April 16, 2015

This week’s ETW Document of the Week is the internal White House summary of President Reagan’s “New Federalism Initiative” announced in his January 1982 State of the Union Address. This proposal is the root source of the “devolution” or “turnback” proposals made today for transportation programs.

The proposal would have turned back responsibility for all federal mass transit spending and airport improvement grants and most federal highway spending that was not on the Interstate System to states. The federal transportation spending turned back would have totaled about $6.4 billion per year. $23.8 billion per year in other federal grant programs would also have been turned back to states.

To pay for the turned back programs during a four-year transition period, the plan called for dedicating $28 billion per year in existing federal excise taxes to a new Federalism Trust Fund, which would have included half (2 cents per gallon) of the gasoline and diesel taxes in effect at that time, taking that money out of the Highway Trust Fund.

After the first four years, the federal taxes going to the Federalism Trust Fund would be reduced to zero over a second four-year period, during which time states could either raise their own excise taxes to fund those programs or else cut the programs back.

The 1982 New Federalism Initiative never went anywhere, mostly because states fought back against the other part of the program. In addition to the “turnback” portion, the plan was predicated on a “swap” – the federal government would take over 100 percent of the funding for the split-funded Medicaid program, and in exchange, the states would pick up 100 percent of the funding for the split-funded food stamp and AFDC programs.

In retrospect, it is ironic that the plan never moved forward because states did not want to trade their share of Medicaid for the federal share of food stamps and AFDC, because since 1982, health care costs have risen far more rapidly than have welfare costs, to the point that Medicaid is in many cases the main driver of state fiscal problems.

And it is also interesting that President Reagan moved from proposing to cut the Highway Trust Fund’s receipts from gasoline and diesel taxes in half in January 1982 to advocating in November 1982 that Congress more than double those same taxes going into the Highway Trust Fund. But that is a much longer (and very interesting) story.