New Federalism or Feudalism?

By Ed Magnuson

Many applaud the end, but few defend the means

While the nation's army of state and local officials, as well as less personally involved political scientists and economists, examined the sketchy outlines of Ronald Reagan's New Federalism last week, few quarreled with the President's professed goals. Many had long joined his call for a rollback in the overextension of the Federal Government, a more rational division of state and federal functions and the need to bring many governmental decisions closer to the people who must live with the results. The desire to get more value out of each tax dollar was warmly applauded. Declared Republican Governor James Thompson of Illinois: "It's time to give us our money back."

But there were widespread doubts, even among Reagan's most ardent supporters, that he had produced a plan that would achieve those goals. Some skeptics, most of them Democrats taking a sharply partisan view, even charged that Reagan's real motives were not as altruistic as those he set forth. They claimed that the President's aim was to rid Washington of its most troublesome domestic programs, fobbing them off on the states in the expectation that many would soon die there. Some suggested that he was trying especially to get the problems of the poor off Washington's back.

New York City's Democratic Mayor Ed Koch termed the Reagan plan "a con job, a snare and a delusion, a steal by the Feds," adding, "I don't think he understands the impact of what he is doing." New York's Democratic Governor Hugh Carey contended that the New Federalism is really "a new feudalism," which will pit states against each other and cities against their state capitals as all struggle anew for a fair share of dwindling federal funds or jockey to protect their own economic interests. In the same vein, Democratic Governor Jerry Brown of California warned that the 50 states might become "competing colonies." West Virginia's Democratic Governor Jay Rockefeller charged that Reagan was "dumping onto the states what he doesn't want to face up to himself."

While applauding the push for some decentralization, Political Scientist Paul Peterson, chairman of the Committee on Public Policy Studies at the University of Chicago, wondered about Reagan's intent. "If your overall purpose is to reduce benefits to the needy without appearing to do so," he said, "then the answer is to shift responsibility for serving the needy to state and local governments."

Even those who did not question the President's motives found it difficult to defend his particular reshuffling of federal and state roles. Academic theoreticians and practical politicians alike see a need for a federal hand in helping the poor, since their problems are often created by national economic conditions. Only a federal presence can apply pressure to hold down the inequities stemming from a state's relative inability or unwillingness to deal fairly with the problem. States and cities, on the other hand, can more effectively make decisions on how to provide such basic public services as schools, roads, water, sewage and transit systems.

Reagan's proposed realignment would indeed eventually free Washington from its current responsibility to help states and cities improve their traditional local services. But his more immediate "swap" of programs, which would go into effect in October 1983, would also toss two of the Federal Government's largest, most difficult and most controversial welfare services, food stamps and Aid to Families with Dependent Children, back to the states. In this exchange, Washington would take over full funding and operation of Medicaid, a program that supplies health care to many of the same people helped by the other two services. The primary rationale seems to be a matter of political convenience. The Administration's dubious projection of AFDC and food stamp costs slightly exceeds that of Medicaid--and without the enticement of getting out from under the faster-growing Medicaid program, the states obviously would never agree to take on the other two burdens. At issue in the swap are these programs:

AFDC. The nation's basic welfare program, it provided benefits to 11.1 million individuals last year at a cost of $6.9 billion to the Federal Government and $5.89 billion to the states. Each state is free to set its own level of benefits, which range from $96 a month for a family of three in Mississippi to more than $200 for a similar family in New York. The Federal Government matches what the states decide to pay. The program already is basically administered by state and local governments, with Washington bearing half of these administrative costs.

FOOD STAMPS. This program has 21.7 million recipients, whose eligibility is determined under regulations from Washington. The cost last year was $11.4 billion, with the Federal Government picking up all of the tab. While the stamps are distributed by state and county officials, the program is mainly a federal one.

MEDICAID. The program, which provides medical care for the poor (unlike Medicare, which serves the elderly, it has no age requirement), aided some 22 million people last year at a cost of $30.5 billion. The Federal Government assumes about 55% of the total cost, which has been growing at nearly 15% annually, far above the inflation rate. The states have been free to provide optional services, such as eyeglasses and prescription drugs, with Washington sharing this cost. Benefits and eligibility standards vary from state to state. In the proposed federal takeover, it is unclear how Washington would accommodate these differences.

Understandably, the proposed shift of programs sent state finance officials scurrying off to their computers to determine just how they would fare in dollars. And while presidential aides tried, unpersuasively, to assure Governors that there would be no state winners or losers when, and if, the swap is approved by Congress, the estimated disparities sometimes were large. Officials in Ohio, who already face a $1 billion state budget deficit, figured the state would lose perhaps $400 million in the exchange. Florida estimates its loss at $455 million, Tennessee at $206.8 million, West Virginia at $110 million. Minnesota, on the other hand, expects to gain about $90 million from the swap, while New York's gain could go as high as $1.3 billion, if Washington picks up the state's optional payments, which seems unlikely.

White House estimates, which predict a much better fate for the states than local officials do, foresee the states emerging with a net combined gain of more than $2.5 billion. Obviously, all such projections are murky, with various officials making different assumptions about just what would happen. "The numbers thrown around by the President look suspicious," contends Economics Professor Bernard Weinstein of the University of Texas. "State and local governments will get the shaft as well as the shift."

The more basic issue, as Vermont's Republican Governor Richard Snelling views it, is that "this is not a numbers game, but a question of how people will be served." Most critics of the swap see a great danger that once federal funding of AFDC and food stamps ends, many states will deliberately keep such benefits low in the expectation that the poor will move to states where benefits are higher. Contends Felix Rohatyn, a New York financial expert who has advised states and cities on their money problems: "All poverty programs should be funded by the Federal Government; otherwise, states are going to compete by driving poor people into other states." To Princeton University's Richard P. Nathan, a professor of public affairs, the plan "sets up all the wrong incentives."

While some sociologists fear the federal withdrawal could spur a renewed wave of migration of the needy from the South to Northern and Western states, where benefits are comparatively generous, Atlanta Mayor Andrew Young worries about even shorter flights. "If Alabama decides to be irresponsible," he says, "Atlanta will be flooded with poor people."

The Administration's rebuttal is that voting rights gains among blacks and reapportionment of state legislatures have given the poor greater political clout, making it less likely that legislatures will act harshly to lower current welfare and food stamp benefits. Political Scientist William K. Muir at the University of California in Berkeley agrees. "Thirty years ago, you had a political system rigged against the poor and the black. But by and large, that has been cured. It's very rare to see a diminution of the franchise once it has been obtained."

Reagan's decision to give up AFDC and food stamp programs, which he has criticized as being vastly abused, while retaining Medicaid, in which abuses are more likely to be committed by doctors who overtreat and overprescribe than by the indigent ill, angers some state officials. Says Gerald M. Thornton, director of social services for North Carolina's Forsyth County: "He wants to take Medicaid, a respectable program, and give us food stamps, a program that's so unpopular that a person who gets stamps might as well be wearing tattoos. That's like getting a gift of garbage."

Vermont's Snelling, who is chairman of the National Governors Association, notes that the Governors have long sought a re-examination of the many federal aid programs, but have specifically opposed giving welfare responsibilities back to the states. To the contrary, they have asked the Federal Government to operate and fund all income-maintenance programs, while seeking full control of many of the road-building and similar capital construction projects. Nevertheless, Snelling welcomes the President's initiative. "There's enough federalism in his proposal, coupled with his intention to consult with us, for us to start talking."

Many state officials worry even more about whether Reagan's plan to temporarily fund 43 other programs with a $28 billion trust fund will prove adequate. Among the programs that would be affected: grants for airports, noninterstate highways, mass transit, water and sewer systems, community development, vocational education, child abuse, child nutrition, migrant health clinics, locating runaway youths and crime prevention.

Adding up his own numbers, Governor Rockefeller estimates this fund will fall at least $19 billion short of keeping the programs going at their current levels. After this fund is scheduled to be phased out in 1991, Reagan's invitation to the states to replace the federal money by passing higher excise taxes* to keep the programs going, or to kill the programs, meets with little enthusiasm, even though he has offered to repeal most current federal excise taxes on gasoline, tobacco and alcohol at that time.

Many states are financially strapped and find it difficult politically to seek more tax hikes. The states already levy excise taxes at varying rates. Receipts for such taxes, which disproportionately hurt low-income earners, show that the states are taking in more money from cigarettes and gasoline than Washington does.

Moreover, the grass-roots anti-tax movement of the past few years has put tight limits on tax increases in many states. Another limitation on state fund raising: the closer an elected official is to the electorate, the harder it is for him to raise taxes and survive. Republican Paul Gillmor, president of the Ohio state senate, flatly predicts that any programs turned over to Ohio with insufficient funding "will simply be terminated," which may well be what the Administration has in mind.

The likelihood that the financially pressed states and cities are better equipped to administer many federal aid programs than Washington's more distant bureaucrats is also challenged by some experts. Contends Michael Luger, assistant professor of public policy studies at Duke University: "Certain states are managed better than others, but, typically, the Federal Government has much better trained personnel and better managers." It also has many more of them at much higher salaries, which is part of the problem. Though states have their own waste and corruption problems, the general competence of their officials seems to be growing.

For all its obvious faults and great uncertainties, Ronald Reagan's New Federalism proposals were generally welcomed as the start of an overdue and refreshing national dialogue. The debate may be long one, but it is almost certain to be worthwhile.

--By Ed Magnuson.

Reported by Joseph N.Boyce/Atlanta and Christopher Ogden/Chicago

*An excise tax differs little from a sales tax except that it applies to a specific product rather than being levied as a fixed percentage on a broad range of products. Excise taxes on liquor and tobacco are often called "sin taxes."

With reporting by Joseph N.Boyce/Atlanta, Christopher Ogden/Chicago

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