The dual personality of federalism.

States may be the laboratories of democracy, but the federal government thinks that it knows best. It hardly ever does.

This has been a Dr. Jekyll and Mr. Hyde decade for state governments. The Dr. Jekyll side of the 1990s has gotten more publicity. This is the side of the decade's personality defined by devolution, flexibility and more responsibility for state legislatures. Dr. Jekyll has presented the states with landmark devolution legislation: most prominently, welfare reform, a new safe drinking water act, the children's health program and Medicaid reforms.

The Mr. Hyde aspect has received less attention. Preemption of state authority and centralization of policymaking in the national government characterize this half of the decade's dual personality. It restricts state options and promotes uniformity. The Mr. Hyde half has preempted state authority over telecommunications policy, federalized criminal penalties and given the federal government more responsibility for regulation of banks.

Dr. Jekyll is devolution. Mr. Hyde is counter devolution. Devolution trusts state officials and relies on them to be responsive and responsible. Counter devolution says state boundaries are archaic. Devolution subscribes to Justice Brandeis' premise that states are laboratories of democracy. Counter devolution raises the question, "Are states really necessary?"

The devolution trend may have lost momentum. (Only new legislation on work force training and surface transportation pending this year would continue devolution.) On the other hand, there are at least a dozen proposals before Congress this year that have the potential for more preemption and greater centralization in Washington of policymaking.

Is there something about the last decade of the 20th century that is accelerating the trend toward preemption? Yes and no. There are five primary explanations of why federal officials propose to preempt state activity. Two of these are more or less unique to the 1990s. Three, however, are permanent components of the preemption debate.

PREEMPTION BECAUSE OF TECHNOLOGY

There is no doubt that technological advances have altered the way the country conducts its business and the way people communicate. The Internet, computer networks, cellular phones and all of their technological and telecommunications cousins have shrunk the world. They ignore state boundaries, present daunting challenges to state regulatory schemes and tax structures, and tempt federal officials to supplant state regulation and taxation with national approaches.

Turn on your computer. Get on the Internet. Access the Barnes and Noble home page. Type in your Visa number. Order a hundred dollars worth of books. Do you pay your state and local sales tax? Probably not. Get in your car and drive to the mall. Go into Barnes and Noble and buy the same books. Do you pay your state and local sales tax? Absolutely.

Sign up with America Online. Pav the monthly fee. Do you pay a local government Internet access tax? Maybe, but probably not. Decide that you want to be the first in your neighborhood to use on-line telephony. Do you pay the telecommunications tax? Now, that's a really tricky one.

"Electronic commerce poses a long-term threat to the current tax system. The threat is that consumers will increasingly use electronic media for purchasing goods and services-circumventing conventional sales taxation," writes Thomas Bonnett in Is the New Global Economy Leaving StateLocal Tax Structures Behind? State legislators are only just beginning to grapple with the tremendously complex and politically charged questions of whether and how to tax transactions on the Internet.

Federal officials are concerned about how state and local governments will tax the Internet. Some, like California Congressman Christopher Cox, Oregon Senator Ron Wyden and the Clinton administration, worry that any rush by state and local governments to tax it will stifle a burgeoning new industry and dampen economic activity. Senator Wyden argues that taxation of Internet activities would prevent "small high-tech businesses from prospering."

Wyden and Cox are pushing federal legislation that would prevent state and local governments from enacting new Internet taxes for six years. They argue that a lengthy moratorium is necessary to give the industry a chance to grow and to provide time for government and industry officials to work out a systematic approach. North Dakota Senator Byron Dorgan, a former state tax commissioner, strongly opposes the Cox-Wyden bill. "Federal preemption is inappropriate," he says. "The federal government should keep its nose out of the states' business."

Technology, combined with a dramatically evolving economy, also explains federal attempts to preempt state regulation of the banking and insurance industries. State legislatures initiated the revolution in financial services industries in the 1980s when they began allowing interstate banking. In 1994, Congress approved the Riegle-Neal bank reform bill that largely substituted federal interstate branch banking rules for the ones states had developed. Legislation to modernize banking pending before this session of Congress would further erode state control of financial services. The bill, whose chief sponsor is House Banking Chairman Jim Leach, would limit states' regulatory authority over insurance and securities.

Iowa Congressman Leach argues that technology and the changing financial services marketplace make state regulation of the industry virtually obsolete. In a March 1997 speech before the Institute of International Bankers, the Banking Committee chair argued: "The global financial services industry is evolving at a rapid pace, and legislation is needed in part to reflect marketplace changes, in part to set the ground rules for the next generation of change."

The Office of the Controller of the Currency, an executive branch agency, has made similar arguments in a series of recent rulings that have eroded the ability of states to regulate banking and insurance.

Despite the changing financial marketplace, defenders of state banking and insurance laws argue that state regulation is necessary to ensure a financial system that makes the most sense for each state. "Banking needs in Arkansas are just not the same as they are in New York," says Arkansas Representative Myra Jones. She fears that "continued nationalization of banking will prompt the exodus of investment capital from certain states, especially rural ones."

PREEMPTION AND POLITICS

Congressional politics have changed over the past decade. There are more competitive congressional districts. And congressional campaigns are becoming more and more expensive. It is plausible to argue that both of these developments have exacerbated the congressional tendency to propose legislation that would preempt state authority.

According to American Enterprise Institute scholar Norman Ornstein, congressional elections have become more competitive in the 1990s. More seats are changing parties from election to election. There are greater fluctuations in election margins. (An incumbent may win with 60 percent of the vote one year, then lose two years later.) And the number of safe seats has come down from the high mark of the 1988 election.

More competition presumably means that congressional candidates are actively on the lookout for issues that will appeal to voters. They need popular ideas that set them apart from their opponents. What better place to look than state legislatures?

For several years, legislatures have responded to consumer concerns about managed care. According to NCSL's Health Policy Tracking Service, 32 states have adopted legislation that gives patients in managed care direct access to OB/GYNs. Twenty-six legislatures have passed laws requiring that insurers cover emergency care. Recognizing the popularity of these and similar laws, Georgia Congressman Charles Norwood has introduced comprehensive legislation to regulate a variety of managed care practices. If approved, Norwood's bill would preempt all state legislation m this area.

The 1997 gubernatorial race in New Jersey drew national attention to consumers' concerns about the costs of automobile insurance. Since the 1970s, 15 state legislatures have attempted to control insurance costs by adopting no-fault laws. Kentucky Senator Mitch McConnell, asserting that "the nation's auto insurance system desperately needs an overhaul," has introduced legislation in the 105th Congress that would preempt state laws and impose a national nofault system.

State legislatures have responded in various ways to consumer complaints about fees that banks charge for using automatic teller machines. A few have banned the fees altogether. A few others have required banks to inform customers that they will be assessed a fee for using the machine. Bills currently pending in Congress copy these two approaches. New Jersey Congresswoman Marge Roukema takes the warning message approach. New York Senator Alfonse D'Amato would ban the fees. Either would preclude state regulation and variations among states.

The cost of running for Congress has continued to rise in the 1990s - substantially more than the rate of inflation. A cynic might link the increase in preemption proposals to an incumbent congressman's nearly insatiable need to raise campaign funds. Some legislative and regulatory proposals, which almost coincidentally preempt state authority, are worth billions of dollars to companies. The companies naturally marshal their lobbying resources in support or opposition to the bills and favor their congressional allies with political donations.

In 1995, the New Hampshire legislature became the first in the nation to restructure electric utilities. Since then, nine other legislatures have approved similar legislation. In 1996, Colorado Congressman Dan Schaefer introduced legislation that proposes to impose national deregulation and to preempt state efforts. Such a massive change in the electric industry would be worth millions, if not billions, of dollars to companies affected by restructuring. For example, the Edison Electric Institute, a trade association for investor-owned electric utilities, opposes federal mandates that would require states to restructure. Enron, a power marketing company, supports such federal action.

It is not surprising, therefore, that campaign contributions from companies in this fight have increased dramatically since Congressman Schaefer first introduced his bill. For example, Enron and its PAC in 1993 reported soft money contributions to the various congressional campaign committees and the two national parties of $47,000. By 1995, this figure grew to $120,000. And in 1996, the year the deregulation bill was filed, Enron's soft money contributions totaled $286,500 - a sixfold increase in three years.

Contributions to individual congressmen also increased in this period. Congressman Schaefer chairs the Energy and Power subcommittee of the House Commerce Committee. Campaign contributions from energy companies to Congressman Schaefer, for example, went up following introduction of his bill. In 1993-94, Schaefer reported contributions from energy companies and associations of $25,806. They increased by almost $10,000 for 1996-97 - once the bill was introduced.

Comprehensive national legislation to reform telecommunications, which passed in early 1996, also attracted substantial donations to congressional campaigns and the national political parties. A 1996 Common Cause study found that "local and long distance telephone companies gave their biggest political donations ever during the last six months of 1995." The bill, which South Dakota Senator Larry Pressler called "the most lobbied bill in history," preempts state authority over the telecommunications industry and sets the conditions for entry of Bell companies into the long distance telephone market.

Certain congressional committees may be popular among members because of the issues with which they deal and their link to campaign contributions. Membership on the House Banking Committee has grown by five since the beginning of the current biennium. The Bureau of National Affairs attributes this to the committee's jurisdiction over financial modernization legislation - proposals that would preempt state authority. "It is a bonanza in terms of PAC funding," says an unnamed source for the BNA story. "The issue before the Banking Committee pits the banking lobby against the securities lobby, the insurance lobby. It's a committee that naturally attracts major PAC funding. This is one of the richest PAC mines." And apparently a rich source of preemption.

PREEMPTION AND DIVERSITY

In the late 1970s, the National Conference of State Legislatures and the State Government Affairs Council cooperated on a project on "purposeless diversity." Legislators and private sector representatives attempted to identify policy areas in which uniformity among states was desirable. The project's premise was that some kinds of diversity impose costs on the private sector and, therefore, have a dampening effect on the economy. Like many things, though, purposeless diversity is in the eve of the proverbial beholder. Debate in the federal government over preemption often centers on whether uniformity is warranted in order to reduce private sector costs.

For a decade or more, Congress has considered legislation that would preempt state product liability laws. Proponents of preemption in this area argue that a national product liability law would reduce business costs and, therefore, improve the competitive position of American businesses. In testimony before the Senate Commerce Committee in 1993, Alabama Representative Michael Box asserted that these arguments are "specious" and lauded the advantages of a civil justice system that allows states to fine-tune their laws in response to changes within each state. Representative Box summarized by saying that "uniformity has no greater intrinsic value than the value of self-government by states."

In 1996, Congress approved product liability legislation. President Clinton vetoed it, however. During 1997, West Virginia Senator Jay Rockefeller shuttled between the White House and Capitol Hill in an attempt to find a compromise. New product liability legislation could surface again during the 1998 session.

PREEMPTION AS A CATCH-22.

Some advocates of specific preemption proposals argue that states have not done enough in the area. Proponents of others point out that most states have already acted, so why shouldn't the federal government step in and finish the job? State legislatures are damned if they do, damned if they don't.

In the damned-if-they-do category are some of the federal proposals to regulate managed care. If 41 states already ban the use of so-called gag clauses in communications between managed care doctors and patients, then, proponents ask, what's the harm in having a national law? But federal intrusion precludes additional experimentation and the adjustments that legislatures make as they Main experience with new laws.

In the damned-if-they-don't category this year is child care. President Clinton has made new child care legislation one of his top four or five initiatives for 1998. The administration so far has resisted pleas from some children's advocates to fight for national standards. The advocates argue that these standards are necessary because they believe many current state laws and regulations are inadequate to protect the safety of children.

PREEMPTION AND NATIONAL IMPERATIVES

Occasionally, achieving a national goal overrides concern for state authority. In these instances, preemption is nearly a coincidental effect of the desire to accomplish a compelling national objective. The Voting Rights Act of 1965, for example, substituted federal law for state laws in order to end discrimination. Federal air quality law supplants state laws and regulations because air does not recognize state boundaries, and states, acting on their own, cannot reduce pollution.

The national tobacco settlement and proposals to reform the federal tax system are good current examples. The tobacco agreement, reached among 41 state attorneys general and the tobacco industry, is intended to accomplish several objectives. It would reduce smoking, especially among children and adolescents. It would reimburse states for past and future medical costs for patients with smoking-related illnesses. And it would limit the tobacco companies' liability from at least some financial and legal claims. At the core of the agreement is a trade. The companies agreed to pay $368.5 billion over 25 years, $193.5 billion of which would go directly to the states. States, in turn, would accept federal preemption of state tort law. The attorneys general also agreed, in part to satisfy antismoking activists, to preemption in several other areas, including laws regarding smoking in public places, a minimum smoking age, vending machine sales and other retail practices. The settlement must be codified with federal legislation.

Several members of Congress, including Massachusetts Senator Ted Kennedy, Utah Senator Orrin Hatch, North Dakota Senator Kent Conrad and Arizona Senator John McCain, have introduced bills offering their versions of the settlement. Each would preempt state authority.

Proposals to reform the federal tax system have received more attention in the past several months, especially now that it appears the federal budget will be in balance within the year. Some would change elements of the current income tax structure. Others would scrap the income tax in favor of entirely different taxes. Texas Congressman Bill Archer, House Ways and Means chair, and Louisiana Congressman Billy Tauzin have different national sales tax proposals. House Majority Leader Dick Armey advocates a flat tax. The goals of these reformers include simplifying taxes, mitigating inequities and eliminating an unpopular tax. Any of the proposals, however, have consequences for state revenues and state tax codes, including preemption.

THERE ARE SOLUTIONS

State legislators and governors are working to find ways to draw attention to the problems posed by preemption and to minimize the number of federal bills and regulations that supplant state authority. Meeting in November 1997, representatives of NCSL, the National Governors' Association, the American Legislative Exchange Council and the Council of State Governments agreed to a set of "federalism statutory principles and proposals." The proposals are patterned in part after elements of the Unfunded Mandate Reform Act and are designed to place procedural obstacles in the way of attempts at preemption. The groups are now working to generate support in Congress and the administration for such a measure.

Current controversies over preemption and centralization reach back to the drafting of the Constitution, to the early days of the United States, and the debates between Alexander Hamilton and James Madison - differences that led to the formation of the first political parties in this country. They no doubt will continue into the next millennium.

RELATED ARTICLE: THE TOP TEN PREEMPTION PROPOSALS FOR 1998

There are at least 10 proposals pending in Congress and the administration this year that would preempt state authority.

Electric Utility Deregulation Since 1995, 10 legislatures have chosen to deregulate the electric utility industry. Many others have considered restructuring and have rejected it or decided to defer it. Proposed congressional legislation would impose a national solution.

Tobacco Settlement The agreement reached between state attorneys general and the tobacco industry would preempt state law in several areas - product liability, smoking in public places, sales to minors and others. Preemption in the agreement is viewed as a concession state officials would make in exchange for settlement funds - and to achieve a national goal of reducing smoking, especially among teenagers. Most of the bills introduced in Congress as versions of the settlement would also substantially preempt state authority.

Juvenile Justice Last spring, the House passed juvenile crime legislation, sponsored by Florida Congressman Bill McCullom, that continues a trend toward federalizing crime and criminal penalties. For example, it would force states to try as adults juveniles accused of violent crime. Similar legislation is pending this year in the Senate.

Tax Reform All of the major proposals to revamp the federal tax code - whether a national sales tax, a flat tax or changes to the income tax - have consequences for state tax systems. The consequences include explicit or implicit preemption of state tax laws and a significant impact on state revenues.

Internet Taxation Bills offered by California Congressman Christopher Cox and Oregon Senator Ron Wyden would place a moratorium on state and local taxation of activities conducted over the Internet. Early versions of the legislation might have rolled back many existing and traditional taxes, including those on sales and property. Later rewrites would preclude only imposition of new taxes on Internet activities.

Child Care President Clinton wants to make affordable child care available to more people. He has resisted calling for national standards that would govern child care providers. Children's advocates want national standards, which would preempt state control. So far, they have not garnered much support in Congress.

Product Liability For at least a decade, Congress has considered bills that would substitute federal rules of law for state product liability laws. In 1996, Congress, for the first time ever, was able to agree on federal product liability legislation. After lengthy debate in the White House, President Clinton vetoed the bill. Congress was unable to override the veto. Several members of Congress, led by West Virginia Senator Jay Rockefeller, tried during 1997 to find a compromise acceptable to both the president and Congress.

Takings Many state legislatures have wrestled with the complex and controversial questions associated with property rights and the taking clause of the Fifth Amendment to the Constitution. The U.S. House last year passed legislation that would remove certain aspects of property rights matters from the purview of the states. The Senate is taking up similar legislation in 1998, sponsored by Georgia Senator Paul Coverdell and Utah Senator Orrin Hatch.

Financial Services Financial modernization legislation, whose chief advocate is Iowa Congressman Jim Leach, would remove firewalls between banks and other financial services, such as insurance and securities. In the process, it would preempt all state laws that currently govern the relationship between banks, insurance companies and the securities industry.

Managed Care Georgia Congressman Charles Norwood is the principal sponsor of legislation that would regulate a wide range of managed care practices - for example, the length of maternity stays, access to emergency services and access to specialists. If approved, the bill would preempt state activity in this area.

RELATED ARTICLE: THE FIVE HALLMARKS OF DEVOLUTION IN THE 1990s

The election of Bill Clinton, a former governor, to the White House in 1992 and the Republican takeover of Congress in 1994 created an atmosphere congenial to turning responsibilities over to state legislators and governors. The phenomenon known as devolution funds programs through block grants, rather than categorical funding. It gives state officials greater flexibility for designing programs. It loosens some of the strings that the federal government traditionally has attached to grant money. And it substitutes options for cumbersome, "father knows best" federal waiver processes.

Unfunded Mandate Reform Act

Ohio Senate President Richard Finan has called unfunded mandates "the most powerful symbol of the imbalance in the federal system." Unfunded mandates, he said in a 1997 speech, "represented the exact opposite of how our federal system is supposed to work. Decisions were being made at the national level and paid for one or two levels below that."

Passed in early 1995, the Unfunded Mandate Reform Act marked the beginning of the devolution era. The act has three key elements. It set up a unit in the Congressional Budget Office to develop cost estimates on mandates. It has a strong point-of-order procedure, which gives any member of Congress the right to question an unfunded mandate on the floor. And it requires all federal agencies to prepare an analysis of any new regulation that will cost more than $100 million.

Welfare Reform

The sweeping 1996 welfare reform law is the centerpiece of devolution. It substitutes a block grant, called Temporary Assistance for Needy Families, for the old entitlement program, Aid to Families with Dependent Children. State officials accepted lower and constrained funding levels for flexibility in designing and running programs. The law stresses moving welfare recipients into jobs. It eliminates the onerous federal waiver process that state officials formerly had to follow to experiment with their own approaches. It is not totally lacking in mandates and penalties. (State legislators have especially railed against its very prescriptive child support enforcement section.) Yet its key elements form the mantra of devolution: more flexibility, more responsibility and more choices.

Safe Drinking Water Act

The old Safe Drinking Water Act epitomized the "command and control" approach to federal-state relations common in the 1980s. The old law was an effective rallying point for the campaign against unfunded mandates. Why, cried legislators, mayors and governors, must a city in Nebraska test its water for a pesticide that is used only on pineapples in Hawaii? State legislators, governors and local officials were instrumental in passage of the new Safe Drinking Water Act, which removed many of those unfunded mandates. Approved in 1996 - at almost the same time as the welfare reform law - the new drinking water law also establishes a state revolving loan fund for construction of drinking water capital projects.

Medicaid Reforms

The budget bill approved last August codified an agreement between congressional leaders and the president to balance the budget by 2002. (Current predictions are that the budget may be balanced by FY 1999.) The act is a comprehensive combination of tax cuts, spending increases, spending cuts and program changes. Among the program changes are two that continue devolution. The first is a set of alterations to Medicaid that give state officials greater flexibility in running this expensive program. State legislators can now decide to use managed care in their Medicaid programs without applying to the federal Health Care Finance Administration for a waiver - waivers that formerly might be approved, might be denied, but without fail took many months, and sometimes years, to process. Legislators also now have more flexibility in determining cost reimbursement. The new budget act repeals the Boren Amendment, which Medicaid providers had used in court to compel states to reimburse them at higher rates.

Children's Health Insurance

The budget balancing act also initiated the most significant change in national health policy in a decade or more. The children's health insurance program allocates $24 billion over five years to states to provide coverage to children who are currently uninsured. State legislatures have considerable flexibility under the new law for choosing among coverage options and setting benefit levels.

Carl Tubbesing is NCSL's deputy executive director.