Reinventing Federalism

"In all human organizations, public or private, nothing positive happens unless somebody's neck is on the line."

"We would return, with different tactics, to the same principle created by our Founders. The best check on power is to have two or more powers squabbling amongst themselves."

©Copyright 1994-2005 by Liberty Issues and Michael J. Hihn. All rights reserved.

Last month, I showed how the structure of my tax plan would neutralize the distortion of taxes on economic decisions. I also wrote the structure would help restore federalism.

Federalism is the distribution of government power and programs, between state and federal levels.

For many libertarians and conservatives, restoring federalism means a return to the original Constitution. Government power and programs would shift back to the state level, closer to the people, as envisioned by the Founders.

That's the old federalism. New Federalism, a Reagan initiative, had a different goal.

In New Federalism, the notion of where power resides is secondary. The problem, as Reagan repeatedly stated, is ''runaway government.'' He wanted to control government, not rearrange it. New Federalism would not by itself reduce government power and spending. It was instead a tool to get us started - a very necessary tool.

Consider welfare. At the federal level, there's AFDC in the Health and Human Services budget, and food stamps in the Agriculture(!) budget. Welfare is also budgeted and run at state and county levels, plus most major cities.

Who's accountable? Nobody. That's intentional.

The welfare establishment has outflanked us. One simple alternative to government welfare is a 100% tax credit for contributions to certain charities. That would reduce both taxes and spending, simultaneously and seamlessly. But those tax credits must be issued by five or more government agencies, at three different levels of government. Where do we start?

No single legislature and no single bureaucracy, at any level, can be held accountable for overall costs or results. That means fixing, repealing or privatizing most government programs, without first consolidating them, is a pipe dream.

In all human organizations, public or private, nothing positive happens unless somebody's neck is on the line.

Consider K-12 education. I saw the problem as a school board member in Ohio. We ran the schools on behalf of the community. Or did we? We approved the budget. But spending was dictated by state and federal mandates. State and federal politicians had a right to these mandates, because they provided funding.

We were accountable for only 55% of revenues - local school levies. State government provided 35%. The feds provided the rest. Who's accountable? Nobody. Also intentional.

The education establishment has outflanked us too. Education vouchers, to be fully funded, need approval from all three levels of government. Teacher unions control the lowest level, school boards, and dominate the two higher levels. If you shut down local funding, most states will give or loan any shortfalls.

Enter Reagan, with an idea. Let's sit down - state and federal - and decide who should do what. Then let's shift all the current dollars to that level, and hold somebody - anybody - accountable for the results. They sat. They talked. It collapsed.

New Federalism was Reagan's best hope for permanently transforming government. It collapsed for two reasons. Governors believed they'd wind up providing federal-level programs, but without the dollars that paid for them. They were correct.

There was, and is, no mechanism for transferring both programs and dollars. The Liberty Issues Tax Plan provides that structure.

There was another, less obvious, reason for failure. New Federalism was never strongly supported by major Reagan constituencies. They wanted to restore the old federalism. But they forgot how badly it was broken. The old federalism had been lost, within the constitution.

It was the 17th Amendment - the direct election of Senators - that dismantled the most powerful check and balance created by the Founders. The Founders understood power. More important, they understood the lust for power.

We have checks and balances within the federal government, as each branch wields and defends its power. Power lust by one branch intrudes on power lust in another. But those internal checks cannot control the overall size of federal government.

To provide an external check on central government, state governments, as a group, retained the power to veto any and all federal legislation. That veto power resided in the U.S. Senate, which originally represented state legislatures.

Originally, federal Senators were hired and fired by state legislators. What that meant, and what we lost with the 17th Amendment, has largely faded from our collective memory.

To illustrate: Imagine yourself a U. S. Senator, beholden to your state legislature. Would you blackmail your own bosses into a 55 MPH speed limit? How many unfunded mandates would you vote for? Would you tell your bosses how to run their welfare program, or their schools? Would your bosses need a ''federal waiver'' on any-thing you voted for? Would there be a federal income tax? Or a Federal Reserve Act?

That was power - real power - over federal expansion. It was automatic - wired into the system. And it worked. The 17th Amendment was the first example of that fraud we now call ''power to the people.''

Power over government was not transferred to the people. It was dismantled. That too was intentional.

The Founders would laugh at our notions of People Power, with its endless screeching to ''get involved.'' If we must get that involved, the entire concept of representative government has collapsed.

The genius of representative government is that we don't have to be that involved. When the system is broken, we the owners hire different people. When that doesn't work, and it hasn't, we change the system. But we should never, as owners, get bogged down in menial tasks intended for the hired help.

The old federalism cannot be restored. And nobody's really trying. If supporters were serious, repealing the 17th Amendment would be their first priority. It's not even on the list.

My proposal: a federalism that gives states real clout, but different clout, in dealing with the federal government. We do have an advantage the Founders did not have - over two centuries of experience.

CREATING THE TOOL

The Liberty Issues Tax Plan includes a flat-rate payroll tax and a national sales tax - at equal, low marginal tax rates.

As the first negotiation toward federalism, the federal government would offer to collect and forward state income taxes. Canada does this (or did when I lived there briefly). This eliminates an entire tax bureaucracy at their provincial (our state) level.

Employers would have one payroll deduction, instead of two, and only one tax payment. In Canada, I completed a tax return for my federal taxes. On that same return, on a single line, my provincial income tax was then 19% of the federal tax.

If I'd under-withheld, I sent a single check for both taxes. If I had a refund, I claimed both refunds on a single form, and received both on a single check.

In one common-sense stroke, we've just eliminated tens billions of dollars in hidden overhead ... on top of the simplicity from a flat tax itself.

Now recall the Liberty Issues Tax Plan eliminates any need for most Americans to ever again file a federal tax return. We've also eliminated most state tax returns!

Negotiation is required, because states would lose control of their tax structure. Different states could of course have different tax surcharges. But they'd have to buy into the flat-tax concept, and the same federal exemption.

Thus, the only possible state objection would be they want a ''progressive'' income tax. But to do so, they'd have to justify keeping their entire income tax bureaucracy. They'd also have to justify denying their voters and employers the overall simplicity of this plan.

Negotiation is also required, because states would collect and pass along the federal sales tax, as a piggyback to their own sales tax.

States would also determine, on their own, how to collect the Liberty Issues capital transaction tax - all of which (I believe) can also be piggybacked. For example, counties would likely collect the tax on home sales, as piggybacked to taxes they now collect during escrow. For the major stock exchanges, there are already local transaction taxes that can be piggybacked.

We now have revenue streams flowing in both directions between the state and federal levels. That's another reason I wanted multiple taxes. There's the obvious reason - the lowest possible tax rates.

I also want each level of government to be at the mercy of the other.

USING THE TOOL

To restore accountability, we need to get entire program functions into one level of government. For comparison, consider corporate mergers and divestiture. One company sells a division to another company.

Within that division, nothing changes ... at first. The same people go to work, in the same place, doing the same job, for the same clients or customers. Later, the new owner starts pruning out duplicate and overlapping functions.

Why not do the same with government?

To illustrate let's assume your state gets 20% of all income taxes collected in that state. If welfare moves entirely to the state level, your state might keep 25%. From that 25%, your state would then keep every dime it saves.

That's a smooth hand-off. It creates the immediate opportunity to slash the obvious waste of duplication and overlap. And it places defined accountability for results.

With full control, and all the dollars, your state can finally manage a total and comprehensive reform ... including full or partial privatization.

Compare that smooth hand-off with the chaos of the Reagan years. The federal government slashed local funding. State and local governments used that as an excuse to increase their own taxes. It was like patting your head and rubbing your stomach (try it). When the shell game ended our combined taxes had skyrocketed, the federal share stayed roughly the same, and - did you see any efficiencies?

With my plan, the shift of dollars and accountability is totally seamless. There can be no shell game. Your taxes won't change a penny, regardless how many dollars and programs are shifted, and regardless of which way they shift.. Even employers would send the same dollars, to the same place, on the same form.

This is only a tool for controlling government. The hired help has to use it. They will, because the tool forces them to compete with each other.

Back to federalism: we should not care which direction the dollars and programs shift. In fact, each state should do what its wants. I can see larger states taking full control of (say) welfare, while smaller states might give all welfare (including that which is now local) to the federal level.  Or three states might run a regional program.

That may look strange to you, in a federal context. But that's what we do now at the local level. At the county level, most of us have a choice of service providers: A city might provide its own police force, for example, or contract for those services with the county.

I believe we should increase these kinds of choices. With privatization where we can, but also between levels of government.

I agree, with our Founders, that fighting power with power is one way to prevent the abuse of power. Politicians have the power to damage us every day. We delegate them that power, in forming governments. We don't have time to watch them that closely ... and shouldn't have to. That's the essence of representative government.

Pick any level of government. At two or three other levels, we're already paying other politicians who also want more power. They have time to police the other guys. Let's make them all compete for more power, against other politicians who want to keep it.

This does not, of course, address the issue of what government should be involved in. But it does address the issue of federalism, in whatever we allow governments to do.

It provides a structure for permanent and ongoing competition and improvements. The pressure to compete and improve would become a driving force in government, as it is in the marketplace.

In the market, success is rewarded with profits. In government, success would be rewarded in the coin of that realm - power. But that power would come at the expense of another level of government, instead of at our expense.

We would return, with different tactics, to the same principle created by our Founders. The best check on power is to have two or more powers squabbling amongst themselves.

That's the hired help. Our job, as citizens/owners/voters, would be a lot easier. More like consumers. State and federal politicians would each give their pitch. Then we'd pick one supplier, but reserve the right to change suppliers at any time.

The Liberty Issues plan gives us the tool to changes suppliers easily, and often. Every two years, we could go out for bids.

That's the essence of federalism reinvented. Each state has its own version, and can change it any time. Copy what works. Invent something new. Whatever. I'll close with ...

JUST ONE EXAMPLE

I mentioned food stamps earlier. Food stamps are administered by Agriculture, because they began as a method to distribute government surplus foods. Only foods in surplus were originally eligible, and distribution was through existing markets.

Food stamps were later expanded to become a ''safety net'' program for welfare recipients, the unemployed, and low income workers.  The current notion is that at least this support goes for food. The wisdom of that is debatable. But let's look instead at the awesome waste involved.

You get laid off, and file for unemployment. At the state unemployment office, you learn you're also eligible for federal food stamps. To register for food stamps, you then go across town to a federal office. Then you go back to state unemployment, and tell them how much you'll get in food stamps.

I suspect nobody cares about all this running around by welfare and unemployment recipients. But every time they go somewhere, you and I are paying for the bureaucrat on the other side of the desk, the desk itself, the office space, the utilities .... get the picture?

If unemployment qualifies you for food stamps, why can't the unemployment office set them up?

Federalism.

Wipe out the entire food stamp bureaucracy at Agriculture - in Washington and around the country. Treat food stamps like currency. Sell them to any state or county that wants to use them - in any combination or amount they want.

Exchange stamps for cash with any private charity that wants a food program. Run food stamps through the banking system, and ignore who distributes them.

We could do that tomorrow, without changing federalism, and without the Liberty Issues plan. But if they can do it tomorrow, they could have done it ten years ago. Why didn't they?

Nobody's accountable.

Update:  Consider the alternatives.