Beware Feds Bearing Gifts

The Supreme Court has held that the federal government can pass a tax (or other law) that applies incidentally to state governments — as long as it applies generally to everyone and doesn’t violate the “dual sovereignty” of the states by interfering with the states’ core functions. So the federal minimum wage applies to state employees, and the federal government can impose payroll taxes that apply to state employees — because those measures apply to all employers, whether public or private. But the federal government can’t tax or regulate states as states by passing laws that apply principally (rather than incidentally) to them. It can’t pass a law that says: “A tax is hereby imposed on the budget of every state in the amount of x.” That, according to the Supreme Court, would violate the states’ reserved sovereignty.

The problem with the forced state reimbursement of the insurance-provider tax for Medicaid MCOs is that it forces states to subsidize the insurance providers in ways not contemplated in the Medicaid agreements. States had no notice of this expense, until a private board exercising powers delegated by Congress imposed it on them. Under federal rules, states are specifically commanded — as states — to pay this tax. And that is so close to being a tax on state government that it makes no difference, and it’s imposed by a private party, no less.

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