For states, Washington’s budgetary seduction proves too hard to resist

February 6, 2013

Federalism’s days appear to be numbered. The reason isn’t so much that the power of the federal government has increased, though that’s part of it. Instead, the slow-motion death of federalism flows from the fact that a wide array of federal programs have seduced state governments into playing Washington’s tune.

This week, for example, Ohio Governor John Kasich, a conservative who first came to prominence as one of the foot soldiers of the 1994 Republican Revolution, announced that he supports the federal expansion of Medicaid, one of the central pillars of President Barack Obama’s Affordable Care Act (ACA). Opposition to ACA, and to the enormously expensive Medicaid expansion, had until recently been considered a conservative litmus test.

Kasich is the fifth Republican governor to embrace the Medicaid expansion, alongside Arizona’s Jan Brewer, Nevada’s Brian Sandoval, New Mexico’s Susana Martinez, and North Dakota’s Jack Dalrymple. And he almost certainly won’t be the last. Florida Governor Rick Scott, a former healthcare executive who strongly opposed to the Obama administration’s health reform effort in his 2010 campaign, is widely expected to do the same.

So does this represent some deep ideological reversal? Not really. Rather, it shows that state governments are almost always happy to pass the buck to the federal government. Federalism was designed to foster healthy competition among the states. Yet the proliferation of joint federal-state programs has instead left us with what Michael Greve, a law professor at George Mason University and author of The Upside-Down Constitution, calls “cartel federalism,” in which the states collude with the federal government to suppress healthy competition.

Under a fiscal federalism cartel, states don’t fund their own programs under competitive conditions. Instead, they rely on Congress to tax households nationwide and then dole out the money to state and local governments. In effect, Congress seduces state and local governments with seemingly “free” money that comes with lots of strings attached. 

The Medicaid program is the most important of these joint federal-state initiatives. Founded in 1965 to provide medical care for the poor, Medicaid is run by state governments, but the states receive 50 percent to 83 percent of the funding from the federal government. (The size of the federal contribution varies according to states’ wealth.) The bigger the federal contribution, the “cheaper” the Medicaid program from the perspective of a state government. Under the ACA’s Medicaid expansion, participating states will be required to increase eligibility to include all households that earn up to 133 percent of the poverty threshold. In return for accepting this expansion of Medicaid, the federal government will pick up 100 percent of the cost of covering these newly eligible enrollees. Eventually, this federal contribution will decline to 90 percent. But from the perspective of state governments, this expansion will be “free,” or close to it.

To most state governments, this looks like an excellent deal. Low-income households will gain coverage while federal taxpayers, as opposed to state and local taxpayers, will foot the bill. Given that Medicaid spending now exceeds K-12 spending as a share of state budgets,what’s surprising is that some governors remain opposed. .

As Greve has explained, however, the “cooperative” nature of the Medicaid program has greatly encouraged spending growth. States that would be unwilling to spend 25 percent or more of their budgets on Medicaid if they had to tax their own citizens for the entire cost of the program are happy to do so if every dollar they spend is matched by a dollar or more of federal spending, as spending less would mean failing to collect “free” money.

This buck-passing dynamic is why the Reagan White House briefly championed a Grand Swap in which the federal government would assume exclusive responsibility for Medicaid while state governments would assume exclusive responsibility for K-12 education. The beauty of this approach is that it acknowledges that many Americans don’t want to see a “race to the bottom,” in which states compete to spend as little as possible on medical care for the poor. The Swap wasn’t so much a small government idea ‑ Medicaid would still exist, after all ‑ as it was a coherent government idea. The federal government would stick to its responsibilities, andstates would stick to theirs.

Because getting from here to there in one single bound would be very difficult, we could go for an incremental approach. First, Congress would federalize the part of Medicaid that is responsible for meeting the needs of low-income seniors who also qualify for Medicare, a group that accounts for 15 percent of Medicaid enrollees but 39 percent of total Medicaid spending. States would continue to operate the under-65 part of the program, but instead of receiving today’s open-ended funding commitment, they would receive federal block grants that are tied to a state’s poverty level and whether or not the state’s economy is in recession. Granted, this would still be federal money with strings attached, at least at first, but there would be less money and fewer strings. Reforming Medicaid along these lines would help create a sane and sensible division of labor between the states and the federal government.

We could go much further to encourage real competition among state governments. Recently, for example, Rohit Aggarwalla of Bloomberg Philanthropies called for abolishing the federal surface transportation program and the federal gasoline tax that funds it, leaving state governments to fund highways as they see fit. This approach would allow states to experiment with new approaches to funding transportation, including following the lead of governments in Australia and New Zealand by turning state Departments of Transportation into regulated, self-financing public corporations.

The beauty of Aggarwalla’s approach is that it would force state governments to put up or shut up. Low-tax states would either starve their highway systems of much-needed investment or they’d demonstrate their superior efficiency. High-tax states, meanwhile, would either see huge economic gains from lavishly funded roads and bridges, or they’d waste vast sums on expensive boondoggles. We’d have a fighting chance of seeing which approaches to transportation work and which do not. In an ideal world, we’d extend this logic to K-12 education as well. The federal government would get out of the K-12 business, apart from requiring state governments to report data about the quality of schools and funding basic research. Everything else would be left up to state governments, which would spend more time pursuing innovative approaches and less time chasing federal dollars.

Greve has an idea for how Congress might encourage even more state-level innovation. If a state refuses to participate in a federal grant program, he proposes allowing its citizens to receive a proportionate tax rebate. Instead of leaving federal dollars on the table, state governments that refuse to play ball with federal grant programs will leave more dollars in the pockets of their taxpayers. Although this has little hope of passing muster with Senate Democrats or the Obama White House, it’s the kind of idea that could revive American federalism.

PHOTO: A Tea Party member reaches for a pamphlet titled “The Impact of Obamacare”, at a “Food for Free Minds Tea Party Rally” in Littleton, New Hampshire October 27, 2012. REUTERS/Jessica Rinaldi


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But one of so many ways the intent of our founding fathers and our Constitution are routinely ignored or successfully subverted by our ruling “political class”.

Posted by OneOfTheSheep | Report as abusive

The federal government must become the major player and payer in America’s Health Care.

Once the federal government becomes the primary payer of medical bills, they will finally be able to change the game. So far, they are not a big enough player in the game.

We must devise and implement a system to efficiently ration medical care. There are some procedures that are simply not cost effective. There are some patients whose health is so poor due to morbid obesity, diabetes, fatal disease, etc. that even the most expensive procedures can do little to alter their unfortunate outcomes.

This is a conversation and debate that we must have.

Posted by breezinthru | Report as abusive

“Federalism was designed to foster healthy competition among the states.”

Reihan, this is a dumb comment and you should know better. The Founders wrote the Constitution to prevent competition from the states, specifically in things like border duties and other restraints of trade, competing coinage, divergent foreign policy, etc. Federalism was intended to preserve the prerogatives of state government. In short, states wanted to keep as much power as they could, and not have too much power be concentrated in a faraway government, as it had been under the English Crown and Parliament.

The idea that any Founder intended the states to compete with each other to test out social policy and programs is completely ahistorical. Cut out this kind of nonsense.

Posted by BKLNBlueDog | Report as abusive

Unfortunately the former slave states continue their unwillingness to extend citizenship rights and privileges to all citizens.

PPACA actually puts a marker down that everyone who lives in the US should have access to affordable health care AND that our efforts in public health should focus on primary prevention.

The medicaid expansion is designed to

1. Assure access to affordable health care.

2. Close/reduce health disparities between states.

The authors claim that federalism enhances market efficiency between the states is not borne out by any reliable evidence. (Art Rolnick has studied the impact of “incentives” on job creation. The short version is that these incentives are extremely expensive and result in no new net job creation.)

Posted by hm2viking | Report as abusive