February 14, 2012

Obamacare's Bully Mandate

Can the federal government seize state revenues to pay for Medicaid?

Government mandates are once again a hot topic. In last week’s column, I discussed this issue by addressing the case of Patrick Witt, the Yale quarterback accused of sexual assault.

In one sense, the travails of Witt are small potatoes compared to a second mandate that’s been in the news. That mandate requires all religious institutions that partake of the health-care benefits under the Patient Protection and Affordable Care Act (PPACA) to supply—against their moral beliefs—contraceptive, sterilization, and abortion services to all persons whom they treat at their facilities in order to continue receiving government benefits, some fraction of which have been raised by tax revenues from persons of similar religious beliefs.

This conditional grant offers the president the perfect way to expand his influence without having to endure the rigors of the political process on such a poisonous dispute. But the doctrine of unconstitutional conditions should apply here, as it did in the Witt case. A direct legislative order to engage in conduct antithetical to their religious convictions would be in flat violation of the First Amendment’s guarantee of the “free exercise of religion,” which is far broader and more comprehensive than the religious right to “worship,” to which the president grudgingly acquiesces. The mandate should go and the religious groups should receive government support on even terms with all other groups, even those that support legalized abortion.

The political furor has forced the president to back down on the direct command to religious institutions. But now bitten with the statist bug, he just announced that all insurance companies who participate in programs funded through the PPACA will be required to offer the same suite of women’s health-care services for free.

 Epstein  
 Illustration by Barbara Kelley

This unapologetic “accommodation” will not close the issue with respect to religious liberties. It simply adds a second casualty to the world of conditional grants. Just what allows the feds to order individual firms to supply goods for free simply because government officials believe that these services are essential?

They could easily be right, but that does not, for these purposes, matter. The proper procedure for distributing free goods, in an age that is all too tolerant of massive redistribution through government fiat, is by way of taxation, which requires the Congress to step up to the plate to make the necessary fiscal appropriations. Circumvent that process and there is no reason why the government will not use its fiat to drive these companies into bankruptcy. The use of this conditional grant under the PPACA has thus ignited a full-scale political and cultural war.

Nor is it the only one. As I mentioned toward the end of my last column, the use of conditional grants is not limited to government actions that target individuals, universities, religious organizations, and business firms. The federal government can also direct its power to the states in a concerted effort to reduce their status from sovereigns in a federal system to the errand boys of an omnipotent national government.

The Constitution is alert to this danger. Its original design features dual sovereigns—at the federal and state level—each of which is supposed to operate without interference from the other. In the formative days of the republic, this goal was achieved in two ways. The first was to limit the scope of general federal power to commerce “among the several states.” This deft move excluded economic activity—like agriculture, manufacture, and mining—that took place within the various states from federal power.

The second was to limit the power of the purse so that Congress could only spend money to advance the “common Defence and general Welfare of the United States.” The common defense is a public good for the United States, as opposed to the goods of the individual states or the citizens within a state. The definition of a public good for these purposes is one that, like defense, can only be supplied to one individual if it is also supplied to another.

That the common defense is a collective good generates a real challenge for governance: voluntary contributions will not supply the funds needed to sustain the collective good as each rational citizen will seek to free-ride on the others. In that scenario, no revenues would be collected at all. The ability to raise funds for this collective purpose via taxation overcomes the problem, but it raises another: how to limit taxation so that it cannot be invoked to transfer wealth from A to B, either within states or across states.

The federal government is using its tax and spend powers to strong arm the states.

Congress can also appropriate funds in pursuit of the “general welfare.” Thus, it can build and operate post offices and a patent and copyright office, both of which are enumerated powers granted to Congress in the Constitution. The Framers created a limited government big enough to do the jobs that were needed, without engaging in the tax and transfer systems that are at the heart of the health-care law.

The Progressive Era, however, put the decisive kibosh on this general strategy. During that time, both the Commerce Clause and the spending clause expanded far beyond their original scope so that the federal government could muscle the states at will. The opening salvo was the 1903 case of Champion v. Ames, which held that the federal government could regulate the shipment of lottery tickets in interstate commerce, even though they were legal both in the state from which they came and in the state to which they were sent. The net effect was to confine the production and use of these tickets to the state of their manufacture, by cutting off all local manufacturers from the national market.

Not a big deal, you might think. But the same cannot be said when a similar scheme was used to rein in child labor within the states (which had their own child-labor laws) by refusing to let any firm that used child labor anywhere in its operations to ship its goods into interstate commerce. Firms that produced most of their goods for sale outside their home state were forced to capitulate to the federal standard.

That decision was struck down in Hammer v. Dagenhart on the basis that the regulation of manufacture, as of 1918, was still within the exclusive power of the states. The connection between the commerce power and the spending power was made clear some four years later in the Child Labor Cases that held, sensibly enough, that Congress could not tax the goods shipped in interstate commerce by firms that used child labor anywhere in their production. Set that tax high enough and it becomes tantamount to a ban.

Congress’s next attack against federalism was taken up in what is probably the most important of the spending power cases to date. In United States v. Butler (1936), the Court struck down an aggressive scheme that the New Deal Congress had devised to limit the total amounts of farm production in order to prop up the prices of agricultural crops.

The Court’s narrow reading of the commerce clause blocked this New Deal policy, but the Congress did not relent. It concocted a clever scheme that taxed excessive production by some farmers only to remit the proceeds to others who had observed the cartel restrictions. Justice Owen Roberts, on one of his good days (he had many bad ones), rejected this gimmick lest the taxing and spending power “become the instrument for total subversion of the governmental powers reserved to the individual states.”

The age of limited government came to an end in the Progressive Era.

Matters did not stand still for long, for within the year, the older limitations in the Commerce Clause were dashed in the 1937 case of National Labor Relations Board v. Jones & Laughlin Steel. No longer did manufacture precede commerce among the several states. Now it became an integral part of it. At this point, the need to use these indirect taxing devices disappeared. Congress seized the opportunity by passing the Agricultural Adjustment Act of 1938, which authorized the Department of Agriculture to conduct national elections to determine the total level of crop production, which it then administratively divided among the several states.

No bad deed goes unrewarded. That law was duly upheld in Wickard v. Filburn, which is now one of the mainstays of our modern constitutional order. If Congress could do anything under the Commerce Clause, as Wickard v. Filburn essentially held, it was easy to read the “general Welfare” language of the spending clause in the same broad fashion. Thus in the modern era, “general welfare” no longer refers to public goods that benefit the United States as a whole. Instead, any arrangement that taxes A and gives to B will be found to serve the general welfare if Congress thinks that it does. The Courts just stand aside and cheer, because the age of limited government came to an end in the Progressive Era.

This comfortable vision received an instructive challenge in South Dakota v. Dole (1987). The federal government wanted to impose a minimum drinking age for alcohol. But the Twenty-First Amendment, which repealed prohibition, explicitly withheld from Congress the power to regulate the manufacture and consumption of alcoholic beverages. In this tiny corner of the law, a quirk of history meant that the old principles of limited government still applied. To get around that direct prohibition, Congress passed legislation in 1984 to withhold 5-percent of the highway funds allocated to a state if it did not raise its minimum drinking age to 21.

That course of action was rejected by an odd couple. Justice William Brennan, a committed liberal, wrote a short opinion that stated that the power to regulate alcohol consumption “falls squarely” within the exclusive power of the state, so that “Congress cannot condition a federal grant in a manner that abridges this right.” Justice O’Connor, a cautious conservative, wrote a longer opinion that noted that the anti-circumvention logic used in Butler survived as a constitutional principle after the expansion of the Commerce Clause, even if it applied only in a far more limited set of circumstances.

Unfortunately, Chief Justice Rehnquist wrote the majority opinion, which turned the Constitution upside down. No longer did the spending clause impose a limitation on the power of government. Rather, the Court was duty-bound to defer to Congress’s judgment so long as it made its views clear and gave fair warning of its intentions.

Rehnquist also stressed that the small 5-percent withholding meant that this case involved only “encouragement” not “coercion.” Would the same logic apply if a thief told his victim “you need to give me only 5-percent of the money in your wallet”? And what is the point at which encouragement becomes coercion? In effect, the states are at the mercy of the federal government. They can forego the revenues, but they can never escape the taxes.

This issue is now squarely before the Supreme Court with a second Obamacare mandate that the federal government has imposed on the states in their operation of Medicaid. This mandate has received far less attention in the press than the other provisions of the bill. Medicaid has always been regarded as a “voluntary” partnership between the federal government and the states. But this partnership should never be confused with the ordinary private partnership from which either side is entitled to withdraw at will.

Government fiat will drive companies into bankruptcy.

For many years Congress has imposed all sorts of conditions on the use of tax revenues raised from the citizens of individual states. Many of these conditions are perfectly benign, covering bookkeeping arrangements and specifying the purposes for which these funds should be spent. In the case of this mandate, the federal government is requiring all states to pick up the Medicaid coverage for individuals who fall within 100- to 133-percent of the poverty level. The coverage must meet the standards set by the various health-care programs sold to private persons over the exchanges. The federal government picks up the tab for 100 percent of the payouts from 2014 to 2016, declining gradually to 90 percent by 2020. It also picks up 90 percent of the added administrative expenses until 2015, after which the states are on their own.

The program also limits the ability of the states to alter downward the benefit levels for those individuals who are already under the Medicaid program, which imposes substantial costs that are difficult to quantify. Against this are offsets for supposed savings that the states will enjoy by shifting individuals who currently receive uncompensated care into the program. And people who cannot get Medicaid benefits because their states have opted out are exempt from the individual mandate.

The kicker here is brutal but effective. The states that do not sign on to this program will lose all their federal payments for existing Medicaid recipients, which for a large state like California amounts to $25 billion per year. The state residents will, however, continue to pay into the program. Whatever the merits of the government’s financial projections, it is clear that opting out is impossible for many states.

The proper way to evaluate this program is to ask, therefore, whether a direct mandate that the states spend these additional sums for the various classes of Medicaid recipients would be consistent with the equal sovereignty of the states. There are a number of important cases that hold that, by direct regulation, the federal government cannot force the states to use their resources to advance national ends.  More concretely, in New York v. United States, the Supreme Court held that the Congress could not make the states “take title” to nuclear wastes against their will. And in Printz v. United States, it held that Congress could not require local sheriffs to run background checks, at their own expense, for new gun license applicants.

The trillion-dollar question is whether the federal government can commandeer state revenues (and that’s putting aside the billions that might be owed to the states once this experiment sorts itself out). The logic of conditional grants says that these conditions should be beyond the power of the federal government to impose. If the deal is as good as the federal government claims it is, we would not see 26 states in open rebellion, as there are today. The way to avoid all these difficulties is to have the government pick up the entire tab for these Medicaid expenditures and to pay the states the costs needed to cover the programs.

The use of taxation requires the Congress to bear full and open responsibility for the funds that it appropriates. The conditional grant allows Congress to shift that burden down to the states, without having to confront explicitly and annually the revenue costs that it imposes. Right now, it is anyone’s guess exactly how this game will play out.

If the deferential attitude of Chief Justice Rehnquist in Dole controls the case over the Medicaid mandate, as it has in the lower courts, the federal government will win. But if the Court rises to the occasion, it will realize that neither it nor anyone else can figure out today the size of the tab that an excitable Congress has imposed on the states. The Court will then opt for the sensible rule that leads to more political responsibility in the welfare state. It will chasten the lower courts that have upheld that mandate while overturning Dole and telling Congress to design a Medicaid program that does not allow it to export its grief to the states.            


Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).


Letters to the editor

Our Progressive President

I have tried to understand this new "progressive" movement and its usurping of citizens' rights across the board. I have searched for logical or even semi-logical reasons why this government is being turned upside down. It would be easy to say that this President is just "radical" or has an agenda, as do most new administrations, but I have come to understand that even "the great divider" cannot do everything alone.

It appears that our great nation is currently being ruled by a very small handful of "progressives" who are bent on pushing all of us toward "socialism" or worse. I envision the day, shortly, that our economic system will fail due to these ill-conceived policies and programs. We will not be able to sustain such radical agendas much longer.

We live in a nation where it has become "illegal" in some parts to have salt in restaurants in NYC, to play frisbee on a beach in California, and to purchase "happy meals." it will not take many more instances such as these before the "sleeping giant" of the majority rises up.

---Emmet A. Winslow


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