Tying the Hands of States: The Impact of Federal Preemption on State Problem-Solvers

7/19/2004

Executive Summary

“To stay experimentation in things social and economic is a grave responsibility. Denial of the right to experiment may be fraught with serious consequences to the nation. It is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”

- Brandeis, dissenting, New State Ice Co. v. Liebmann, 285 U.S. 262, at 311 (1932)

States have long been the laboratories for innovative public policy, particularly in the realm of environmental and consumer protection. State and local legislatures, smaller and often more nimble than the federal government, can develop and test novel policies to address problems identified by local constituents. If a certain policy works, other states can try it. If the policy fails, the state or local government can quickly modify the policy without having affected residents in all 50 states. Success at the state level then often gives rise to federal policy.

Politicians and scholars have debated the balance of power between federal and state governments since the time of the Constitutional Convention. Far from being simply theoretical, this debate has real-world consequences. When considering federal policy that could conflict with state policy, Congress often has to choose between establishing its policy as the minimum protection or “floor,” allowing states to enact stronger legislation to supplement that minimum standard, or as the “ceiling,” in effect establishing maximum requirements that states cannot supersede. Over the last three decades, states have become increasingly active in passing strong laws to protect the health, safety, and well-being of their residents. The federal government has increasingly responded to state-level problem solving with its own powerful political tool—preempting the right of state governments to legislate on a given issue and establishing federal law as the ceiling.

This paper discusses just a few arenas in which the federal government has dictated federal law as the ceiling, effectively preempting state policies on issues ranging from financial privacy to health care to global warming.

• Consumer privacy. Congress has passed legislation preempting the right of states to pass credit accuracy and privacy laws that are stronger than federal law. At the center of the debate is a strong privacy law passed by California State Senator Jackie Speier that went into effect on July 1, 2004. Ultimately, the courts will decide if federal law preempts this California policy—which would close the door for other states to follow California’s lead.

• Banking regulation. In January 2004, the Office of the Comptroller of the Currency (OCC) issued a sweeping rule that would prevent most state consumer protection laws from applying to nationally chartered banks. This likely will dissuade any state legislator or regulator from acting to impose rules on state entities stronger than those imposed by OCC on their primary competitors, national banks.

• Health care. In June 2004, the Supreme Court unanimously rejected efforts by states to give patients in HMOs the right to sue managed-care companies when they refuse to cover treatment that a doctor has deemed medically necessary. The court ruled that the Employee Retirement Income Security Act (ERISA) preempts the “right to sue” laws of Arizona, California, Georgia, Maine, New Jersey, North Carolina, Oklahoma, Texas, Washington and West Virginia.

• Global warming emissions from vehicles. In July 2002, California’s then-Governor Gray Davis signed a new law to reduce greenhouse gas emissions from passenger cars and light trucks. The California law faces challenges from the auto industry and potentially from the federal government—both of which may argue that the proposal is preempted by federal authority to set fuel economy standards. The outcome of this fight will be felt outside of California. Just this year, New Jersey, Rhode Island and Connecticut said they intend to start following California's auto emissions standards instead of the federal standards. New York, Massachusetts, Vermont and Maine already do so.

• Nuclear power plants. Federal law preempts state regulation of the construction, operation, and licensing of nuclear power plants, placing sole authority with the Nuclear Regulatory Commission (NRC). These preemption issues are particularly salient in states, such as Ohio and New Jersey, where community groups, regulators and state officials are concerned about the safety and continued operation of aging nuclear power plants. State officials can submit public comments to the NRC and otherwise weigh in on NRC decisions; however, the authority to operate or close a plant rests squarely with the NRC.

As the stories and anecdotes from state legislators and regulators included in this paper show, federal preemption has often tied the hands of state legislators and regulators eager to solve problems facing their constituents. But this preemption hurts more than the residents within one state’s borders. Federal preemption suppresses the creativity of state problem solvers and shrinks the marketplace of ideas—leaving us with “lowest common denominator” solutions.

These few examples are indicative of what appears to be a growing trend—conflict between state and federal lawmakers over the role state governments should play in protecting the health, safety, and well-being of their constituents in the face of inadequate federal regulation. Federal preemption battles are brewing on issues ranging from insurance regulation to energy efficiency requirements to regulation of toxic chemicals. While the policy context of each of these issues differs, the crux of the debate remains the same: where does the authority of the federal government end and the power of the states to do more to protect their citizens begin?