Congressional Inconsistencies.

In the perennial struggle for power, there are always trade-offs. Last year, for instance, states traded authority over the banking and brokerage industries for financial modernization. What will happen to Internet taxation remains to be seen.

Several members of Congress, a governor, a state legislator and an attorney general gathered on May 20 in the U.S. Capitol. The occasion was congressional approval of a provision guaranteeing that states would get their full share of the tobacco settlement money.

"That was a truly heady experience," recalls Maryland Delegate Nancy Kopp, who represented the National Conference of State Legislatures at the celebration (disguised as a press conference). "Passage of this anti-recoupment law was an unequivocal message that decisions about how to allocate the tobacco money would be made in state capitals, not by the national government. It was, in its way, a continuation of devolution."

Six months later, President Bill Clinton signed legislation revising the laws governing the financial services industry. The National Journal proclaimed it one of the most important accomplishments of the first half of the 106th Congress.

"In a congressional session marked more by words than by action," it noted, "one legislative landmark stands out: the demolition of the 66-year-old wall that separated banking from the insurance and securities business."

The law will allow new hybrid businesses merging banking, securities and insurance services. A barely observed by-product of this financial services reform legislation is its preemption of state laws that traditionally regulated the banking, insurance and securities industries.

"Technology and the global economy may have made financial modernization inevitable," says Michigan Senator Joanne Emmons. "Often lost in the debate, though, was the evisceration of state regulation. There are trade-offs in almost any bill. In this one, we gain modernization. We sacrifice state authority. We get preemption."

So, the first half of the 106th Congress continued the Dr. Jekyll and Mr. Hyde treatment of state governments. One heady victory places control over billions in tobacco settlement money with state legislatures and governors. But landmark financial services legislation weakens the control that state officials traditionally have had over this major sector of the nation's economy.

This has been the federalism fight of the 1990s. In this corner, wearing red, white and blue trunks, a native of 50 state capitals, representing devolution and flexibility, we have Dr. Jekyll. In the opposite corner, wearing green trunks with a dollar sign motif, stands Mr. Hyde, representing Washington, D.C., national solutions and preemption.

FEDERALISM SCHIZOPHRENIA

Will this federalism schizophrenia persevere during the first congressional session of the new century? The answer is almost certainly yes. Perhaps the best predictor of the congressional agenda for 2000 is what it has left over from last year. Many of these items have the potential for preemption and centralization. The presidential campaigns and the intense fight for control of Congress could increase the number of proposals that would supplant state decision making with national standards. Yet, there will also be opportunities to protect and even enhance state prerogatives.

INTERNET TAXATION: FIRST BIG FIGHT OF THE CENTURY

The Federal Advisory Commission on Electronic Commerce is scheduled to issue its recommendations on taxation of Internet transactions in April. The 19-member commission, which was created in 1998 by the Internet Tax Freedom Act, has been the vehicle for a contentious and fundamental debate over the future of state and local revenue systems. The debate is also over preemption and the federal government's role in state tax policy.

The often acrimonious fight has been led by two Republican governors who are members of the federal commission. The chair, Virginia Governor James Gilmore, wants to make the Internet a "tax free zone." He and his allies, who include Ohio Congressman John Kasich, advocate federal legislation that would ban state and local governments from collecting sales taxes on electronic commerce. Gilmore argues that the Internet is an indispensable component of the growth and vitality of the nation's economy. "The Internet is the most transforming technological development since the Industrial Revolution," he told USA Today. "Its growth must not be thwarted by taxation."

Utah Governor Michael Leavitt, on the other hand, believes that keeping state and local governments from collecting taxes on Internet sales is unfair to Main Street retailers who are required to collect them. He also notes that state and local officials need the revenues generated by sales taxes to keep up with constituent demand for services and to assume the added responsibilities that have come to them through devolution. Leavitt took on members of his own party at a November press conference. "Aren't we the party of devolution?" he asked. "How can we as Republicans argue for devolution on the one hand, yet take away state tax resources with the other?"

Governor Leavitt has put forward a proposal that would streamline sales tax collections for electronic transactions. The plan, which would not require congressional approval, uses technology to eliminate the financial and administrative burdens on remote sellers for collecting sales and use taxes. It would also require greater uniformity among state and local tax laws. NCSL's Task Force on State and Local Taxation of Telecommunications and Electronic Commerce has endorsed the Leavitt proposal, with some reservations.

The federal advisory commission will attempt to choose among these and 35 other proposals as it develops a final report by April. Whatever it says, the report almost certainly will spark debate in the press and in Congress. For Leavitt and his supporters, there is a risk that members of Congress will side with Gilmore and Kasich and attempt to pass legislation that would prohibit collection of taxes on e-commerce and other Internet transactions. "There is such a short time--perhaps a year or two--to develop a system that is fair and workable," asserts Tennessee Representative Matt Kisber, co-chair of NCSL's task force. "What we need right now is for Congress not to act, not to preempt."

FOUR LEFTOVERS FROM 1999

The postmortems on the 1999 session of Congress began several weeks before adjournment. A September analysis in the Washington Post noted that Congress at that point had passed only 39 bills, many of which were in the category of naming buildings or appointing members of commissions. The newspaper blamed the low output on the battle to win majorities that began as soon as the 1998 elections were over. The Hill, a Washington weekly added, "All year, both parties scrambled to set an agenda for the elections, with little regard for whether the positioning would produce actual legislation."

A New York Times recap concurred. "The fierce struggle for the House, in particular, sets the tone for debate on almost every issue of significance. The Republicans are trying to govern with one of the narrowest majorities this century, and they face a Democratic minority that is in a determined, disciplined drive to pick up the five seats needed to return to power."

The result of this acrimony was passage of very different bills in the two houses, bills that then stalled when they reached the conference committee stage. Several of these stalled bills, including digital signatures, juvenile crime, managed care and aviation, have major consequences for state legislatures.

It appeared that some form of federal managed care legislation was a sure thing a year ago. President Clinton wanted it. Republican and Democratic congressional leaders wanted it. Committee chairs and rank and file members wanted it. The only problem was agreeing on "it." The most fractious debate occurred in the House. After months of negotiations, Speaker Dennis Hastert and other House Republican leaders watched as the House defeated their version of managed care and patient rights legislation in October. Instead, the House passed a bill supported by House Democrats and 68 Republicans. Sponsored by Georgia Republican Charles Norwood and Michigan Democrat John Dingell, the legislation is, among other things, a sweeping preemption of state insurance regulation and an extension of existing ERISA preemption to other areas. The Senate approved a more limited managed care bill. It mostly preserves the states' authority to regulate insurance and is focused primarily on self-funded ERISA plans that the federal gov ernment already regulates.

Late in the 1999 session, Senate and House leaders appointed managed care conferees. Hastert's list included only one member who supported the Norwood-Dingell bill. The bills are so divergent that several observers wonder whether the conference committee will be able to find common ground. Rather, Congress may turn to other popular health-related bills such as privacy of medical records and prescription drugs for Medicare patients.

The Internet and other technologies have prompted 44 state legislatures to enact laws that establish standards for electronic signatures and for transmission of records. Two bills awaiting conference committee negotiations in 2000 would assert the federal government's authority over this field. The House bill, sponsored by Commerce Committee Chair Tom Bliley, is more prescriptive than the Senate version and preempts state laws on electronic transmission of records. The Senate bill, championed by Michigan Senator Spencer Abraham and Vermont Senator Patrick Leahy, also sets a national standard for digital signatures. However, it would allow state legislatures to reestablish their authority by enacting model legislation, the Uniform Electronic Transaction Act, recently developed by the National Conference of Commissioners of Uniform State Laws. NCSL's Assembly on Federal Issues unanimously approved in December a resolution that endorses the Senate bill.

The fight during 1999 over reauthorization of federal aviation programs reprised a debate waged a year earlier over highway funding. Pennsylvania Congressman Bud Shuster and a majority of House members preferred legislation that would guarantee that money in the aviation trust fund be spent on aviation. Several senators and the president, having lost a similar battle over TEA 21 in 1998, opposed the Shuster approach. Aviation bill conferees were able to agree on most program reauthorization issues, but were divided primarily over funding issues, including whether to guarantee state airport improvement grant money. They were also split over expansion of the number of landing slots at three major airports. The conference committee was unable to resolve its differences, and Congress failed to agree to a short-term extension of airport programs. The conferees presumably will resume negotiations early this year.

North Dakota House Majority Leader John Dorso notes that "most federal anti-crime bills pass in election years." Congress demonstrated Dorso's prescience by working all year on juvenile justice bills, but delaying resolution of House and Senate differences until 2000. The bills began the year as state friendly. They would have removed a variety of mandates and sanctions and given states more flexibility in designing and running juvenile justice programs. They became much less state friendly, though, when Congress added language federalizing crimes and penalties, for example, specifying when juveniles must be tried as adults. The primary obstacle to passing the juvenile crime bills was a disagreement over whether to include a gun control measure. Conferees will try to resolve these during the election year session.

OTHER 1999 LEFTOVERS

At least three other measures important to states made some progress during 1999 and could receive more attention in 2000. Twenty-one states have now restructured or deregulated their electric utility systems. Several members of Congress and the Clinton administration have advocated federal legislation. There was little concrete legislative activity on these bills until late in the 1999 session. The House Subcommittee on Energy and Power reported an electricity restructuring bill in October that is deferential to past and future state efforts. Both the White House and the chair of the powerful House Commerce Committee, Virginia Congressman Bliley, objected.

The House passed two significant education bills in October. Each offers contrasting approaches to the policy role of the federal government. On the one hand, the House reauthorization of the Elementary and Secondary Education Act places numerous mandates on the states and local school districts. For example, it allows parents to transfer children from an unsafe school to any school in the state. The other, the so-called Straight A legislation would create a 10-state pilot project allowing states to receive their federal education money in the form of a block grant. Elements of the ESEA bill, according to Kansas Representative Ralph Tanner, "weaken our system of government."

"The imposition of a federal mandate," he says, "even when it has a desirable outcome, is at best a pyhrric victory." The Straight A bill has drawn qualified endorsement from NCSL and Representative Tanner.

Speaker Hastert tried in October to revive House negotiations over the Superfund program, legislation that has languished for four years. By November, the talks had broken off. Superfund renewal was dead again, at least until this session.

TWO BIG ISSUES TO WATCH

Fleishman Hillard's budget expert Stan Collender compared the 1999 budget fight to a popular television series. "This Seinfeld budget battle was about nothing, and nothing much got done," he told USA Today. He decried the final bill as "the biggest list of highly questionable gimmicks ever used." Many of these gimmicks merely delay harder budget decisions until next year and could place pressure on programs valued by state legislators.

Human services block grants could be especially vulnerable. Throughout 1999, state legislators successfully fought congressional proposals to reduce funding for the Temporary Assistance for Needy Families block grant, the centerpiece of the 1996 welfare revamping. In negotiations over the new welfare law, legislators and governors agreed to substitute a block grant for entitlement funding in order to get more flexibility in designing programs. Their fears about the uncertainty of block grant funds proved well-founded during 1999. Their. "a deal's a deal" campaign prevented cuts for the FY 2000 budget and presumably will have to be resurrected for FY 2001.

Another issue brewing is that the world's rapidly changing information technologies have caused legislatures and the federal government to examine how they affect privacy. Medical records, financial information, drivers' licenses, and Internet activities have all come under scrutiny over the past several months. As legislators grapple with these complex issues, they will be wary about federal proposals that would unnecessarily preempt state authority.

PREVENTING PREEMPTION: A GLIMMER OF HOPE

The current era of state-federal relations is characterized by few, if any, new instances of unfunded mandates, but many federal proposals to usurp authority. Many of the legislatures' federal priorities for 2000--electric utility restructuring, digital signatures and managed care, among others--fall into this preemption category.

The Senate Governmental Affairs Committee last August passed legislation designed to reduce federal preemption of state authority on a 12-2 vote. The bill had resulted from months of negotiations among the committee chair, Tennessee Senator Fred Thompson, its ranking minority member, Michigan Senator Carl Levin, and representatives of NCSL, governors and local officials. Celebrations of this milestone were premature. The Senate success mobilized the bill's opponents. A coalition of business, labor and environmental groups, led by the U.S. Chamber of Commerce, had brought great pressure on the committee considering companion legislation. Realizing he did not have the votes, Indiana Congressman David McIntosh, the bill's chief House proponent, withdrew the measure. Since August, McIntosh has attempted to broker a compromise among the bill's strongest supporters, led by NCSL, and its opponents.

"Passage of this federalism legislation should be state legislatures' highest priority for 2000," says NCSL President Paul Mannweiler. "Minimizing preemption would begin the new century with a new, more constructive era in the states' relations with the federal government."

Carl Tubbesing, NCSL's deputy executive director, heads the Washington, D.C., office.

1999 VICTORIES FOR THE STATES

The media postmortems on the 1999 session uniformly criticized Congress for its slow pace and low output. And the scorecard on the priorities for the state governments reflected that. The year did feature one of the states' greatest victories ever, however. There were several other wins, but none of the magnitude of the protection of the states' tobacco settlement money. There were also a few defeats.

* Tobacco Settlement. North Carolina Representative Dan blue Called passage of anti-recoupment legislation a "stunning affirmation of the states' standing in the federal system." The Clinton administration had claimed that states owed the federal government over half of the money due them as part of the master settlement agreement with the tobacco industry. Texas Senator Kay Bailey Hutchison and Florida Senator Bob Graham led the charge in Congress to deny the claim. State legislators and governors mobilized behind anti-recoupment language inserted in the emergency appropriations bill that made its way through Congress in the spring. When the conference report on the supplemental appropriations bill passed in May, the anti0recoupment provision was in it.

* A start on a Federalism Package. During the year, Congress considered a series of bills designed to strengthen the standing of states in the federal system. The most sweeping of these--the Federalism Accountability Act and the Federalism Act--progressed several steps in the Senate and House before stalling under opposition from the U.S. Chamber of Commerce and others. However, two bills in the package passed. The State Flexibility Clarification Act, a refinement of the Unfunded Mandate Reform Act, instructs the Congressional Budget Office to score a reduction in federal matching funds as a mandate. The other, the Financial Assistance Accountability Act, simplifies the grant application process for states.

* Federalism Executive Order. President Clinton signed a new executive order on federalism in August. Negotiations over the new directive consumed more than a year. They began when state legislators and other state and local officials protested one order Clinton issued to replace one signed by President Reagan and another Clinton had issued earlier in his administration. The one now in effect--#13132-maintains most of the philosophical underpinnings of the Reagan order, but features several practical improvements that make it more workable.

* Social Security Numbers on Drivers' Licenses. A provision in the immigration law passed in 1996 would have required states to include Social Security numbers on drivers' licenses. In alliance with the American Civil Liberties Union and the Eagle Forum, NCSL argued that the provision threatened privacy and preempted the laws in 44 states that specifically prohibit those numbers on licenses. The transportation appropriations bill for 2000 includes language that repeals the provision in the 1996 immigration law.

* FY 2000 Budget. Passing appropriations bills in the new era of federal budget surplus proved no easier than passing them when deficits were rampant. State officials were primarily concerned about proposed cuts to welfare block grants and other social services money. At stake, they argued, was the deal they had made in 1996 to exchange the flexibility of block grants for the certainty of entitlement programs. Despite several threats, the Temporary Assistance for Needy Families block grant escaped the budget battle this year more or less unscathed. A companion program, the social services block grant, was cut by $153 million.

* ED Flex. Congress's limited bow toward devolution in 1999 came with passage of Ed Flex legislation. This new law, which extends an experimental program to all 50 states, streamlines the waiver process for seven education program requirements.

* Welfare Regulations. Battles won in legislation sometimes can be lost in the regulations. But that proved not to be the case in 1999 when the Department of Health and Human Services issued final regulations for TANF. State legislators worked hard to persuade HHS officials to permit maximum flexibility in running TANF and its related programs.

* Financial Services Modernization. The biggest loss for states in 1999 came with passage of new financial services legislation. Although NCSL supported financial services reform, the organization objected to several provisions that preempt state laws in the final bill. One affects the states' authority over the legal status of mutual insurance companies, another preempts state laws regarding licensing of insurance agents and the third relates to the privacy of medical records.