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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 y 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 unfaimess 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 revenucs.
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
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 policie
than the next state, North Dakota should benefit from new business investment, creating more
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. 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
, the Senate Energy Committee has expressed strong commitments to state resolution of electric utility deregulation and is proceeding cautiously.
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
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 y.
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
Al 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 Olmstcad 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
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