• Congress will establish an internal process for making it much more clear to agencies and the courts when it intends to preempt and what the limits are on the scope of such preemption;

and

Congress will provide guidance to agencies and courts, in the form of a strict rule of construction, so that court decisions and agency rules preempt state law only when there is a clear statement of congressional intent.

As a practical matter, the need for greater clarity in congressional intent goes to the heart of the problem. A review of the case law, I think, will bear me out when I say that most preemption cases do not involve an "actual conflict" between federal and state law. In other words, the cases do not ordinarily turn on explicit provisions in federal law providing for preemption or on circumstances where it is physically impossible for an individual or corporation to comply with both state and federal laws. As a 1991 report of the Appelate Judge's Conference notes: "Supremacy Clause cases typically call on the courts to discern or infer Congress's preemptive intent." The report goes on to say that: "By their very nature, implied preemption doctrines authorize courts to displace state law based on indirect and sometimes less than compelling evidence of legislative intent. This indirectness in turn suggests a greater potential for unpredictability and instability in the law."

The largest part of the preemption problem results from courts and in particular administrative agencies, in effect, reading preemption into the statute based on some theory that it is implied. For this reason, I urge this committee to pass legislation ensuring a process under the rules of the House and Senate for making it clear when Congress intends to preempt and to

provide for "a rule of construction" to guide courts and agencies in their reading of federal statutes. This should limit overly-creative theories, based for example on such loose notions of implied preemption as the pervasive nature of federal regulation, the peculiarly federal nature of the interests at stake, allegations that state law "stands as an obstacle," or the "scope of authority" granted to a federal administrative agency.

In conclusion, I want to emphasize that NCSL would like to see anti-preemption legislation move forward on a bipartisan basis. Members of both parties should support a bill that ensures a more thoughtful legislative process and that limits unjustified federal displacement of state law based on creative theories of preemption by implication. Such legislation would strengthen our system of federalism. It would also strengthen the role of Congress. Most important of all, passage of anti-preemption legislation would assure the American people that their states and local governments will continue to play a role in regulating the local economy in a way that protects the public interest.

Mr. Chairman, members of the committee, I thank you for this opportunity to testify.

Good morning, Mr. Chairman, my name is Clarence Anthony. I am a the mayor of South Bay, Florida, and I serve as the President of the National League of Cities, the largest and oldest organization representing the nation's cities and towns and their elected officials. I am here this morning, with my colleagues, to discuss the relationship between the federal government and state and local governments-whether we can achieve a more effective partnership to benefit our mutual constituents.

We want to begin by thanking you and the committee for holding this hearing. We believe we are in the midst of fundamental changes affecting the relationship of the federal government to state and local governments. We are grateful to you for your recognition of the importance of this issue-not just to us, but to all Americans. The changes--both those ongoing and pending in the Executive branch, on the Hill, and by regulatory agencies--could have long term impacts on state and local governments. We support fundamental changes in policy direction, many of which you have either authored or supported, to ensure the most efficient and effective possible service to our citizens and taxpayers. We appreciate your interest, and we hope to provide continuing support for changes to rebuild our federal system.

Mr. Chairman, there are some 36,000 thousand cities and towns in the United States. Most have small populations, few professional staff, and small budgets. 91 percent have populations of less than 10,000. This is a time of great change for all of them. The fiscal trends are significant with consequences for the future. For the most part, the current changes involve the assumption of significantly greater responsibilities - offloaded from the federal government - and significant federal preemption threats to historic and traditional local fiscal, land use and zoning authority.

We are in the middle of enormous and rapid changes in the federal-state-local relationships with long-term consequences for the nation's cities. The changes, if anything, were re-emphasized just one year ago by the President's Executive Order on Federalism and concurrent proposal to revoke two earlier Executive Orders that we were involved in putting together. They are highlighted by the legislation signed into law last October to interfere with the rights of states and local governments to regulate and tax sales and services provided over the Internet in the same way as all other sales and services are taxed-even though no such limitations would apply to the federal government. This legislation, adopted with minimal consideration of the consequences for state and local governments, and especially for public education, demonstrates the importance of this committee's efforts to ensure we have adequate information to inform all policy-makers prior to taking actions. In no instance have we been invited to the table even though the most significant impacts will be felt at home.

The nation is witnessing totally new emerging technologies transforming the country and its cities - perhaps in ways totally different than in previous cycles. These changes have implications for state and local revenues as they radically redefine old concepts of nexus, and as the economy moves to the future against a backdrop of state and local tax systems adopted for another era. Because today's new technologies are not as capital-intensive, or labor-intensive, or heavily industrial as the ones which used to drive the American economy, NLC adopted a proposal to create a joint endeavor with the National Governors' Association (NGA) and the National Conference of State Legislatures (NCSL) to produce a report intended to provide information to

elected state and local leaders about the changing nature of the national economy, with an analysis of the potential impacts on state and local revenues and the flexibility of current structural capacities to respond to these changes. We are following up this year with a new report looking at the impact of the global economy, deregulation, and information technology on the structure of state and local governments.

Economic, technological, telecommunication, demographic, and legislative changes are altering the federal system, perhaps beyond recognition. Our purpose last year was to examine the equity and responsiveness to changes in the economy of State and local revenue systems in today's global economy. What are the factors eroding state and local authority: federal pressure, changing demographics, globalization of the economy? Designed during the smokestack age, are state and local tax systems obsolete, inequitable, and unresponsive to changes in the economy? Have changes in the American economy, the population, and federal policies undercut the ability of states and local governments to assume greater demands and ensure equity in their revenue systems?

The most significant fiscal trend over the past twenty years has been the declining share of federal support to state and local governments, which has placed a much greater burden on current state and local taxes. Federal grants-in-aid to state and local governments averaged 21.5 percent of their total spending over the 1990-95 period. This is well below the 26.5 percent peak that occurred in 1978. Consequently, state and local governments have had to rely much more on their own tax revenue sources to generate sufficient revenue to provide services required by the public. Further, the recent trend of Congress pushing more responsibilities to state and local governments will place additional burdens on the current state-local tax structure.

Deregulation of the telecommunications and electric industries. Allowing competitive entry in these regulated industries will force state and local governments to experience substantial tax shifting. Substantial hardship is expected for taxing jurisdictions that rely heavily upon existing electric generating facilities to pay local property taxes.

Federal tax reform. Congressional proposals for a flat tax and a national retail sales tax would force states to undertake major revisions of their sales and personal income tax systems. Both proposals would eliminate state and municipal authority to issue tax-exempt municipal bonds— affecting more than $1 trillion in outstanding bonds used to finance virtually every school, jail, road, airport, and bridge in the nation. It would be difficult to overstate the havoc caused to the state-local tax structure if federal tax law eliminated deductions for mortgage interest, state personal income taxes, and local property taxes.

At the time our framers put together and fashioned our unique system of federalism, it was a long journey through the mud and swamps to get back and forth from Capitol Hill to the White House. Today, it is a matter of microseconds. The Internet heralds a new age that renders borders increasingly irrelevant. The most powerful trends affecting our future are international trade,