The Region

The congressional process and the constitutionality of federal legislation to end the economic war among the states

Philip P. Frickey - Faegre & Benson Professor of Law, University of Minnesota

Published June 1, 1996  |  June 1996 issue

Melvin Burstein and Arthur Rolnick contend in the Federal Reserve Bank of Minneapolis' 1994 Annual Report that Congress should prohibit state and local subsidies and preferential taxes used to attract new businesses and to keep existing businesses from exiting in response to offers from rival jurisdictions. Their argument seems to run afoul of two American traditions: free competition and local control. They suggest, however, that the use of such economic preferences is economically inefficient and can be corrected only by a nationally imposed solution.

Under our federal structure of 50 states and their subdivisions, localities may indeed have incentives to take action that, although rational for each of them in isolation, produces a collective irrationality. An example is child labor regulation. When some localities allowed child labor in order to foster low wage rates, other jurisdictions were left with the unhappy choice of either meeting that competition by allowing child labor themselves or prohibiting child labor and thereby arguably disadvantaging their businesses in the interstate marketplace. Our federal structure created strong economic incentives for a "race to the bottom," the acceptance of the lowest common local denominator rather than a policy serving the national interest.

The resolution of the child-labor dilemma is suggestive of the constitutional issues arising from a national solution seeking to coordinate public policy in our federal system. After Congress outlawed the interstate movement of goods produced by child labor, the Supreme Court in Hammer v. Dagenhart, 247 U.S. 251 (1918), struck down the statute as unconstitutional—as beyond congressional power under the Commerce Clause of the Constitution, which authorizes Congress to "regulate commerce among the states." The Court concluded that the true aim of Congress was to regulate labor in manufacturing, which was not "commerce"; that in any event such localized economic activity was not commerce "among the states"; and more generally that the power to regulate local affairs was reserved to the states and localities by the Tenth Amendment to the Constitution. On this last point, the Court embraced what we lawyers call a "slippery slope" argument, concluding in rather apocalyptic terms:

The far reaching result of upholding the act cannot be more plainly indicated than by pointing out that if Congress can thus regulate matters entrusted to local authority by prohibition of the movement of commodities in interstate commerce, all freedom of commerce will be at an end, and the power of the States over local matters may be eliminated, and thus our system of government be practically destroyed.

A generation later, when constitutional law underwent a sea change during the New Deal era, the Supreme Court overruled Hammer, in United States v. Darby, 312 US 100 (1941). Today there is little doubt that the power to regulate "commerce among the states" includes virtually unlimited authority to regulate any economic transaction even remotely affecting interstate markets. It would seem, therefore, that the solution proposed by Burstein and Rolnick is easily within the constitutional power of Congress.

Nonetheless, the conclusion that Congress has the authority to prohibit local and state business subsidies is not entirely foregone. As Burstein and Rolnick acknowledge, any assessment of constitutionality must examine what the Supreme Court has signaled about such subsidies in its decisions applying the judicially constructed "dormant" or "negative" Commerce Clause. In these cases, the Court has interpreted the grant of power to Congress to regulate "commerce among the states" as implicitly mandating a policy of free interstate markets, such that local economic measures that have not been outlawed by Congress are nonetheless unconstitutional if they unduly burden interstate commerce. In these cases, the Court has usually viewed the local economic activity as inconsistent with the policy of the Commerce Clause only where out-of-state interests are burdened for the benefit of local interests—for example, by a tax that discriminates against out-of-state goods. Accordingly, in West Lynn Creamery Inc. v. Healy, 114 S.Ct. 2205, 2214 (1994), the Court has suggested that "a pure subsidy funded out of general revenues ordinarily imposes no burden on interstate commerce, but merely assists local businesses." The Court has even stated that "a State's goal of bringing in new business is legitimate and often admirable," in Metropolitan Life Ins. Co. v. Ward, 470 US 869, 879 (1985).

Burstein and Rolnick argue, in effect, that the Court has its economics all wrong—that local and state business subsidies can, in fact, substantially degrade and burden interstate commerce. If Congress were to pass legislation consistent with their proposal, would the Court strike it down because it lacks sufficient linkage to interstate commerce?

The current Court is, in fact, the first Court in 60 years to strike down a federal statute as beyond the commerce power. Last year, in United States v. Lopez, 115 S.Ct. 1624 (1995), it invalidated a federal statute prohibiting the possession of a gun in or near a school for (on my reading) three basic reasons: The regulation was not economic in purpose or effect, the regulated subject matter (schools) is a core function of state and local government, and upholding the statute would essentially indicate that congressional commerce power was unlimited (the slippery-slope argument again). Does Lopez, when conjoined with the dormant Commerce Clause cases, signal significant constitutional difficulties with the Burstein and Rolnick proposal?

In my judgment, the constitutional problems are surmountable so long as Congress addresses them. What will be needed, in my view, is a presentation that these subsidies are contributing to a national economic problem such that federal intervention is justified notwithstanding our preference for local control. Of course, even if Congress acts based on a legislative record demonstrating that the subsidies are a problem of federalism, rather than virtue of it, the Court will, of course, have the opportunity to second-guess the congressional conclusion if litigation challenging the constitutionality of the measure is instigated. To be on the safe side, the statute Congress adopts should not simply be based on a legislative record, but should also include explicit and carefully drafted congressional findings consistent with that record. Although findings do not guarantee the constitutionality of the statute, the Supreme Court has routinely deferred to such findings, particularly where they are responsive to concerns about constitutionality likely to be at the forefront of the judicial mind, as I have recently explained in The Fool on the Hill: Congressional Findings, Constitutional Adjudication, and United States v. Lopez, 46 Case Western Res. L. Rev. ___ (1996) (forthcoming).

Such a deliberative congressional process has its virtues, of course, beyond the narrow arena of constitutional law. The legislation that Burstein and Rolnick propose would profoundly reshape contemporary schemes of public finance and economic self-promotion that have become routine throughout America. Their proposal may seem drastic and not consistent with even the educated intuition. Supporters of this measure would be well served, then, by a process of education aimed at all interested parties, not merely those with legislative and judicial power. If this process is properly constructed, constitutional concerns can be adequately addressed along the way.

This paper, published by the Minneapolis Fed for "The Economic War Among the States," a conference held in Washington, D.C., on May 21-22, 1996, is reprinted in this issue of The Region.

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