Lamar Alexander, who served two terms as governor of Tennessee and twice ran for president, came to the U.S. Senate a couple of years ago hoping to advance the cause of devolution and states' rights. It has been a lonely occupation. "I've been disappointed," Alexander admits, "to find so few voices in the United States Senate who respect the prerogatives of governors and mayors to make their own decisions. The conservatives are just as bad as liberals at passing new programs and expecting someone else to pay for it."

That's not a bad description of politics in Washington as George W. Bush's second term opens. Federalism is being treated these days a little like the burgeoning federal deficit: It's important--but not as important as six or eight other things that policy makers care more about. Even diehard devolution advocates such as Alexander concede that the ability of states and localities to shape domestic policy--or even to preserve their existing leverage over local spending and taxation priorities--is on the downhill slide.

Four years ago, the picture looked considerably different. In the 1990s, states had taken the lead in dealing with critical policy issues that Congress discussed but didn't address, such as health care and utility regulation. A governor who decried federal power grabs was about to take office as president, joined by a Republican Congress whose members were fond of asserting that the most effective levels of government were those closest to the people--states, counties and cities.

That seems like a long time ago, in more ways than one. In the years that have passed since the September 11, 2001, terrorist attacks, more and more Americans have come to see centralization of government as the best route to future security. As a result, federal standards have been imposed on state and local activities, major and minor-- including, in the most recent session of Congress, the provision of driver's licenses. "The trend is absolutely toward less respect for state initiatives, rather than more," says Douglas Kendall, of Community Rights Counsel, a public interest law firm, and co-author of a new book on federalism.

Even beyond security-related issues, however, the first half of the current decade has seen an unusual amount of aggressive federal intervention. The No Child Left Behind Act, signed into law in 2002, may be the most prominent case, imposing strict federal penalties on local school systems whose pupils are unable to pass standardized tests. But there have been many others, in central areas such as health care, the environment and social issues.

Remarkably, all of these and other centralizing federal initiatives have been launched by a conservative Republican president and Congress whose previous rhetoric tended to support devolution and states' rights. "The ardor for devolution and federalism among Republicans has cooled considerably," says Michael Greve, director of the Federalism Project at the American Enterprise Institute. "People don't even pay lip service to it anymore."

Not too many years ago, Congress was full of subcommittees devoted specifically to the subject of intergovernmental affairs--the relations among the national, state and local governments. Today, it's hard even to find individual members who take these concerns seriously.

There's not much institutional support for federalism outside of Congress, either. The old U.S. Advisory Commission on Intergovernmental Relations in its heyday attracted senators and cabinet secretaries to its meetings--even the president on occasion-- but the organization became politicized and, after it died in 1996, nothing emerged that could take its place. The National Academy for Public Administration has just launched a forum for federalism discussions, but it's very much in the early stages.


Increasingly, the people whose job it is to lobby for states and localities in Washington feel that when the Republican majority decides something has to be done about an issue, such as homeland security, education or safe drinking-water standards, state and local governments have little choice but to get on board in some fashion or other. They can't remain significant players if they simply oppose any federal role. "We try to protect things we've been protecting for 20 years," says Ray Scheppach, executive director of the National Governors Association. "The world is shifting, and we have to recognize that. There are not a lot of people on the Hill recently who have shown a lot of interest in federalism. We're on the defensive now."

The biggest fights loom in the area of taxes. Many state rates are tied to the federal code, so states will be losers assuming, as everyone in Washington does, that the biggest recent cuts in income and estate taxes are made permanent. And there is major buzz around the idea of saving the federal government money by eliminating or reducing the federal deduction for state income tax. "There's very serious sentiment in the Republican Party for doing that because it has the incidental benefit of hammering mostly high-tax, Democratic states and that can't be unwelcome," says the AEI's Greve.

On the spending side, the 1995 law barring Congress from imposing new mandates on the states without committing to pay for them remains on the books. But it has had minor practical effect, especially in the past several years. Congress has found it remarkably easy to structure laws that force lower levels of government to do things without creating a mandate in a technical sense. Most of the time, these create programs in which states and localities are asked to participate voluntarily--but at the risk of losing large amounts of federal funding if they decline. Or new federal programs carry with them the promise of future funding to defray state and local costs but the money does not appear.

To help pay for the No Child Left Behind requirements, the feds upped their share of total education spending, to about 8 percent, but with the law just three years old, they're already more than $25 billion behind in their payments to states and local school districts. Similar shortfalls are bedeviling special education, despite passage of a new law promising full funding. "Under the new federalism," says Donald Borut, executive director of the National League of Cities, "you have new mandates where a small amount of money is defining and leveraging how the larger amount of money is being spent."

More arrangements of this sort seem inevitable in the near future, given the massive deficits that exist at the federal level. Federal revenues, measured as a share of the gross domestic product, have reached their lowest point since the 1950s. Given President Bush's stated desire to cut the federal deficit in half, coupled with his desire for more tax cuts, enormous pressure is going to fall on those domestic programs that are largely carried out in the form of grants to state and local governments. There is hardly an area of their budgets--on either the revenue or the spending side--that will not be adversely affected by upcoming decisions in Washington.

Intergovernmental aid formulas drawn up by Congress in more generous times have kept the number of federal dollars flowing to states and localities high by historical standards during the past couple of years. But the rate of growth in funds for domestic programs other than entitlements has slipped during every year of the Bush presidency, and the flow of dollars in absolute terms has already slowed in many parts of the fiscal 2005 budget. The one entitlement that Congress can turn to for major budget savings is the one where cuts stand to cost states the most money: Medicaid. The joint state- federal health care program will soon surpass education as the largest single expenditure at the state level, even though more than half the program's cost currently comes out of federal accounts. The Bush administration proposed in 2003 to convert Medicaid into a block grant, with more flexibility for states but limited funding, and while that proposal went nowhere, the administration may try again. Failing creation of a block grant, significant targeted cuts in Medicaid seem inevitable.

Similar shortfalls may soon befall welfare programs, which were turned back to the states in 1996 (in what was seen as a landmark achievement of the devolution era), with Washington sending block grant funds. The welfare law has been extended eight times since expiring in 2002 and will come due again in March. Whenever a new law finally makes it through, the block grants are virtually certain to shrink.

With federal assistance to the states decreasing, and increasing portions of state budgets going to make up for the absent federal dollars, it is inevitable that states will re-examine policies toward their own local governments as a way of saving money. Aid to local government has already been reduced more than any area of state budgets in recent years, aside from higher education.

And cities and counties certainly can't count on much direct help from the feds. The Bush administration has already attempted to phase out several programs that assist urbanites, such as Community Development Block Grants and the Section 8 and Hope VI housing programs. Aid to poor families through the tax code is likely to taper off as well. "It's hard to think of urban constituencies to whom the Republicans owe anything," says Greve. "If you figure there's only so much money to go around and attention to be lavished, even without someone saying let's go out and punish Chicago and Manhattan and L.A. and San Francisco, the lack of attention is enough to have that effect."


As worrisome as the coming round of budget austerity may be to state and local advocates, it does have a cyclical quality to it. Federal deficits rise and fall; federal formulas are stingier in some years than they are in others. The 1960s and '70s were periods of relative generosity toward states and localities; the '80s were a period of retrenchment; the prosperity of the '90s loosened things up again. Eventually, situations do change. What is more worrisome for the long run is the increasing interest of federal governing majorities in preempting state power altogether: lifting whole areas of policy out of the hands of state governments and centralizing them at the national level. This is a strategy that much of the business community and its lobbying organizations have come to endorse.

It used to be a given that many industries preferred to be regulated in state capitals, where their political influence was greater and the assertiveness of legislators was much weaker. But that has changed. In the past couple of decades, many state legislators, governors and other officials have turned into activist regulators across a broader range of policy, from health care to finance to pollution. New York Attorney General Eliot Spitzer is only the most prominent among a whole new generation of state policy makers imposing demands on corporations and industries that used to enjoy relatively lenient treatment at the state level.

As a result, business groups--which are themselves increasingly national or global in reach--are turning to Congress for relief from state-level regulation that not only tends toward strictness but also differs from one jurisdiction to another in its details. And Congress, although dominated by Republicans nominally suspicious of federal power, has been quicker than in the past to preempt state regulation, often arguing that national uniformity is necessary.

This has been happening whether it's a major issue, such as time limits on welfare, or a relatively minor one, such as blocking unwanted telemarketers. The fiscal 2005 budget passed by Congress, for example, preempts any state or local requirement that hospitals, insurance companies or health providers provide abortion services or referrals. (California's attorney general plans to challenge these strictures in court.) The Bush administration, meanwhile, regularly has challenged state authority on other social issues, from medical marijuana to assisted suicide.

These trends are accelerating fast, in part because rapid communication among activists can quickly move an idea that blossoms in one state--a ban on state contractors sending work overseas, say-- to legislatures in 30 or 40 capitals. Almost as quickly as new state regulations are passed, businesses and trade associations are in Washington arguing that they can't comply with a chaotic flurry of regulatory legislation whose fine print may not be the same in any two states. The bottom line is that much of organized business now prefers to deal with a single 800-pound gorilla, rather than 50 monkeys.

A prime example of the change in strategy is insurance regulation. Insurance companies have always been regulated solely by the states, but most now argue that they need a regulatory framework in Washington to compete with banks and other financial service entities that have been given more flexibility by the feds.

There are two proposals on Capitol Hill right now. One would set up a dual charter, similar to what banks have, under which an insurance company could choose whether to be regulated by states or the federal government. The other would keep the states as primary regulators--but only if they change their rules to satisfy congressional demands within three years. "It's a very interesting debate as to whether that is more of a jab at states' rights than an optional federal charter," says Gary Hughes, of the American Council of Life Insurers.

Hughes adds that states have tried to be responsive to his industry, but that it's still a cumbersome process for any insurer to win multi- state approval quickly enough to move new products to the market in competition with other financial services. "Even if you get 50 state regulators to agree on a course of action," he asks, "can you get their 50 state legislatures to agree to do the same thing?"

It's possible that no insurance bill will move through Congress anytime soon, given the abuses in the industry recently exposed by Spitzer in New York--but it's also possible that proponents of centralization will use the controversy as proof that the federal government needs to step up its role. Regardless, this question of differing state policies is a factor in an increasing number of areas. The governors and the American Association of Motor Vehicle Administrators led a cooperative effort to get state DMVs to agree to a uniform policy of driver's license security requirements, in order to stave off a federal intervention. More than 40 states quickly got on board, but the handful of stragglers left a big opening for the feds to fill with new standards included in the intelligence reform bill passed last month.

Despite the difficulties, it's possible that such voluntary efforts offer the best strategy for state and local governments to use at a time of increasing pressure to centralize. All the major state and local groups met with telecommunications companies last month in hopes of arriving at a mutually agreeable set of tax rates for that industry, before Congress takes away states' telecom taxing authority altogether.

Scheppach of the governors' association says that in some areas states should be pushing for hybrid models, in which the feds would set regulations but states would enforce them. A model could be the Streamlined Sales Tax Project, under which 21 states have agreed to standardize their sales tax codes in hopes of being allowed to collect taxes on electronic purchases. The U.S. Supreme Court has ruled in the past that the diversity of state sales tax codes would present an unreasonable burden on electronic and catalog sellers. A standardized code might lead to the relaxing of this restriction--although states still need congressional approval before they can make any tax mandatory on interstate commerce.

It's also possible that, in the end, the streamlined sales tax will merely serve as a prelude to a national sales tax. Federal officials have found that they like flexing their muscles in areas where state and local governments used to dominate. Taxes are unlikely to be different. And once the feds do move in, it's difficult to imagine a future in which they might choose to move out, whether the subject is taxes, education, public safety or the environment. "Whether Bush thinks he's doing it or not, he's redefining federalism," says Bruce Katz, director of the Brookings Institution's metropolitan policy program. "Cities and states will have to deal with the consequences. What they're going to hope for is, 'You're going to cut our budgets, but please don't tie our hands.'"