The States and the Senate

Last month's `summit' meeting started on the subject of taxes. But it ended with a much broader challenge.
April 2000
Donald F. Kettl
By Donald F. Kettl  |  Columnist
Former dean of the School of Public Policy at the University of Maryland, and a nonresident senior fellow at the Volcker Alliance and the Brookings Institution

Two historic things happened when the nation's governors showed up in Washington a few weeks ago for their annual meeting. One was that, for the first time in history, the governors sat down as a group with the members of the U.S. Senate. The second, maybe the more important one, was that the discussion didn't degenerate into the traditional squabble over federal aid and federal mandates. Instead, the governors challenged the Senate--and themselves--to rethink what federalism means in the knowledge economy.

The most conspicuous issue on the table was taxation of Internet commerce. Should the states be able to tax sales in the mushrooming e- marketplace? Most governors are worried that, without e-taxes, a major state revenue source will evaporate. They want a chance to collect the money. How does that get done? For nearly everyone who has thought about this, simply figuring out the logistics is a daunting problem in itself.

But it wasn't the technicalities that Utah Governor Mike Leavitt, the NGA chairman, kept focusing on during his morning with senators in the Capitol. Leavitt's main issue was the larger mismatch between the way state governments work and the challenges they face.

For example, he told the senators, a business owner who currently wants to operate across the country, in separate stores or on the Internet, must obtain 50 different licenses, write 50 checks and comply with 50 different sets of laws. That means to him that economic growth will suffer--or that businesses will find ways around state regulations.

Meanwhile, there are increasing reports of conflict between advances in medical care and the state regulations that govern them. At the moment, a patient cannot receive an MRI scan in Nevada and have a radiologist in Utah read it. The problem is not the technology. In fact, the technology makes it simple to get opinions in complicated cases from the nation's best doctors, wherever they might be. Nevada law, however, permits only physicians licensed in Nevada to provide the service.

Leavitt's concerns aren't new ones. The balance of local flexibility and national uniformity is federalism's ageless balancing act. But in a 21st-century economy that seems to know no geographic borders, the whole system of regulation needs some serious thought. And individual states can't really experiment much on their own. A state can try to regulate the flow of Internet and global business, but if the markets see the state's rules as an impediment, the money can flow to where the barriers are lower. In that situation, any sensible governor will be likely to leave the issue alone.

The whole federal system is running up against problems that, like those of a kindergartner just learning to color, refuse to stay within the lines of our governmental structures. We tend to think vertically- -states, counties, cities, school districts--when more of our problems are horizontal--urban sprawl, pollution, economic growth. There is a disconnect between government institutions and tax structures and the burdens being forced upon governments in the new century.

That was why, after the senators and governors had their e-tax conversation at the Capitol, Maryland Governor Parris N. Glendening, the NGA vice chair, sought to steer the debate onto broader ground. "We have a unique opportunity to redefine federalism," he insisted, "and to decide how we will lead and govern in the 21st century." Throughout American history, Glendening reminded the group, reformers have periodically redefined government's roles and structures. "The time has come again," he said, "to reshape government in a knowledge and technology-based world."

Leavitt echoed those views., "During the next decade," he bluntly predicted, "globalization will reshape governments more profoundly than the Industrial Revolution and the Progressive Era combined. States can fight the changes and die, accept them and survive, or lead and prosper."

As Leavitt and Glendening both argue, it's not so much a case of whether governments will change, or whether federalism will evolve. They will. The Internet-driven protests surrounding last December's World Trade Organization meetings point to the tidal wave sweeping over governments everywhere. The global economy and electronic communication are changing the way everything works. Rather, it's a question of whether all of America's governments--federal, state, and local--will find solutions or let themselves be swept along by the global e-revolution that is occurring.

The "summit meeting" at the Capitol offered at least one promising signal that some of the key players understand exactly what is happening. But a signal is all it was. The governors and their states have to keep the pressure on for a reevaluation of all the mechanisms of the federal system in light of 21st-century economic reality. And the federal government has to have the flexibility to listen to them.