TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, May 5, 2017

Weekly SSRN Tax Article Review And Roundup

This week, Ari Glogower (Ohio State) reviews a new article by Daniel Hemel (Chicago), The Federalist Safeguards of Progressive Taxation, 93 N.Y.U. L. Rev. ___ (2017):

Glogower (2016)In his new work, Daniel Hemel considers the distributional consequences of federalism doctrines protecting states from congressional overreaches.  Hemel argues that the anti-commandeering doctrine (which prevents Congress from compelling states to administer federal programs), the anti-coercion doctrine (which prevents Congress from effectively compelling states to administer federal programs through coercive offers) and the sovereign immunity doctrine (which prevents Congress from abrogating state sovereign immunity) all provide the states with valuable entitlements, that can be bargained away in exchange for federal funding.  In other words, states can choose to cooperate with federal government programs, instead of refusing on the basis of these doctrines, but the federal government will have to pay.  

The result is surprising, because the federalism doctrines are typically considered to be checks on progressive federal programs.  For example, in the anti-commandeering case Printz v. U.S., 521 U.S. 898 (1997), the conservative wing of the Supreme Court struck down a provision of the 1993 Brady Act that required state and local law enforcement officials to perform background checks on firearm purchasers.

How could these doctrines increase redistribution through progressive taxation?  Hemel begins by noting that the federal tax system is significantly more progressive than state and local taxes.  For example, in Delaware, the state with the most progressive tax system, families in the bottom quintile pay an average rate of 5.5%, whereas those in the top percentile pay approximately 6.4%.  Consequently, when states trade away their federalism doctrine entitlements in exchange for federal funding, fiscal responsibility for government programs shifts to the more progressive federal system. Hemel argues that the net effect is a transfer of wealth to lower-income taxpayers, as less revenue is raised through regressive or proportional state and local taxes.

Do states actually bargain in this manner?  Hemel offers numerous examples where Congress cuts different deals with states to implement federal programs and pass legislation.  For example, Mississippi receives  $3.11 of government funding for every dollar it spends on Medicaid, whereas Massachusetts receives a dollar-for-dollar match.  And just this week (if you haven’t heard) House Republicans reached a deal to repeal elements of the Affordable Healthcare Act (“AHCA”) after winning over moderate holdouts with an $8 billion sweetener to subsidize state high-risk pools for people with pre-existing conditions.

Hemel argues convincingly that any deals shifting funding obligations from states to the federal government will affect the relative ratio of government programs funded from progressive revenue sources, on the one hand, and proportional or regressive sources, on the other.  How big is the distributional effect, and how much of the bargaining is attributable to the federal doctrines in particular?  Hemel notes that, in 2016, the federal government transferred $666.7 billion in revenues to the states.  If the states had raised the money directly, after-tax incomes of lower earners would have declined significantly, whereas incomes of the wealthy would have increased.  It is empirically challenging, if not impossible, however, to determine the precise value of the federalism doctrine entitlements, or the amount of federal transfers that are attributable to state waiver of these entitlements.  Returning to the Medicaid examples, some federal spending concessions, such as the $8 billion spending provision added to the AHCA repeal bill, are best characterized as inducements to win the necessary votes to pass the legislation, and not necessarily payments to buy out the states’ federalism entitlements. 

The paper’s final section takes a broader look at the political dynamics of federalism and congressional bargaining, and the distributional consequences whenever states, and their representatives, extract spending concessions from the federal government in exchange for facilitating federal programs.  From this perspective, the judicial federalism doctrines are one intriguing plotline in a large, complex, and fascinating story.   


Here’s the rest of this week’s SSRN Tax Roundup:

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