Keeping State And Federal Separation Healthy

In our last article we talked about the importance of a federal division of power.  How do we judge the health and degree of such a division?

One aspect of this is the formal constitutional division.  Many countries have some kind of special-case federal devolution of power that is a political tradition or concession, but which is not enshrined in the constitution.  The Scottish, Welsh, or Northern Irish parliaments in the UK are an example. They are not like US states or Canadian provinces – they have power due to a UK Parliament law, and each has its own separate level of autonomy.  This means the power can be changed or taken back by a majority vote in the UK Parliament. Spain has similar deals for some of its regions.  

By contrast, the federalism of a country like the US, Canada, or Germany is more assured because it is enshrined in their constitutions.  That means that the powers are clearly delineated, more uniform, and harder to take away.

This seems fairly obvious.  But another way to judge the real degree of federal autonomy is to follow the money.  Money is power, and that power is exercised through spending. The ratio of the money spent by the national versus subnational governments can tell a lot about their real respective power.  Usually this difference comes from a difference in tax revenue. As a counterexample to constitutional federalism, China has no formal constitutional devolution of powers to its provinces. But by some estimates 80% of spending is done by the provincial governments, so it is often viewed these days as having backed into a de facto federalism as part of administering such a huge country.

The US examples of following the money to power are when the federal government uses its money to coerce states into doing what it wants.  Historic examples include using highway funding to control speed limits or drinking ages, which the federal government has no legal right to be involved in.  But by controlling money sent to maintain the interstate infrastructure – which they do legally control – the national government can influence the states’ choices.  Another recent example is holding out the incentive of extra Medicaid funding if states change their laws to suit the federal interests.

The actual ratio of state and local vs federal government spending in the US is 45% vs 55%.  In other words, the US has a strong division of powers legally but the money shows that the national government has more influence than a review of the constitutional structure would suggest.  The reasons are likely complex, but I think it’s mostly a historic result of pressures of the mid-twentieth century. It was in this period of depression and war that high levels of taxation were first imposed on US citizens.  Due to the political philosophy of FDR in dealing with the depression and the national demands of war, the federal government raised its taxes to fund national projects. The federal income tax is still much higher than all state income tax levels, and indeed some states still do not even use income taxes.  This leads to a simple phenomenon of boxing out the states – they can’t raise taxes enough to administer major social programs while the federal taxes remain, which means they have to accept federal money and influence in such areas.

Contrast this to the example of Germany.  In Germany the state-to-national spending ratio has been about two-thirds state-and-local to one-third federal for decades.  In other words, the states in Germany have great fiscal power to go along with their federal political power. In Germany the national government still collects the most taxes, but the constitutional structure is different. The model is redistributive.  The federal government takes in tax revenue, and disburses it to the states. The states then choose how to spend the money as part of their own budgets. This is a less coercive model of federalism. Canada also works on a similar system. Because the federal subdivisions are legally entitled to the distribution, the central government isn’t able to use the disbursement to force actions at the lower level.  

I think there are two ways forward for the US – a legal change to distribute revenue between state governments, or simply to lower federal taxes and cut some federal programs in order to allow the states room to do things on their own.  Either would produce a wider variety of policies and experimentation, which can only help to arrive at the best answer.

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