That is the reason we come today to appeal to you that we need to have enforceable federalism. Without it, it is inevitable. Whether it is preemption or whether it is mandates, the effect will be the

same.

Chairman THOMPSON. Thank you very much.

I know you have to leave shortly. I thought my time was running a little short here and I checked and found out that staff is taking care of you and cutting my time back, so be it.

Senator Lieberman.

OPENING STATEMENT OF SENATOR LIEBERMAN

Senator LIEBERMAN. Thanks, Mr. Chairman.

Let me first, if I may, as a matter of process-you referenced to a GAO study on the implementation of the federalism, Executive Order No. 12612. At GÃO's request, OMB has prepared a letter providing GAO with its views on that ongoing study and the folks at OMB have asked me to request that this letter be placed in the record, also, which I would like like to do at this time.1

Chairman THOMPSON. It will be made a part of the record.

Senator LIEBERMAN. Thanks, Mr. Chairman. Thanks very much for convening this hearing. Thanks to Governor Thompson and Governor Leavitt for being here. Two very thoughtful opening statements.

I appreciate that the hearings are being convened, because they do give us a chance to step back and consider in a broader context some of the judgments we naturally make on an ad hoc basis as we consider the whole range of legislation. We sometimes explicitly debate federalism questions by that name, using terms like preemption. For instance, in product liability debates and the Internet sales tax moratorium, which we were involved in together, at least on the discussion stage, Governor Leavitt, there is a lot of focus on the appropriateness of preemption. In other cases, of course, we do it but we do not talk about it. It is implicit. So this is a very important opportunity that these hearings give us to look at the big picture.

There is a third panel here of scholars, Professor Galston and Professor McGinnis, that I thought provided very good overviews which are helpful as we go through this. Professor Galston's paper points out historically in this century that you might say we have gone through two different periods. One was when for reasons of history, and you might say necessity, the power of the Federal Government grew, most notably the great depression of the 1930's when the problem went beyond the capacity of the States and localities to handle, and then, of course, the Second World War.

But in the more recent decades, though it may not look like it from the State level-and I came here after 16 years in State Government, 10 years as a State Senator and then 6 years as Attorney General-that the trend has been much more in the direction of the devolution revolution, but there is this tension that I think the Framers not only foresaw but intended.

1 The letter dated May 4, 1999, from the Office of Management and Budget appears in the Appendix on page 212.

Your metaphor, Governor Leavitt, of not making this a mainframe but keeping it a network of PCs is a good one. I suppose on the other end, the other extreme that we should avoid, is to break the network, that is, to not just have millions of PCs out there operating on their own because of the weakness of the National Government.

On the question of preemption and inappropriately intruding on the role of the States and local governments, last Congress, as you know, we considered so-called takings legislation, which I thought posed a direct threat to the ability of local governments to exercise their authority in the area of zoning and land use planning. In States like mine, our local governments are working very hard and are very proud of and very protective of that authority, and right now, for instance, there is a heavy emphasis put on acquisition by the local governments, and State, of open space land. I was privileged to join with the Chairman in working to defeat this legislation.

But in other instances, deciding whether Congress should prevent State and local governments from acting becomes, at least for me, a more difficult question. This goes directly to something that Professor McGinnis and Professor Galston talk about in their papers, which is the intention of the Framers in creating the Federal system to protect continental free trade, that it is on a continentalwide basis, national trade.

Professor Galston in his statement urges us to be open to the possibility that economic and technological changes of our day, such as telecommunications, the Internet, interstate banking, may require a reconsideration of some of the established Federal-State relations in certain areas.

This is a very complex question, but with the opportunity to step back and look at the big picture, I wonder if you have any suggestions about how we should weigh our varying responsibilities, Federal and State, for doing what the Framers clearly intended us to do, which is to maintain not only a continental market but a free market, as it were, while at the same time not encroaching on the appropriate areas of responsibility for State and local governments. I am thinking here specifically of the area of commerce, interstate commerce. Does either one want to take a shot at that? Governor Leavitt.

Governor LEAVITT. I actually do have some thoughts about that, Senator. I think that you have identified what may be the challenge of this generation of governance. We are approaching what I think is the new frontier of federalism. We may have to reinvent federalism, given the fact that we are now in a time when borders have less constructive meaning than they did before. We are having to find new ways of creating checks and balances in a Nation that has relied on borders that have defined us, and we no longer may have that option.

I would like to suggest one way that that can occur best. Aristotle used to speak a lot about the golden mean, which he defined as being the place between two vices, the natural tension between them. That is the basis of our federalism.

I still believe that the place that you are referring to is that gold

and the National Government have the capacity to resist one another in their effort to find it. The big problem we have right now and the reason we are drifting toward a mainframe type of government as opposed to a group of network PCs that really characterizes the information era is that the States are anemic. We do not have the capacity to resist the National Government. We are essentially told what we will do in almost every case, and the only resistance we have is to come to places like this and talk.

As we try to pioneer this new frontier of federalism, we have to find ways for the States to be able to resist the Federal Government, to find those places, or we will end up with a system of government that will not be consistent with our point.

Senator LIEBERMAN. Thank you.

Governor THOMPSON. Senator, if I could just add something very quickly, something that has really bothered me and I think it is starting to really concern a lot of people, I know it has Governor Leavitt, who has been a leader in this, but the fact of the new telecommunications, the new Internet commerce that is developing, there is the tremendous impact that is going to adversely impact the States. That is, as this new commerce is developing, the sales taxes that States are going to receive are going to diminish and it is going to get worse. The only people that can really help us are you.

We are so fearful of the situation where we may end up being like the European common community, where the States in Europe have to go to the Federal Government to get all their revenue and you have to fund us because you have taken away our sales tax resources. I do not think you want that. We do not want it, and are very concerned about that. So we need some way to be able to communicate with you that we have to redevelop this federalism.

The second point I would like to make is that we also have to do something as it relates to the administrative agencies, because I like dealing with you and I can usually convince you to go part way with the position of the States, but once it leaves your hands and goes over to a department, to some bureaucrat there that is going to promulgate the rules, like they have in TANF, we are left out. We have no recourse whatsoever. So we need some sort of assurance, some sort of protection under this new commerce and under the administrative agencies to be able to get our views out there and to be able to have an equal voice somehow with the Federal Government.

Chairman THOMPSON. Gentlemen, the clock has run on our vote, I think. If we do not leave right now, I do not think we are going to be able to vote.

Senator LIEBERMAN. Thanks for your very thoughtful responses. Chairman THOMPSON. I know that Senator Voinovich and Senator Collins are going to be back, if you would bear with us. I know you have to leave early.

Senator LEVIN. Could I find out when they do have to leave? In terms of my return, I would be interested. What is your schedule? Governor LEAVITT. Regrettably, Senator, I will have to depart

soon.

Chairman THOMPSON. I think we were talking about 10 o'clock.

Senator LEVIN. This is deja vu from yesterday for me, I am afraid. Usually, deja vu goes back a few years, but this does not. Governor THOMPSON. As Yogi Berra says, deja vu has got to be repeated all over again.

Chairman THOMPSON. Whichever Senator returns first will reconvene.

Governor THOMPSON. Thank you very much.

Chairman THOMPSON. Thank you very much. I guess I will not get a chance to go over my chart with you, but I put that up there for your benefit, so just absorb that and use it in whatever way you might want to.1

Governor THOMPSON. Thank you, Senator.

[Recess.]

OPENING STATEMENT OF SENATOR VOINOVICH

Senator VOINOVICH [presiding]. We will reconvene the hearing. The other Senators will be back in a couple of minutes. One of the real challenges of being a new Senator is figuring out how you can get to the floor in the fastest fashion without getting lost.

We were in the question period and Governor Thompson had to leave. Governor Leavitt, in terms of preemption legislation, what are you most concerned about in terms of preemption that is going on right now on the Federal level?

Governor LEAVITT. Senator, may I say that, I think, for the most part, it is the trend and the practice generally that concerns me. There is a momentum about a willingness to do it. It is in taxation authority of local government. We saw that potential with the Internet Tax Freedom Act. Gratefully, it was mitigated substantially from its original form. It is in the area of utilities, in the area of education-it is a new trend.

Frankly, I think it is based on-we have talked about unfunded mandates. That is a philosophy of compelling State and local governments to do things. In many cases, preemptions are a desire to prevent State and local governments, but both of them have the same. Those are some of the categories I would point to.

Senator VOINOVICH. I know that many people are in support of Senator Thompson's preemption legislation. How do you think that would have made a difference in terms of the issue of this Internet taxation problem, or Internet Tax Freedom Act?

Governor LEAVITT. It very clearly impacts the States' capacity to provide for our basic services. If the States lose the capacity to tax, the States lose the capacity to govern.

Initially, the original legislation that was proposed would have literally withdrawn all local taxation authority and then would have, by legislation, given back minor pieces. I think under Senator Thompson's proposal, that could have never reached serious consideration in the Congress because the States would have been able to ask their friends in Congress to be able to impose the teeth of the law and it would have given us a means by which we could have pushed back. The tension, the healthy tension, the checks and

The Chart entitled "Federal, State, & Local Taxes Collected Per Person," submitted by

balances that were intended by our system would have been provided. The mantra needs to be enforceable federalism.

Senator VOINOVICH. In other words, if the preemption legislation had been in effect, the people that drafted the Internet Tax Freedom Act and the committee that reported it would have been really forced at least to look at the issue of preemption

Governor LEAVITT. That is correct.

Senator VOINOVICH [continuing]. Probably something that did not occur to them until after they were off and running.

Governor LEAVITT. Plus the consultation, I think, would have been part of pointing that out.

Senator VOINOVICH. One of the things in which I am interested, and I hate to get into specifics, but there is some difference of opinion among some of the Committee Members in terms of whether a rule of construction-a legislative piece that says the presumption is that this legislation was not meant to preempt, or regulation was not meant to preempt, unless it said so explicitly, would be adequate without having a point of order. Would you like to comment on that?

Governor LEAVITT. I am not able to comment on the parliamentary throw-weight of the provision, but I can say that all the construction provision is a reflection of the Tenth Amendment. It is a statutory acknowledgement that the National Government has a limited role and that unless it is an enumerated responsibility of the National Government, it should be left with the States and the people. That was a condition of our Constitution in writing. It is part of the Constitution and we ought not to blanch at all in having Federal legislation that acknowledges and gives it its full due.

Senator VOINOVICH. The administration, as you know, last year changed their federalism Executive Order and then backed off from the changes. Could you bring us up to date on just where that is in terms of the White House and negotiations between the State and local government organizations?

Governor LEAVITT. The White House did propose a new federalism Executive Order that was deeply alarming to the States because it—well, first of all, it removed all reference to the Tenth Amendment and would have made substantial changes in the interaction between States and the Federal Government. By retracting it, they set into place a new process where they are working right now with the Big 7 to determine if changes are needed to the existing federalism Executive Order. They believe that there are changes necessary. The States and local governments would argue that there are no changes needed to the existing federalism Executive Order. There are no changes that are imminent, but there is an ongoing discussion between the Big 7 and the White House.

Senator VOINOVICH. Do you think anything is going to be done prior to the President's term of office ending?

Governor LEAVITT. That is unknown to me, but again, I would say that the position of the States and the National Government is that the burden needs to be placed on why it needs to be changed. We see very little reason for us to make any substantial change in the existing federalism Executive Order that has served us since the Reagan administration.