Tuesday, March 21, 2017

NYU Tax Policy Colloquium, week 8: Daniel Hemel's "The Federalist Safeguards of Progressive Taxation"

Yesterday we resumed after spring break, and dipped a toe into the deep blue waters of constitutional law.  Daniel Hemel's paper looks at three recent developments in federalism doctrine, viewed by many as efforts by a conservative Supreme Court to kneecap liberal legislation, and argues that they increase the progressivity of the overall U.S. tax system (counting all levels of government).

First, a couple of brief thoughts on federalism doctrine and practice.  Leaving aside some constitutional law professors and perhaps judges, my Rule 1 about federalism arguments in the political process - i.e., discussions of whether state governments should be able to set policies distinct from or even antithetical to those being pursued at the national level - is as follows: Almost everyone is almost always hypocritical.

I don't mean this to impugn people (much though it may sound like it).  The thing is, almost everyone cares far more about substantive issues than about which level of government should get to decide things. So, when their side controls the national government, they want the states to have to fall in line, and when the other side controls the national government, they want "their" states to be able to diverge, So people are hypocritical about federalism, not because they're hypocrites, but because it isn't really what they care about.

Modern examples, of course, include the Medicaid expansion, gun or abortion or immigration policies, etc. But I learned the basic lesson about this before I was 20 years old, as an American history major in college. When New England Federalists controlled the national government under Washington, the Virginians were all about "states rights."  Then, when the Virginians took over, New Englanders started to talk that way during the Embargo / War of 1812 era.  Then of course we all know about the South during the run-up to the Civil War, except that they wanted broad and aggressive federal powers to require enforcement of the Fugitive Slave Act. So one doesn't even need the modern history regarding civil rights and "states' rights" to know the basic score.

But back to the Hemel paper. He notes three constitutional doctrines in the area of federalism that recent Supreme Court jurisprudence has emphasized, all viewed by many as conservative moves, and argues that they will have progressive effects.  I'll just discuss two of the doctrines here: anti-commandeering and anti-coercion (the third pertains to sovereign immunity).

Anti-commandeering featured in a recent case, Printz, that barred the federal government (through the Brady Handgun Violence Protection Act) from requiring state and local officials to run background checks on prospective handgun purchasers. The idea was that the feds can't requisition local officials to perform federal tasks.

Anti-coercion featured, I gather not very coherently, in the ACA case (NFIB), where the Roberts opinion said the feds couldn't tell states that they'd lose all their Medicaid funding if they didn't extend coverage to people up to 133% of the poverty line, even though the expansion was funded for a number of years. This apparently was too much a "gun to the head." Some gun, I'd say, and the lack of sharp intellectual contours becomes clearer when one asks: What if Medicaid had included the higher coverage as part of its package from the very start?  This of course led to the extraordinary spectacle of Republican governors turning down what was in effect free money for many of their poorer residents. (This, of course, is a drama that continues to play out, with states increasingly accepting the expanded coverage, and the current excitement about Paul Ryan's effort to ... well, if I simply described what he is trying to do it would sound partisan.)

Anyway, the constitutional literature has apparently noted that what all this means, in terms of the allocation of powers, is not that the feds can't use the state governments to advance their own ends in either scenario, but that they need to get consent. So two big favorites of modern legal scholarship - the Coase Theorem and the distinction between property and liabiltiy rules - have been deployed to describe the doctrines' effects.

The Coase idea is that the entitlement to use state government services belongs to the states, not to the feds. So we have an assignment of property rights that can be followed (depending on transaction costs) by bargaining to achieve the net-optimal outcome for the parties. Suppose the only issue raised in both of the above settings - rather than pertaining to ideology and politics around handguns, health care, etc. - was administrative cost. E.g., suppose the federal government could do something at the state and local level at a cost of $12, but the state government could do it for only $10. Then one might expect the feds to offer the state, say, $11 to do it. But if the feds could command the state to do it, the only immediate and direct difference (in the world of this little hypothetical) would be that the state doesn't get the $11. But if it cost the state $12 and the feds could do it for just $10 and the feds could command the state to do it, the deal would go the other way - the state would pay the federal government $11 for permission to beg off.

I don't actually find this an enormously illuminating or realistic way to think about either the handgun checks or the Medicaid expansion. But that's the literature as Hemel finds it. His point is that the anti-coercion and anti-commandeering rules, if these Coasean deals take place, make the federal government "poorer" and the state governments "richer" than under the opposite rule.  More on that in a moment.

Turning to property rules vs. liability rules, the paper notes that the states have a "property" right since the feds wouldd need them to agree voluntarily to "sell" it (as in the case where they accept the Medicaid expansion or agree to do gun checks conditioned on the feds, say, paying for the services provided). It's not inalienable - the state can agree to do it - and it's also not a "liability" rule, as it would be if the feds could "commandeer" but then could be sued and required to pay compensation.

The liability rule version of this, though fanciful, offers a useful thought experiment. Suppose the feds could have required the handgun checks, subject only to compensating states financially for the cost of in effect lending out their personnel to do federal jobs. I imagine that the officials in pro-gun states would have remained unthrilled - presumably, political views about gun policy were central to this dispute. Likewise, in the Medicaid example, the states actually were being substantially compensated, and I doubt that the prospect of having to pay more down the road was really central to the reluctance (how often do governors of any party think that far ahead when they have a chance to get current big $$ for their constituents?). So the "liability" rule, if it defined compensable damages in terms of the administrative costs to the state and local governments, would be friendlier to federal power than the "property" rule.  (But if we imagined other compensable harms, such as from some measure of the state officials' subjective reluctance to pursue policies they disliked unless the state was given a whole lot more money, it would start to look more similar to the property rule.)

Anyway, the paper's main argument is that, since federal tax financing is significantly more progressive than state tax financing, requiring the feds to buy off the state governments might be expected to increase revenue-raising by the former and lower it by the latter.  Hence, absent other adjustments, which the paper does extensively consider, the result would be to make overall tax financing more progressive. This is a nice point. But it is offset to a degree if the big-money policies that the feds want to pursue but can't due to their inability to purchase state cooperation, would tend to be progressive ones a la Medicaid expansion.

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