Does Federal Spending "Coerce" States? Evidence from State Budgets

By Galle, Brian | Northwestern University Law Review, July 1, 2014 | Go to article overview

Does Federal Spending "Coerce" States? Evidence from State Budgets


Galle, Brian, Northwestern University Law Review


ABSTRACT-According to a recent plurality of the U.S. Supreme Court, the danger that federal taxes will "crowd-out" state revenues justifies aggressive judicial limits on the conditions attached to federal spending. Economic theory offers a number of reasons to believe the opposite: federal revenue increases may also buoy state finances. To test these competing claims, I examine for the first time the relationship between total federal revenues and state revenues. I find that, contra the NFIB v. Sebelius plurality, increases in federal revenue-controlling, of course, for economic performance and other factors-are associated with a large and statistically significant increase in state revenues. This version of the study provides extensive background explanations of underlying economic concepts for readers unfamiliar with the prior public finance literature.

[H]eavy federal taxation diminishes the practical ability of States to collect their own taxes.[dagger]

INTRODUCTION

NFIB v. Sebelius-the health care case-upheld most of the Affordable Care Act, but allowed states to "opt out" of certain aspects of the law's changes to the Medicaid program.1 As early commentators have noted, the Medicaid portions of the decision rewrote seventy-seven years of precedent, altered one of the fundamental legal rules underlying the modern state, and, oh by the way, may also affect access to health care for millions.2 What other writers have not yet observed is that all of those outcomes depend logically on a single factual claim, made explicitly by four "dissenters" and relied upon implicitly by the three Justices who joined the "majority" opinion. The Court's entire analysis of that fact is set out in the quotation just above this paragraph. My goal here is to give a more serious examination, including both theoretical and original empirical analysis, of whether federal taxation affects states' "practical ability . . . to collect their own taxes."3

First, a little more background. Medicaid is an exercise of the federal power of conditional spending.4 Congress can "lay and collect Taxes . . . to . . . provide for the . . . general Welfare," and can impose conditions on the receipt of those funds.5 Between 1935 and late June of 2012, that power faced few meaningful restrictions.6 Starting in the 1990s, though, the Court held that Congress was prohibited from "commandeering" state officials.7 Effectively, the federal government could regulate state officials qua state officials only if states were willing to accept money in exchange. In NFIB, however, Justice Roberts's opinion declared that federal threats to revoke Medicaid funds in some settings could so "coerce" states that the states had no "real" choice but to comply, rendering Medicaid the practical equivalent of commandeering.8 Two Justices joined in that portion of the decision, while four other Justices, who described themselves as "dissenters," basically agreed with that outcome, although they did not formally join Roberts's opinion.9

What does health care have to do with state taxes? Consider Justice Roberts's claim that the threat of Medicaid revocation was a "gun to the head" of states.10 Colorful, but states do not have heads. What they do have is budgets. A closer analogy might be the college student told by her parents, "No more beer or no tuition." Many students would start to skip the keg parties. But Mark Zuckerberg could laugh and drink up. Financial pressure, in other words, depends on the need for and availability of other sources of revenue.11 As the NFIB dissenters apparently recognized, Medicaid's large contribution to state budgets does not itself make an intuitive case for coercion; for states to really be pinched by budget threats, it must also be the case that the lost funds could not readily be replaced.

The dissenters filled this logical gap by arguing that states cannot afford to replace Medicaid.12 Their claim, again, is that federal taxes make it tougher for states to raise revenues. …

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