Let me cite one example. In 1998, Congress enacted the Internet Tax Freedom Act, imposing a three-year moratorium on state and local tax measures affecting electronic commerce. The result is at least a temporary preemption of state revenue laws. The federal internet law leaves in place a loophole created by the Supreme Court's 1967 decision in National Bellas Hess v Illinois, which effectively exempts most out-of-state mail order and electronic retailers from responsibility for sales tax collection. The result is a current revenue loss, every year, for states and localities, estimated to exceed $6 billion. Under the new federal law, an advisory commission is studying means of encouraging electronic commerce while accommodating state revenue needs. The fear is that the Internet Tax Freedom Act simply sets the stage for permanent preemption of state tax authority over electronic commerce. Bills calling for such permanent preemption have already been introduced or discussed.

Such a permanent preemption could have a devastating effect on states. The National Governors' Association estimates that if Internet sales reach $300 billion, as some project, by 2002, states and localities, if they continue to be preempted, will lose revenues of $20 billion per year. Such federal preemption, I must also say, puts my local retailers in Fargo, who must collect state sales taxes, at a terrible competitive disadvantage. Such unfairness in the treatment of similarly situated retailers is a threat to the whole sales tax system, on which states depend for about one third of their revenues.

Mr. Chairman and members of the committee, my constituents in Fargo know me for what I am, a legislator who believes in small government and lower taxes. I have a record of keeping taxes

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low and fair for the people of North Dakota. Federal preemption, of this kind, makes it more difficult for me to pursue my goal of common-sense tax reduction in my state.

Let me give you some other examples. For over 15 years Congress, has considered various proposals to set national standards for product liability lawsuits in state court, and Congress has passed in recent years several more-limited preemptions of state civil law, for example the "Y2K" liability bill.

Again, such preemption presumes states can't handle their own business. I believe in tort reform, and have acted to reform North Dakota's civil justice system to create a better business climate. Most other states have done the same. If a few jurisdictions are out of step, so be it. That probably reflects the will of their citizens. As I noted earlier, San Francisco and Fargo are very different places, but that is the beauty of our federal system. It respects diversity. It also encourages a healthy competition among states. If my state has more business-friendly policies than the next state, North Dakota should benefit from new business investment, creating more jobs.

Electric utility deregulation is another good example of a proposal for sweeping preemption. During the last session of Congress, proposals were made by leading House members and by the Clinton Administration to impose national rules in retail electricity markets.2 Such preemptive legislation, which is still under consideration, would impose a "one-size-fits-all" federal policy

on retail competition that ignores local conditions, values, and cost structures. It could also force

2

1 Thankfully, the Senate Energy Committee has expressed strong commitments to state resolution of electric utility deregulation and is proceeding cautiously.

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dramatic changes in state and local utility tax structures and franchise fee systems that again are

not adapted to local needs and could result in major revenue losses.

I am not saying that electric utility deregulation is a bad idea. I am saying, as with tort reform and state tax reductions, let state legislatures handle the issue. Many states are proceeding rapidly to encourage competition in their retail electricity markets. The states are experimenting with a variety of approaches to deal with such complexities as stranded costs and maintenance of basic service to rural areas. By testing different approaches in different states, we will find out which policies work and which backfire. Also, policy is adapted to local conditions. If my state has a history of high utility rates and unsatisfactory service, as a legislator, I may opt for a policy of rapid open competition. On the other hand, if my state has low rates and good service, maybe as a result of large-scale hydroelectric projects, then the prudent policy may be to move more slowly, making sure that market reforms don't have unintended negative consequences for a system that is already working pretty well for families and businesses in my state. Again, respect diversity and allow states to experiment and compete.

As for other examples, I can name several. State regulation of the insurance industry periodically comes under fire. The Telecommunications Act of 1996 swept much more broadly in preempting state law than it had to. We have seen proposals for national standards for building codes and for a police officers' bill of rights regulating how we deal with our own public

employees. Current immigration laws preempt state drivers' license and birth certificate

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The Problem of Preemption by Agencies: I don't want to suggest that only Congress is to blame. The problem of preemption by federal agency regulation is just as big if not bigger.

Let me give an example of the impact of a preemptive federal regulation on the states. As you know, the Americans with Disabilities Act was written by Congress with lofty good intentions in sometimes very general language. One question that arose was whether the ADA requires states in some circumstances to provide mental patients with treatment in community-based programs rather than in state mental hospitals, as a matter of right. The language of Title II of the ADA does not provide a precise answer to the question. Regulations issued by the U.S. Department of Justice, 28 CFR section 35. 130 (d), however, are more precise: "a public entity shall administer services, programs, and activities in the most integrated setting appropriate to the needs of qualified individuals with disabilities."3

Based in large part on this DOJ regulation, the U.S. Supreme Court recently held in Olmstead v. L.C. and E.W. that in certain circumstances, a state can be found to have discriminated against a mentally disabled person in violation of the ADA by adopting a policy favoring institutional over community-based treatment. Thanks to the DOJ regulation, the door is now open for individual litigants and courts to make what should be essentially legislative policy decisions about how scarce state resources are spent to provide optimal service for a wide variety of mentally disabled

persons.

At the time DOJ promulgated this final rule, July 26, 1991, it was still preparing a statement of its federalism impact under E.O. 12612 and promising to provide copies on request.

What should be settled by a state legislature in substantive state law and appropriations for state mental health agencies, now as a result of preemptive federal rulemaking, is regarded as a civil rights issue that may be settled by federal judges. The judges will decide when the costs and program trade-off outweigh the right of a disabled person to "integrated" community treatment.

While I deeply respect the heartfelt concern for the plight of the mentally ill which drove the regulatory and litigation process, I believe there is a serious potential for unintended negative consequences from the DOJ rule and the Olmstead decision. The potential preemption of state law governing mental health policy is broad. The potential cost to states if they provide treatment of the mentally ill is high and, what is worse, unpredictable. It makes the politics of providing better community mental health services potentially much more contentious and difficult.

Now, if you suspect that my position on this issue is hard-hearted or represents some kind of throwback to the bad-old-days when states' rights arguments were used as a cover for state disrespect for civil liberties, let me refer you to a June 9 opinion piece in the Washington Post entitled "Deinstitutionalization Hasn't Worked," by E. Fuller Torry and Mary T. Zdanowicz. The story illustrates the failures and complexities of state mental health policy. Among other arguments, Torry and Zdanowicz say: "Hundreds of thousands of vulnerable Americans are eking out a pitiful existence on city streets, underground in subway tunnels or in jails or prisons because of the misguided efforts of civil rights advocates to keep the severely ill out of hospitals