prior to action by either Congress or any federal agency taking any action with federalism implications. The bill would require federal courts to defer to states in any instance in which a federal law does not explicitly preempt states or, alternatively, if there is no direct conflict between the statue and state or local laws, ordinances, or regulations that cannot be reconciled. The bill would enable us to ensure that Congress' intentions are made clear and that they are enforceable to hold federal agencies accountable to Congress and the people.

Practical Consequences of Preemption

Federal preemption of state laws affects states in a number of ways. It can restrict their ability to raise revenue, promote economic development, meet the needs and priorities of the citizens of an individual state or community, and protect their citizens. The following examples, as well as the attachment, illustrate the practical consequences of federal preemption in these four areas:

• revenues (e.g.: Internet Tax Freedom Act);

sovereignty (e.g. medical records privacy);

• business development and innovation (e.g.: Financial Services Modernization); and

• ability to protect consumers and exercise state enforcement authority. (e.g.: Food Quality Protection Act).

Unlike unfunded mandates, however, once the federal government has preempted traditional state or local authority, that authority is unlikely to ever be returned.

NGA Principles of Federalism

The American federal system established a strong union while preserving the diversity reflected in individual states. State and local governments— governments close to the people-provide the needed opportunities for flexibility and innovation, and by their decentralization of decision-making and responsive nature, encourage citizen participation and support.

Although there is a clear need for national role in a variety of domestic issues, the principles of local determination and diversity require a careful balance of federal and state roles. It is vital to ensure that states have the authority and flexibility needed to respond to the needs of those who live within their boundaries.

We believe the following principles of federalism are essential to the major issues facing states today.

Principles of Federalism

The U.S. Constitution assigns certain responsibilities to the federal government and reserves the balance to states. Congress should limit the scope of its legislative activity to those areas that are enumerated and delegated to the federal government by the Constitution.

In cases where Congress expressly determines that federal preemption of state laws is in the national interest, the federal statute should accommodate state actions taken before its enactment.

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The federal government should exercise prudential restraint by refraining from enacting legislative and regulatory measures that preempt the states' ability to craft innovative solutions in areas of state responsibility.

It is essential that the federal government not preempt, either directly or indirectly, sources of state revenues, state tax bases, or state taxation methods.

State Recommendations

NGA supports this bill, Mr. Chairman, and we urge you to schedule a mark-up as soon as possible. While we do support the legislation, there are a number of important changes that we believe should be made to the bill. First, in Section 5, we believe that the analysis required in committee or conference reports should be expanded. We believe it is critically important for federal officials to understand the effects of legislative and regulatory preemptions on costs, economic development, consumer protections, and state and local enforcement authorities.

Additionally, to ensure greater accountability by Congress, we would encourage amending the bill to provide for a point of order. We believe the point of order under the Unfunded Mandates Reform Act has achieved its purpose without obstructing the process; we believe it an important addition to this bill. Without such a provision, we fear there will be no effective mechanism for enforcing the requirements for an analysis of preemption impacts prior to final passage of a bill.

Finally, in Section 6(b), the Rule of Construction would apply to all rules promulgated after enactment of this legislation. We believe that this subsection should be amended so that the Rule of Construction applies only to federal rules promulgated pursuant to legislation enacted after this legislation.

Conclusion

Because federalism legislation can never be perfect or finished, we are here today to encourage each of you to continue your efforts and expand your good work to this new threat to federalism. We support your efforts to apply these principles of enforceable federalism to legislative and regulatory preemptions of state revenues, laws, and administrative procedures.

When we fail to use these federalism principles consultation, disclosure, impact statements, deference, and enforcement we spend even more effort to correct the problems created in areas such as telecommunications, the Internet, environmental laws, local zoning, regulatory preemption, and long-term tax policy. Our message to you is to move forward towards an "enforceable" federalism partnership between elected officials of all levels of government.

We urge you to join us in a revived working partnership involving all of America in our system of government through all of its elected officials. We can best meet the single and special needs of some of the people, while also meeting the collective needs of most of the people.

Thank you very much.

EXAMPLES OF MAJOR PREEMPTION IMPACTS

Consumer Protection

The Senate Banking Committee is considering legislation, the Securities Markets Enhancement Act of 1999 (SMEA), that would undermine states' ability to protect investors from harm. If enacted, SMEA would:

Prevent states from denying licenses to rogue brokers. States would only be allowed to license brokers who are physically located in the state. In most states, however, 90 percent of stockbrokers conducting business in the state are located elsewhere. States would lose the ability to prevent out-of-state brokers with histories of disciplinary action from selling securities to unsuspecting investors.

Limit the information that states can collect and disclose. States would lose control of their public records. The National Association of Securities Dealers (NASD) would be given the authority to decide what information about state-licensed firms and brokers would be made available to the public. Currently, state securities regulators have the power to provide investors with the information they need to make informed decisions about their stockbrokers.

Weaken states' enforcement authority. If the Securities and Exchange Commission (SEC), the NASD, or a stock exchange has already imposed a financial penalty on a firm or broker, states would be prevented from imposing their own penalty. This would weaken states' ability to enforce state securities laws and protect state residents.

Revenue Generation

Congress passed the Internet Tax Freedom Act in 1998, imposing a three-year moratorium on the imposition of new taxes on Internet access. The legislation also established an advisory commission to study issues related to the taxation of electronic commerce and present recommendations to Congress by April 2000.

The Internet Tax Freedom Act prevents states from imposing taxes on Internet access. For a period of three years after enactment of the legislation, states cannot tax Internet access as a means of raising revenues to pay for education, safety, economic development, and other essential public services. It sets a precedent for federal limitation of states' taxing authority. Among other issues, the Internet Tax Freedom Act directs the Advisory Commission to examine "the effects of taxation, including the absence of taxation, on all interstate sales transactions." The commission could recommend imposing a new, expanded moratorium on taxing Internet sales or even an outright ban on such taxes. Senator Robert Smith (R-N.H.) has already introduced legislation this year to extend the existing moratorium permanently. Others, such as House Majority Leader Dick Armey (R-Texas) have recommended not only making the preemption of state and local authority permanent, but also expanding it to state and local sales and use taxes. States that rely on sales taxes to finance government activities would increasingly have to rely on different mechanisms to raise revenues.