Potholes in the Alley


When President Reagan announced his New Federalism program in 1982, he quoted an unidentified state governor as saying, “The national government should be worried about arms control, not potholes.” The message was clear, and in line with the thinking of the anti-federalists of the 1780s: The federal government should concentrate on matters of defense and foreign relations. The states should do most of everything else, including the care of the potholes and the highways wherein they reside.

There is, however, ample precedent for the federal government to concern itself with highways and many other items of national life. In Article I the Constitution grants Congress the power to “establish post-offices and post roads.” The interstate highway system was established by Congress in the 1950s as a national defense highway network for the purpose, among other things, of transporting nuclear missiles to their silos in places like Montana and North Dakota.

The basic premise of the New Federalism is more akin to the colonies’ discarded Articles of Confederation. Each of the separate states should decide what services it cares to provide to its citizens and figure out how to pay for them. A citizen who does not like things in his state can follow the dictum of “vote with your feet” and move elsewhere.


This would not be so bad were all states starting from scratch or, in the fashionable jargon of the day, playing on a level field. But the field is tilting badly, and is being pushed more askew each year.

A study by State Policy Research Inc. concludes that some states are benefiting handsomely from the shift of federal priorities away from domestic social spending and toward defense. The private research firm reported that federal spending in New Mexico exceeded federal taxes paid by New Mexicans in 1984 by $1,983 per person. At the other end of the scale, Illinois residents sent an average $1,161 more in taxes to Washington than they got back in federal expenditures.

The study includes all domestic federal spending, from Social Security checks for the retired and the federal payroll to items like paper clips, gasoline for federal vehicles, the construction of dams, and welfare and health-care payments.

The federal dollars are, in general, flowing to the Sun Belt and microchip valleys and away from the high-unemployment, industrialized Northeast and Midwest. Even so, California still ranked only 16th on the bonus side, receiving $395 more per person in federal spending than it collected in taxes. The overall result is that states with the heaviest social burdens like welfare and Medicaid are getting fewer federal aid dollars to pay for such services. The burdens are compounded as federal jobs and contracts shift elsewhere.

The disparity would be even greater if Congress enacted tax reform that would eliminate the federal deduction for state and local taxes. When the President said that the deduction amounts to a special subsidy for high-tax states, the emphatic message was that if those states want to provide extra services for their residents they ought to pay the full bill. The deduction does not buy luxuries, however, but merely allows those states to cushion some--but certainly not all--of the shock of 50% federal cutbacks in aid to state and local government since 1981 and a proposed $97 billion more in the next five years.

The dubious justification for the federal cutsz is that the states are running surpluses while Washington is strapped with mounting debt. But, even after 40 states raised taxes in 1983 and 1984, the cumulative state budget reserves have virtually disappeared. Even when the surpluses totaled about $52 billion, the Congressional Budget Office reports, 82% of that money was in trust funds, mostly for pensions, that could not be used for day-to-day state operations.


The 1787 Constitutional Convention consciously structured a delicate federal-state partnership that would promote the general welfare and put an end to economic and social strife between states and regions. The disturbing trend of today is back toward a Balkanized America where the fit get fitter and the federal establishment leaves most states with no choice but to try to do more with less.

The New Federalism was to have been a two-way street, with Washington sharing its tax resources so that the states could finance their new burdens. Instead, it has become a one-way blind alley, with plenty of potholes.