How the States Committed Suicide
In Obamacare, Congress made the states an offer it thought they couldn't refuse: If they expanded their Medicaid systems to include residents with incomes up to 138 percent of the poverty rate, Washington would pick up 100 percent of the tab for the first three years. And any state that didn't go along would see its federal Medicaid dollars eliminated entirely.
When the Supreme Court upheld the Affordable Care Act in 2012, it held that Congress could not punish states so severely for failing to enact federal legislators' preferred policies. (Medicaid composes the largest part of most state budgets, and the federal government automatically picks up 50 to 83 percent of each state's Medicaid spending, no matter how much they choose to spend.) Nevertheless, about half of the states have gone along. This can be seen as the last step toward making the states nothing more than administrative units of the federal government, completing a process that began a century ago.
How did the once-sovereign states become wards of Washington? They did it to themselves. State politicians came to recognize that they would benefit from a more powerful national government. As scholars like Michael Greve and Todd Zywicki have shown, state actors helped to break down the original constitutional system of "competitive federalism," which kept government limited as states competed with each other to attract business and labor. In its place they contrived a parasitical "cooperative" or "cartel" federalism, in which states extract wealth from each other through the federal government.
The first and most important steps came in 1913, when the states ratified the Sixteenth and the Seventeenth Amendments. The Seventeenth was the greatest structural change ever made to the Constitution. State legislatures gave up their power to choose U.S. senators. The Senate no longer represented the states as states, and senators became agents of federal empowerment. Historically, the Senate had been the more conservative chamber of Congress (as the Founders intended); after 1913 it became the more liberal.
The Sixteenth Amendment gave Congress the power to tax incomes. Federal tax revenue had never been more than 10 percent of GDP. Soon after they were never less than 10 percent, and after World War II they were never less than 20 percent. The states had handed over a tremendous revenue source to the federal government.
And what did Congress do with all the revenue? It gave a lot of it back to the states. Congress was able to do things that the Constitution did not allow it to do by paying the states to do them -- provided the state programs met congressional standards. The first such "grant-in-aid" was for the prevention of forest fires in 1911. With help from the income tax, the concept was extended to maternity and child care, education, road-building, and other matters. When Massachusetts challenged the constitutionality of these grants, the Supreme Court dismissed the suit for lack of jurisdiction.
This decision, Massachusetts v. Mellon (1923), was particularly important, because the courts had been important enforcers of "competitive federalism." The Supreme Court added to Massachusetts in 1938, when it permitted state law to prevail over federal common law in areas like torts and contracts. States now competed to be the most friendly forum in which plaintiffs could sue out-of-state corporations.
Grants-in-aid helped to hide the real increase in federal power after World War II. Federal civilian employment has hardly increased at all, despite a doubling of the population. (The increased use of contractors also helps hide the growth of government.) Washington now provides one-third of all state revenue, an all-time high, even though state and local taxes rose from 6 percent of GDP in 1953 to 14 percent in 2007.
State governments have also ceded sovereignty to public-employee unions; many of them adopted collective bargaining in public employment in the 1960s, and since then legislators have awarded ever greater salaries and benefits in exchange for election support. This has brought many American states and cities to the brink -- and Detroit over the brink -- of bankruptcy.
It is a somewhat hackneyed quotation, but we should remember Louis D. Brandeis's observation that "a state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country." At stake in the fight over Obamacare is the end of those labs.
Paul Moreno holds the William and Berniece Grewcock chair in constitutional history at Hillsdale College.