By Anne Stauffer, Director of Fiscal Federalism at The Pew Charitable Trusts
and Former Federal and State Budget Official

The relationship between federal and state finances is complex, not well understood and vital to almost every aspect of Americans’ lives. Federal and state tax dollars jointly support schools, roads, health care, public safety and other key programs. This partnership, however, is under pressure from the enormous fiscal challenges of the past several years and the ongoing fiscal uncertainty at the federal level. An informed conversation using real data on the state impact of federal policies could help policymakers make the tough choices required to put all levels of government on a path to fiscal stability.

The legislative and executive branches have been in a longstanding gridlock, making it difficult to assess their standing on federalism. 

But the U.S. Supreme Court has made its standing clear. The last two Supreme Court terms have produced four blockbuster decisions. All four of these cases have one thing in common—federalism.

A study released by the National Governors Association (NGA) and The Council of State Governments (CSG) found that repealing federal tax provisions that most affect state and local budgets “would bring a net loss of approximately 417,000 jobs and $71 billion in real GDP” over the next 10 years. The study, Macroeconomic Analysis of Federal Tax Proposals Affecting State and Local Budgets, analyzed two scenarios: one would place a 28 percent cap on the value of both state and local tax deductions and the earned interest exclusion for municipal bonds; the other would repeal both entirely. Although the magnitude of the effects of these scenarios varies significantly, the overall result is similar— higher tax burdens decrease consumption and savings rates, while lower levels of infrastructure spending decrease construction activity and the economic spillover associated with it.

By Joseph F. Zimmerman, Professor, Rockefeller College of Public Affairs and Policy, State University of New York

Congressional pre-emption—or nullification—refers to a statute removing regulatory powers from state and local governments. A pre-emption act can range in length from less than one page to hundreds of pages and may be simple or exceptionally complex. Congress in recent decades included one or more pre-emption statutes in omnibus budget reconciliation acts and appropriation acts that are hundreds of pages in length, as well as in other pre-emption acts. As a result, the total number of pre-emption acts is higher than the total number of individual pre-emption bills signed into law by presidents.

The situation is bad between federal and state governments and it doesn’t look like it’s going to get better anytime soon. 

The Council of State Governments’ Focus on Federalism Task Force conducted its first meeting in September at CSG’s 2013 National Conference with a hearing focused on how intergovernmental relations have gotten so bad and what can be done about it. The task force is a two-year effort of CSG to “explore options for repairing the relationships between state and federal governments,” said Alaska Sen. Gary Stevens, CSG’s 2013 chair.