President Reagan focused on the preservation of state and local authority, the new proposal focuses on the supremacy of the federal government. Perhaps the most telling difference between the new version and the earlier two is the insistence upon an expanded list of situations where federal action is justified, including the: need for uniform national standards; reluctance of state and local governments to impose necessary regulations themselves for fear of business relocation; increased costs to governments because of decentralization; compliance with international treaties and other agreements; and • excessive costs of specialized expertise which would put the costs of regulation beyond the capacity of state and local governments. Recommendations We would hope that as an outcome of this set of hearings, the committee would consider the following recommendations: a moratorium on new federal preemptions by the House and Senate. · the adoption of legislation to require a fiscal impact analysis on all federal legislation and federal regulations, including regulations from independent agencies such as the Securities and Exchange Commission, the Federal Energy Regulatory Commission, and the Internal Revenue Service, on states and local governments. • the introduction of a federal Preemption Relief Act, to act as a follow-up to the Unfunded mandates reform Act of 1995. the issuance of a joint report on generation fiscal concerns and disparities and their implications for the federal system. Background As cities have realized an ever smaller share of their budgets from federal grants-in-aid, the importance of the health of local economies has increased. Today, cities realize the greatest portion of their revenues to balance their budgets from local taxes and fees. It is, in large part, for that reason that balancing the federal budget and controlling federal entitlement spending have been our highest federal priorities for the last five years. We have worked especially closely with the National Conference of State Legislatures on both fronts. Spending less to pay interest on the national debt and more to prepare for tomorrow has been a guiding policy of the organization. In some ways, the decision in the budget seems part and parcel of the growing tendency in Washington, D.C. to take away the authority of state and local leaders to make decisions that reflect the will and interest of the citizens they represent - that somehow federal officials know far better what is in the best interests of citizens in a community than their own local leaders. Last July, the NLC Board of Directors adopted a motion to carry out a study of federal spending trends, the changing economy and demographics, and emerging economic disparities. The action came after a major discussion by the Board with regard to the impact of federal fiscal policies and their impact on disparities in the nation's cities. The Board also provided input to a joint initiative with the National Governors' Association and the National Conference of State Legislatures to examine emerging trends affecting state and local revenues. 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 FIVE HALLMARKS OF DEVOLUTION IN THE 1990s The election of Bill Clinton, a former The governor, to the White House in 1992 and the Republican takeover of Congress in 1994 created an atmosphere congenial to turning responsibilities over to state legislators and governors. The phenomenon known as devolution funds programs through block grants, rather than categorical funding. It gives state officials greater flexibility for designing programs. It loosens some of the strings that the federal government traditionally has attached to grant money. And it substitutes options for cumbersome, "father knows best" federal waiver processes. Unfunded Mandate Reform Act Ohio Senate President Richard Finan has called unfunded mandates "the most powerful symbol of the imbalance in the federal system." Unfunded mandates, he said in a 1997 speech, "represented the exact opposite of how our federal system is supposed to work. Decisions were being made at the national level and paid for one or two levels below that." Passed in early 1995, the Unfunded Mandate Reform Act marked the beginning of the devolution era. The act has three key elements. It set up a unit in the Congressional Budget Office to develop cost estimates on mandates. It has a strong point-of-order procedure, which gives any member of Congress the right to question an unfunded mandate on the floor. And it requires all federal agencies to prepare an analysis of any new regulation that will cost more than $100 million. PREEMPTION AS A CATCH-22. Welfare Reform The sweeping 1996 welfare reform law is the centerpiece of devolution. It substitutes a block grant, called Temporary Assistance for Needy Families, for the old entitlement program, Aid to Families with Dependent Children. State officials accepted lower and constrained funding levels for flexibility in designing and running programs. The law stresses moving welfare recipients into jobs. It eliminates the onerous federal waiver process that state officials formerly had to follow to experiment with their own approaches. It is not totally lacking in mandates and penalties. (State legislators have especially railed against its very prescriptive child support enforcement section.) Yet its key elements form the mantra of devolution: more flexibility, more responsibility and more choices. Safe Drinking Water Act The old Safe Drinking Water Act epitomized the "command and control" approach to federal-state relations common in the 1980s. The old law was an effective rallying point for the campaign against unfunded mandates. Why, cried legislators, mayors and governors, must a city in Nebraska test its water for a pesticide that is used only on pineapples in Hawaii ? State legislators, governors and local officials were instrumental in passage of the new Safe Drinking Water Act, which removed many of those unfunded mandates. Approved in 1996 at almost the same time as the welfare reform law-the new drinking water law also establishes a state revolving loan fund for construction of drinking water capital projects. Some advocates of specific preemption proposals argue that states have not done enough in the area. Proponents of others point out that most states have already acted, so why shouldn't the federal government step in and finish the job? State legislatures are damned if they do, damned if they don't. In the damned-if-they-do category are some of the federal proposals to regulate managed care. If 41 states already ban the use of so-called gag clauses in communications between managed care doctors and patients, then, proponents ask, Medicaid Reforms The budget bill approved last August codified an agreement between congressional leaders and the president to balance the budget by 2002. (Current predictions are that the budget may be balanced by FY 1999.) The act is a comprehensive combination of tax cuts, spending increases, spending cuts and program changes. Among the program changes are two that continue devolution. The first is a set of alterations to Medicaid that give state officials greater flexibility in running this expensive program. State legislators can now decide to use managed care in their Medicaid programs without applying to the federal Health Care Finance Administration for a waiver-waivers that formerly might be approved, might be denied, but without fail took many months, and sometimes years, to process. Legislators also now have more flexibility in determining cost reimbursement. The new budget act repeals the Boren Amendment, which Medicaid providers had used in court to compel states to reimburse them at higher rates. Children's Health Insurance The budget balancing act also initiated the most significant change in national health policy in a decade or more. The children's health insurance program allocates $24 billion over five years to states to provide coverage to children who are currently uninsured. State legislatures have considerable flexibility under the new law for choosing among coverage options and setting benefit levels. many current state laws and regulations are inadequate to protect the safety of children. PREEMPTION AND NATIONAL IMPERATIVES Occasionally, achieving a national goal overrides concern for state authority. In these instances, preemption is nearly a coincidental effect of the desire to accomplish a compelling national objective. The Voting Rights Act of 1965, for example, substituted federal law for state laws in order to end discrimination. Federal air quality law supplants state laws and regulations because air does not recognize state boundaries, and states, acting on their own, cannot reduce pollution. The national tobacco settlement and proposals to reform the federal tax system are good current examples. The tobacco agreement, reached among 41 state attorneys general and the tobacco industry, is intended to accomplish several objectives. It would reduce smoking, especially among children and adolescents. It would reimburse states for past and future medical costs for patients with smoking-related illnesses. And it would limit the tobacco companies' liability from at least some financial and legal claims. At the core of the agreement is a trade. The companies agreed to pay $368.5 billion over 25 years, $193.5 billion of which would go directly to the states. States, in turn, would accept federal preemption of state tort law. The attorneys general also agreed, in part to satisfy antismoking activists, to preemption in several other areas, including laws regarding smoking in public places, a minimum smoking age, vending machine sales and other retail practices. The settlement must be codified with federal legislation. Several members of Congress, including Massachusetts Senator Ted Kennedy, Utah Senator Orrin Hatch, North Dakota Senator Kent Conrad and Arizona Senator John McCain, have introduced bills offering their versions of the settlement. Each would preempt state authority. Proposals to reform the federal tax system have received more attention in the past several months, especially now that it appears the federal budget will be in balance within the year. Some would change elements of the current income tax structure. Others would scrap the income tax in favor of entirely different taxes. Texas Congressman Bill Archer, House Ways and Means chair, and Louisiana Congressman Billy Tauzin have different national sales tax proposals. House Majority Leader Dick Armey advocates a flat tax. The goals of these reformers include simplifying taxes, mitigating inequities and eliminating an unpopular tax. Any of the proposals, however, have consequences for state revenues and state tax codes, including preemption. THERE ARE SOLUTIONS State legislators and governors are working to find ways to draw attention to the problems posed by preemption and to minimize the number of federal bills and regulations that .upplant state authority. Meeting in November 1997, representatives of NCSL, the National Governors' Association, the American Legislative Exchange Council and the Coun cil of State Governments agreed to a set of "federalism statutory principles and proposals." The proposals are patterned in part after elements of the Unfunded Mandate Reform Act and are designed to place procedural obstacles in the way of attempts at preemption. The groups are now working to generate support in Congress and the administration for such a measure. Current controversies over preemption and centralization reach back to the drafting of the Constitution, to the early days of the United States, and the debates between Alexander Hamilton and James Madison-differences that led to the formation of the first political parties in this country. They no doubt will continue into the next millennium. THE FIVE HALLMARKS OF DEVOLUTION IN THE 1990s The election of Bill Clinton, a former Th governor, to the White House in 1992 and the Republican takeover of Congress in 1994 created an atmosphere congenial to turning responsibilities over to state legislators and governors. The phenomenon known as devolution funds programs through block grants, rather than categorical funding. It gives state officials greater flexibility for designing programs. It loosens some of the strings that the federal government traditionally has attached to grant money. And it substitutes options for cumbersome, "father knows best" federal waiver processes. Unfunded Mandate Reform Act Ohio Senate President Richard Finan has called unfunded mandates "the most powerful symbol of the imbalance in the federal system." Unfunded mandates, he said in a 1997 speech, "represented the exact opposite of how our federal system is supposed to work. Decisions were being made at the national level and paid for one or two levels below that." Passed in early 1995, the Unfunded Mandate Reform Act marked the beginning of the devolution era. The act has three key elements. It set up a unit in the Congressional Budget Office to develop cost estimates on mandates. It has a strong point-of-order procedure, which gives any member of Congress the right to question an unfunded mandate on the floor. And it requires all federal agencies to prepare an analysis of any new regulation that will cost more than $100 million. PREEMPTION AS A CATCH-22. Welfare Reform The sweeping 1996 welfare reform law is the centerpiece of devolution. It substitutes a block grant, called Temporary Assistance for Needy Families, for the old entitlement program, Aid to Families with Dependent Children. State officials accepted lower and constrained funding levels for flexibility in designing and running programs. The law stresses moving welfare recipients into jobs. It eliminates the onerous federal waiver process that state officials formerly had to follow to experiment with their own approaches. It is not totally lacking in mandates and penalties. (State legislators have especially railed against its very prescriptive child support enforcement section.) Yet its key elements form the mantra of devolution: more flexibility, more responsibility and more choices. Safe Drinking Water Act The old Safe Drinking Water Act epitomized the "command and control" approach to federal-state relations common in the 1980s. The old law was an effective rallying point for the campaign against unfunded mandates. Why, cried legislators, mayors and governors, must a city in Nebraska test its water for a pesticide that is used only on pineapples in Hawaii ? State legislators, governors and local officials were instrumental in passage of the new Safe Drinking Water Act, which removed many of those unfunded mandates. Approved in 1996 at almost the same time as the welfare reform law-the new drinking water law also establishes a state revolving loan fund for construction of drinking water capital projects. Some advocates of specific preemption proposals argue that states have not done enough in the area. Proponents of others point out that most states have already acted, so why shouldn't the federal government step in and finish the job? State legislatures are damned if they do, damned if they don't. In the damned-if-they-do category are some of the federal proposals to regulate managed care. If 41 states already ban the use of so-called gag clauses in communications between managed care doctors and patients, then, proponents ask, Medicaid Reforms The budget bill approved last August codified an agreement between congressional leaders and the president to balance the budget by 2002. (Current predictions are that the budget may be balanced by FY 1999.) The act is a comprehensive combination of tax cuts, spending increases, spending cuts and program changes. Among the program changes are two that continue devolution. The first is a set of alterations to Medicaid that give state officials greater flexibility in running this expensive program. State legislators can now decide to use managed care in their Medicaid programs without applying to the federal Health Care Finance Administration for a waiver-waivers that formerly might be approved, might be denied, but without fail took many months, and sometimes years, to process. Legislators also now have more flexibility in determining cost reimbursement. The new budget act repeals the Boren Amendment, which Medicaid providers had used in court to compel states to reimburse them at higher rates. Children's Health Insurance The budget balancing act also initiated the most significant change in national health policy in a decade or more. The children's health insurance program allocates $24 billion over five years to states to provide coverage to children who are currently uninsured. State legislatures have considerable flexibility under the new law for choosing among coverage options and setting benefit levels. |