My colleague Alex Brill has come up with a revenue-neutral plan to make the tax code more progressive and pro-growth. Among his six proposals: phase out the federal deduction for state and local taxes. Read on to find out why this is a good idea.
It’s no fun being the skunk at the garden party, but amidst the widespread praise of Paul Ryan’s recently announced anti-poverty reforms it appears some criticism is overdue. To be clear, elements of Ryan’s overall plan possess great merit. The main idea of consolidating anti-poverty programs into one stream would seem to make it more accountable to legislators. Allowing it to be spent in ways that are more conducive and particularized to the struggles facing the working poor is smart and compassionate. Increasing the EITC; reducing incarceration for nonviolent offenders; opening up a more a competitive accreditation process for higher education; even attempting to coordinate among federal, state, and local authorities whatever opportunities there may be to reduce regulations (like licensing) that impair economic opportunity for Americans on the lower end of the wage scale—all are good ideas. Of course, details and more details remain to be filled in here.
The plan lacks any proposed cuts in federal spending whatsoever. I suppose, to be fair, that if its goals were achieved, and many were moved into work and the middle class, we would have both more taxpayers and less need for these programs. Maybe. I don’t think that’s how government works, though. However, what is problematic is the plan’s main feature, the so-called “Opportunity Grant” that puts the myriad federal anti-poverty benefits into one benefit and sends it to the states to administer and spend on their citizens. This is really nothing new, it’s a block grant, and it is predicated on cooperative federalism, or what Michael Greve has repeatedly argued is the deconstruction of our constitutional federalism.
Presumably the something new here is that Congressman Ryan’s block grant will permit states “flexibility” and experimentation in how they use it. They will find what works. Not to worry, there will be testing and empirical validation of results in moving recipients into employment and out of poverty. I suppose it’s possible that some good will come of it. I’m also sure the gang in Springfield, Illinois, among other dysfunctional state capitols, can’t wait for this new source of revenue.
But let’s talk competitive federalism first and see what it adds to or detracts from our confidence in the Ryan reforms. Competitive federalism is quite simply our Founders’ federalism: one policy, one sovereignty. This permits accountability because voters clearly perceive how money is being spent and which layer of government is doing the spending. The lines of overlap between federal and state governments are few, as both stick to their respective constitutional roles. There is no practice of states spending money on services that they don’t actually tax their citizens to pay for. Yet, this is precisely what a block grant (“Opportunity Grant”) does.
Good federalism features states competing against each other at the margins on fiscal, labor, social, and educational policies, to name a few areas, while the feds stick to their enumerated powers, and to the extent the latter intervene in areas traditionally regulated by states, they do so in direct ways that avoid empowering the states by sharing a revenue surplus with them.
But what if the feds and the states discover a way to collude and defeat the competitive jurisdictional dynamic of the Constitution? The New Deal, contrary to conservative mythology, was not merely a growth in federal power at the expense of the states. The federal government grew, but it also replaced competitive federalism with cooperative federalism. This federalism of the New Deal was as much about growth in state government spending and size as it was about centralization of power in Washington. The feds wisely recognized that government growth was best achieved by unlocking all aspects of official power—federal and state—so they deeply implicated the states in their projects. Michael Greve in The Upside-Down Constitution writes that
Although federal revenues rose considerably with the onset of the New Deal, an increasingly large share found its way into state and local budgets. . . . Newly enacted grants programs . . . enabled the states to procure federal funds for activities that previously had to be financed from own-source revenues . . . .
The contemporary American policy scene has largely continued this federal-state intergovernmental, cooperative, and overspending scheme. The players all benefit, including, significantly, the states, which offer increased benefits and services to their citizens without actually having to tax them for the benefits provided.
So how might employing cooperative federalism help us think about the “Opportunity Grant” in Paul Ryan’s proposed reforms?
Ryan’s plan does nothing to challenge this dysfunctional system. Instead it wallows in its pathologies. The assumption appears to be that, by wrapping federal anti-poverty funding (food stamps, cash welfare, housing assistance) into one funding stream and sending it to the states to administer, with greater flexibility and creativity mind you, that somehow the poverty curse will be broken. I’m pretty sure the Blue State political entrepreneurs, at all levels, in California, Illinois, and New York salivate at the prospect of applying these funds in the most advantageous ways for their, I mean the people’s, benefit.
One prediction of how states will adjust and profit from the Ryan reform: Current state anti-poverty funds and programs will be reduced—meanwhile those recipients and monies are boosted by the federal grants. The state funds are then freed up for other uses by the state. In short, the pathetic fiscal policies of the usual suspects may have just received more ways to behave like spending addicts. What they need is a concrete tank to sober up in, no matter the pain. Instead, they get more walking around money.
This will not represent a breakthrough in lifting poor Americans out of poverty and marginal employment. One thing we can predict is that the plan’s proposed “caseload” management idea for each welfare recipient will equate with a dramatic growth in state-level bureaucracy or increased state contracts for firms that will link with the states to handle this responsibility. I know, I know, this more holistic approach will be more nuanced and personal, instead of treating people as statistics and robotically handing them a check. We need to let those with training in the rehabilitation and uplift of the poor work with them directly.
One thought, again from federalism maestro Greve, takes us back to the “conservative success” of welfare reform in 1996. We were told, and it is claimed by Ryan in “Expanding Opportunity in America,” that the Clinton era reform moved millions out of poverty and off welfare or TANF which replaced the AFDC program. As noted in the Ryan proposal, poverty rates of single mothers fell from 55 percent in 1992 to 39 percent in 2000.
But what if they were just shifted to other forms of government provision? Consider the following passage from Greve:
The 1996 welfare reform, which replaced the traditional system with a block grant for states that adopt welfare-to-work systems of their own design (more or less), is widely and wildly celebrated as a (conservative) federalism model. Question: why did state welfare bureaucracies welcome the reform? Answer, because states converted cash grants to poor people into labor- and employment-intensive workfare services: drug rehab, employment counseling, day care, etc. (All these people are unionized and vote Democratic. That may be good or bad, but it’s not a success for Republicans.)
Question: what happened to all those people whose cash grants disappeared and who went off the rolls—did they die in the streets? Nope. Did they all find work? Nope. For the most part they migrated to other, federally financed welfare and support systems: food stamps, housing subsidies, Head Start (where unemployed mothers babysit each other’s children), and (as seen) disability. Expenditures for many of these and other programs exploded. The 1996 reform may have been the right thing to do. But its reputation as a model is grossly inflated.
States will, one could predict, welcome this reform plan. It’s a good deal for them, but not for our fiscal sanity. As Greve noted in “Constitutional Moments” in this space, one step that does put us on the right course is to acknowledge that “no good can come from authorizing one government to tax, and another to spend the proceeds.” If we want to get a handle on spending, “we would align taxes and spending and hand Medicaid, education, and most everything else to one or the other level of government but not both.”
Unfortunately, while the Ryan proposal is loaded with great intentions and purposes, it is still very much something borrowed from our dysfunctional spending past and, if implemented, will become our fiscal future. Many have argued that this is serious and innovative policy thinking that conservatives and libertarians should embrace. If so, then give me horse-and-buggy conservatism. Better yet, I’ll take the principles of the Founders’ Constitution.