Here’s the basic idea behind federalism: The states are autonomous to run their affairs pretty much as they see fit, with a few necessary exceptions (no allowing slavery, for example), and Washington generally stays out of the states’ business.
A serious threat to federalism in recent years has been the use of federal funds to bribe just about everyone. States accept the federal funds. Cities accept them. Universities accept them. And with federal funds come strings. Everyone wants the money, and in order to ensure the federal spigot doesn’t get turned off, the recipients of federal funds will do pretty much whatever the feds demand.
This is how federalism is endangered. Congress doesn’t have to pass laws telling states what to do. Congress simply sends the states money. And as the states become dependent on the money, Congress starts putting conditions on the receipt of the funds. The states don’t dare defy the feds’ demands. They’re addicted.
Advertisement - story continues below
Democrats have learned this game well, and they’re playing it shamelessly with the imminent passage of this latest COVID spending blowout. Democrats hate tax cuts. They always oppose them. And it’s not enough for Democrats in Washington to oppose tax cuts at the federal level. According to language in the spending blowout President Biden will likely sign in the coming days, states are barred from cutting taxes if they accept the money:
But here’s the political gut punch. The bill explicitly bars states from cutting taxes. States “shall not use the funds,” the bill says, “to either directly or indirectly [our emphasis] offset a reduction in the net tax revenue” that results “from a change in law, regulation, or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.”
Wow. Democrats in Washington are trying to dictate to governors and state legislatures that they can’t change their tax laws if they accept their share of the $1.9 trillion. The sweeping prohibition would last through 2024, and the bill grants Treasury Secretary Janet Yellen authority to write regulations “as may be necessary or appropriate to carry” it out. The language is so expansive that states could be limited from making any changes to their tax codes that reduce revenue even if they don’t use federal funds as direct offsets. Much will depend on how Ms. Yellen defines “indirectly.” States that don’t comply with her interpretation will have to repay federal funds.
The word “indirectly” is especially invidious here. What Democrats are saying is that, not only can you not use the COVID money to offset tax cuts, you can’t use any revenue to offset tax cuts. In other words, if you take the stimulus funds, you’re committing not to lower the tax rates your state levies on its residents.
Advertisement - story continues below
If you do? They will make you pay the federal bailout money back.
There is nothing to stop Congress from doing this as long as it keeps sending federal money to grateful recipients, who keep accepting it and agreeing to the conditions. In order to restore to states the autonomy they should have under federalism, the whole federal revenue-sharing gambit needs to stop.
And that shouldn’t be that difficult. Why does the federal government need to collect tax revenue (or borrow) just so it can turn around and “share” it with some other entity? If the states need the money, then leave the money in the states in the first place and let them tax it from their own residents. Washington can collect only the money it needs to run the federal government, and nothing else.
It’s insane anyway for the federal government to be funding other levels of government when we’re annually running deficits in the trillions. But this is one of the primary reasons Democrats want the federal government spending as much as possible, and giving it to as many other entities as possible. When you accept federal money, you agree to live by the federal government’s rules, and that makes the federal government all-powerful over just about everything.
That is exactly the agenda of the Democratic Party. So if your state accepts the money, don’t expect your state taxes to be reduced in the next three years. Your state officials are giving up their own autonomy on tax policy in order to satisfy their federal masters.