State Laboratories and National Policy Reforms

More often than not, the federal government punishes rather than rewards states for innovative solutions to national problems.
by | January 20, 2010
 

As the nation stands on the precipice of adopting major policy change in health care, and perhaps in climate change and other areas, it is important to understand how much we stand on the shoulders of the states. It turns out that most bold proposals hatched in Washington actually had their origins in several states. Whether it be the federal highway program, special education or air quality standards, it is likely that without state initiatives, national programs would have taken longer to bloom and develop, if at all.

The state roots of national policy reform are a time honored value within our federal system. States and localities often serve as laboratories testing out the policy effectiveness, administrative feasibility and political support for emerging ideas. In some respects, the nation gets the opportunity to learn from bolder innovative states without facing broad national consequences should the ideas founder.

There are reasons to believe that the reliance on states to generate national policy ideas has accelerated in recent years. Frustrated by political and policy gridlock at the national level, many groups championing policy reforms find states to be more hospitable and eager supporters of new policy ideas and reforms than the federal government. In fact, states themselves have undergone significant political and administrative transformation in the past fifty years, going from what some called the sleepy fallen arches of our system to the active champions of new policy innovations. In a nation with a 24/7 news cycle focused on Washington, a more diverse and aggressive media are likely to report and analyze states' policies and place these issues more readily on the policy agendas of national leaders.

Not content to rest on their own policy laurels, state officials join with powerful advocacy groups to champion the nationalization of their own policies, borne of the realization that in some sense the disparate actions of individual states are incomplete if not finished by national legislation. Even the states taking the initiative to develop cap and trade systems for carbon understand that ultimately a national and global economy requires their policy reforms to be adopted nationwide. The states taking early action understand that their own economies and industries might be vulnerable to free riders, or those states that attempt to offer a cheaper deal by advertising lower cost regulation and taxes.

So far, this is an uplifting story - states and national leaders join forces to realize a more progressive and effective tomorrow. However, national policy often serves to disadvantage the first mover states that brought the ideas to the nation in the first place. One would think that maybe good deeds are their own reward - that states moving first would be rewarded by gaining greater funding and autonomy.

Unfortunately, it's rare that a good deed goes unpunished. In the area of regulation, states with the most far-reaching new regulations, whether it be environmental quality or energy saving measures, find that their own regulatory assertiveness prompts new federal preemptions and mandates designed to reign in and standardize unique state policies. For instance, states taking the initiative to regulate appliances for energy conservation achieved a moral victory in that they forced the federal government to adopt national standards at the behest of appliance manufacturers. However, the new standards were set at levels below those initially formulated in the regulatory hothouses of the most advanced states.

When state initiatives are expanded nationally through new national grant programs, first movers are often penalized here as well. In most cases, grant programs represent efforts to disseminate good ideas hatched by some states to all states. So far, so good. But in doing so, the states with little or no prior program get to use their federal funds to create a new program from scratch. However, federal officials typically do not permit states with established programs to use scarce federal funds to simply replace their own funds. Rather, the innovative states must use their federal funds only to expand beyond their current programs. These "maintenance of effort" rules encourage states to wait for the feds rather than risk initial investment of their own funds in bold initiatives.

Two examples illustrate this problem:

  • The new health care reform bills require states to cover new populations of poor and near-poor families, providing over 90 percent federal matching rates for the newly eligible groups, compared with the average of 55 percent match for the regular program. The states that have already been ahead of the curve by covering these groups through their regular Medicaid programs will not get the opportunity to gain the higher federal reimbursement to defray their costs. Thus, in effect, the federal formula rewards laggard states for waiting for the new federal mandate.
  • The SCHIP program in the 1990's provided new funds for states to extend health insurance to cover families with children. This was fine for the many states that weren't covering families with children. But for those states that had already moved to cover all their children under their own state insurance programs, well, let's just say they were not rewarded. They could not use the new federal SCHIP money to replace some of their own funds, nor could they use the new funds to cover new groups of adults that had no health coverage.

Innovation itself is a prized outcome of a healthy federal system. But in our zeal to nationalize the states' initiatives, we need to find ways to avoid stamping out the spirit and incentive to take leadership. There are indeed ways to design new programs to recognize and even reward states for their progress. In regulation, for instance, some programs adopt "partial preemption" models where states are free to go beyond federal minimum standards. For grants, states with established investments of their own can be given the opportunity to make the case to either use federal funds for other purposes or replace a portion of their previous investments in limited cases. The goal is to get our signals straight and align the nitty-gritty incentives in our programs with the noble goals and intentions of our federal system.

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