for governments to ensure
the sovereignty and security of the people, whilst
ensuring that individual freedoms are also respected and
protected. Dominguez argues that by offering more
power to the regional government, it is possible to
ensure that the rights of ethnic minorities and
indigenous groups are protected. Federalism allows
The article analyses
constitutional changes, the
Supreme Court’s role and impact
on devolution in matters of state
and federalism in the United
States.
13
these groups to be on equal terms with their national
counterparts, thereby ensuring all citizens have access
to similar opportunities as well as similar standards of
living, health care and educational systems.
Boudreault,
Julien/2020.
Cooperative
federalism,
Nation
centered
Federalism,
powers,
application of
powers.
Cooperative federalism has come to be understood as a
system of government characterized by (1) substantive
legislative discrepancies that allow for differences in
governing outcomes across jurisdictions; (2) an
expansive concept of shared jurisdiction meaning that a
large number of legislative matters are within the
competence of both levels of government; (3)
recognition that there is an inherent tension between
maintaining uniformity and national standards while
allowing for diversity and regional variation; and (4) a
relatively high degree of deference to provincial
legislation on the part of courts.
The paper addresses the factors
that affect interstate and
intrastate dynamics in the global
governance process
14
Laurence
Claus/ 2002
Budgetary
Federalism
and United
States of
America.
While the United States of America has historically
participated in fiscal federalism, current issues and
experiences have revealed a pronounced connection to
budgetary federalism. Information collected over the
past fifty years regarding budgetary federalism will be
presented in this essay, along with an explanation of
how federal grants are tied to state budgets, taxes and
education. The findings show that budgetary federalism
is tied to a variety of factors that can be viewed from a
theoretical perspective, as well as pragmatic reality.
The study explored what are the
findings from budgetary
federalism in the USA.
Steven Gold/
1992
Federal Role
and State
Fiscal Stress
Increase in state fiscal stress affects the poverty rate,
income inequality and finally the public policy. A
greater fiscal stress would lead to greater tax burdens on
those at the bottom of the income ladder and less
spending on programs for poor residents and subsidized
housing.
The study explored the effects of
federalism in a state’s economy
15
Bedi,
Sonu/2021.
Pluralist
Constitution,
Nation-
centered
federalism
The strength of Nation centered federalism is to regulate
the world and make sure that everyone is treated equally
under nation law.
The paper discusses the strengths
of Nation-centered federalism
Guillén López/
2019.
Constitutional
Reform and
Nation
centered
federalism
The author found that basic principles of state structure
and the constitutional mechanisms for securing
independence in the constituent regions and cities would
correspond to those laid down
The paper accesses the
relationship between
Constitutional reforms and
Nation-centered federalism
16
References
Bedi, Sonu. 2021. The Pluralist Constitution is the best place to start if you want to understand contemporary constitutional law or
legal theory, or both.
Boudreault, Julien. 2020. Flexible and cooperative federalism: distinguishing the two approaches in the interpretation and application
of the division of powers. National Journal of Constitutional Law, 40(1), 1-35.
Cecot, Caroline. 2021. The Federal Enforcement Threat: The Effect of Overfiling Under the Resource Conservation and Recovery
Act. Journal of Empirical Legal Studies, 18(3), 534-568.
Domínguez, Francisco, Caamaño. 2021. We the people: federalism and constitutional reform. International Journal of Human Rights
and Constitutional Studies, 8(1-2), 4-16.
Guillén, López. 2019. Constitutional Reform and Federalism in Spain. A modest proposal. In Claims for Secession and
Federalism (pp. 509-517). Springer, Cham.
Laurence, Claus 2002. Budgetary Federalism in the United States of America. Vol. 50, 581-592
Partlett, William. 2019. Criminal Law and Cooperative Federalism. Am. Crim. L. Rev., 56, 1663.
Steven, Gold 1992. The Federal Role in State Fiscal Stress. Vol. 22, No. 3, 33-47
Stevenson, Garth. 2019. The origins of co-operative federalism. In Federalism and Political Community. University of Toronto Press
7-32.
Young, Ernest. 2018. State standing and cooperative federalism. Notre Dame L. Rev., 94, 1893.
17
