The legal rules of fiscal federalism

My apologies to the prawfs crew for light blogging during my guest stint -- I've been busily polishing the rough edges of a new draft, "Federal Grants, State Decisions".  Since it's fresh on my mind, and Dan has assured me that there is no clear blawg norm against self-promotion, I'd like to say a few words about it in the hopes that I will pique your collective interest. 

The focus of the paper is on "conditional spending" -- federal grants with strings attached.  Pretty much everyone who's written about conditional grants thinks that they're problematic, and that either they should be outright unconstitutional (a small group of largely conservative scholars) or that courts should interpret the conditions strictly against the federal government (the Supreme Court, along with a medium-sized group of mostly leftish scholars). 

I argue that there's a good chance they're all wrong.    Why?  Read on...

In essence, my claim is that arguments about the dangers of conditional spending all assume that state officials will fail to account for those dangers in their decisions to accept the grant.  Now, it's almost certainly right that state officials don't internalize harms to the rest of the country, don't care that much about long-term effects, and want lots of money.  But my claim is that they have plenty of other self-interested reasons for turning down just those grants that we think would undermine federalism values.  For instance, officials probably prefer a diverse set of rules to a uniform federal rule, so that they can choose the rule that allows them to extract the highest local rents, export costs onto other jurisdictions, and claim maximum credit for any good outcomes. 

The other key claim of the paper is that officials don't really need federal money.  I offer a model showing that, in many cases, it will be politically cheaper to raise money through local taxes than by accepting conditional grants.  And I dig into lots of empirical data on how states respond to grants for evidence on their actual fiscal need (an indirect approach I'm obliged to take because of the scarcity of useful data on actual U.S. fiscal need). 

So, at bottom, I say that the burden should be on advocates of restricted federal grants to explain why they want to ignore freely-chosen political outcomes.  And the data don't seem to be there to support any claim that those choices are inconsistent with the aims of federalism.

I'm hoping the paper will fit relatively seemlessly into my larger project, which is to think about public finance within the framework of law: the legal rules governing our use of tax and spending policy implements.  Comments are welcome.