Cascade Effect 4

The Erosion of Federalism

How States Were Reduced from Sovereign Partners to Administrative Units

The Constitution created a federal system, a union of sovereign states that delegated specific, enumerated powers to a national government. The states were not subdivisions of Washington. They were co-equal partners with their own authority, their own governments, and their own representation in the federal legislature. A century after 1913, that balance has been destroyed.

The Federal Spending Explosion

The most measurable consequence of the 1913 changes is the sheer growth of the federal government. In 1913, federal spending was approximately $715 million (about 2% of GDP). By 2023, it exceeded $6.1 trillion (roughly 23% of GDP). This represents an eleven-fold increase as a share of the economy, enabled entirely by the revenue-raising power the 16th Amendment provided. [1] [2]

Congressional Budget Office data shows that federal spending has averaged 21.1% of GDP over the past 50 years, with the trend consistently upward. The largest categories (Social Security, Medicare, Medicaid, and defense) are all programs that would have been constitutionally unimaginable before the income tax provided the revenue to fund them. [1]

Office of Management and Budget historical tables tell the story of federalism's erosion through a specific lens: federal grants to state and local governments. These grants, which totaled less than $7 billion in 1960, now exceed $1 trillion annually. Each grant comes with federal conditions, regulations, and reporting requirements that effectively dictate state policy in areas the Constitution reserved to the states. [2]

The Conditional Funding Trap

The federal government cannot constitutionally order states to adopt specific policies. But it can, and routinely does, attach conditions to federal funding. Want highway money? Set the drinking age to 21. Want education funding? Adopt federal curriculum standards. Want Medicaid dollars? Accept federal eligibility requirements. The legal term is "cooperative federalism." The practical reality is federal coercion.

From Partnership to Dependence

Timothy Conlan documented how federal grants shifted from targeted infrastructure aid in the mid-20th century to broad social welfare payments that now constitute the majority of state budgets. Medicaid alone accounts for approximately 65% of all federal aid to states, and in many states, Medicaid spending is the single largest line item in the state budget, exceeding spending on education. [4]

This financial dependence fundamentally changed the relationship between states and the federal government. States that depend on federal funds for a quarter or more of their budgets cannot afford to resist federal policy demands. The theoretical sovereignty of states becomes meaningless when fiscal reality makes compliance the only viable option.

Robert Higgs's "ratchet effect" applies to federalism as well: each expansion of federal grants and mandates (typically justified by a crisis) creates new dependencies that persist long after the crisis passes. Programs created as temporary measures become permanent entitlements with constituencies that make them politically impossible to reduce. [4]

The Legal Erosion

The Supreme Court's jurisprudence has tracked the political erosion of federalism. In South Dakota v. Dole (1987), the Court upheld Congress's power to condition highway funding on states adopting a minimum drinking age of 21, establishing a framework that gave Congress broad latitude to use spending power as a policy tool, even in areas where Congress had no direct regulatory authority.

It was not until NFIB v. Sebelius (2012), the Affordable Care Act case, that the Court finally drew a line. Chief Justice Roberts, writing for the majority, held that the ACA's Medicaid expansion was unconstitutionally coercive because it threatened states with the loss of all existing Medicaid funding (not just new expansion funds) if they refused to comply. Roberts called it "a gun to the head" of the states. [1]

But the Sebelius decision was the exception, not the rule. The vast architecture of conditional federal funding remains intact and largely unchallenged. States continue to function, in practice, as administrative units implementing federal policy, exactly the relationship the Founders designed the original Senate to prevent.

Laboratories of Democracy?

Justice Brandeis's famous description of states as "laboratories of democracy" (where different approaches to policy can be tested and compared) has been largely hollowed out. When federal mandates, conditions, and preemption dictate policy in education, healthcare, environmental regulation, and dozens of other areas, there is little room left for meaningful state-level experimentation.

The Connection to 1913

The income tax gave Washington direct revenue that didn't flow through state governments. Before 1913, the federal government's limited resources constrained its ability to influence state policy. After 1913, effectively unlimited revenue enabled the federal government to build programs, attach conditions, and create dependencies that subordinated state sovereignty to federal priorities. [1] [2]

The 17th Amendment removed the states' advocates in the Senate. Ralph Rossum's research demonstrates that state-appointed senators consistently resisted federal encroachment on state authority, because the state legislatures that appointed them demanded it. Popularly elected senators face no such structural pressure. They are responsive to national party platforms, media narratives, and donor preferences, not to state institutional interests. [3]

The combination was devastating: states lost both the financial independence to resist federal demands and the political representation to block them in Congress. The erosion of federalism that followed was not the product of any single policy decision; it was the structural consequence of removing the two pillars that supported state sovereignty in the constitutional design.

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Sources & Bibliography

Primary Source

NFIB v. Sebelius, 567 U.S. 519 (2012)

Supreme Court of the United States

Struck down the ACA's Medicaid expansion as unconstitutionally coercive, a "gun to the head" of states. The first time the Court found a spending condition to be coercive.

Data Source

Historical Budget Data

Congressional Budget Office

Federal spending has averaged 21.1% of GDP over 50 years, now at 23-24%. Essential for documenting the growth of federal power.

Data Source

Historical Tables

Office of Management and Budget

Budget tables going back to 1789, including federal grants to states and total outlays by function.

Academic

From New Federalism to Devolution

Timothy Conlan, Brookings Institution Press, 1998

Documents how federal grants shifted from infrastructure aid to social welfare payments, with Medicaid now accounting for ~65% of all federal aid to states.