Congressional Inconsistencies.

• Author: Tubbesing, Carl

In the perennial struggle for power, there are always trade-offs. Last year, for instance, states traded authority over the banking and brokerage industries for financial modernization. What will happen to Internet taxation remains to be seen.

Several members of Congress, a governor, a state legislator and an attorney general gathered on May 20 in the U.S. Capitol. The occasion was congressional approval of a provision guaranteeing that states would get their full share of the tobacco settlement money.

"That was a truly heady experience," recalls Maryland Delegate Nancy Kopp, who represented the National Conference of State Legislatures at the celebration (disguised as a press conference). "Passage of this anti-recoupment law was an unequivocal message that decisions about how to allocate the tobacco money would be made in state capitals, not by the national government. It was, in its way, a continuation of devolution."

Six months later, President Bill Clinton signed legislation revising the laws governing the financial services industry. The National Journal proclaimed it one of the most important accomplishments of the first half of the 106th Congress.

"In a congressional session marked more by words than by action," it noted, "one legislative landmark stands out: the demolition of the 66-year-old wall that separated banking from the insurance and securities business."

The law will allow new hybrid businesses merging banking, securities and insurance services. A barely observed by-product of this financial services reform legislation is its preemption of state laws that traditionally regulated the banking, insurance and securities industries.

"Technology and the global economy may have made financial modernization inevitable," says Michigan Senator Joanne Emmons. "Often lost in the debate, though, was the evisceration of state regulation. There are trade-offs in almost any bill. In this one, we gain modernization. We sacrifice state authority. We get preemption."

So, the first half of the 106th Congress continued the Dr. Jekyll and Mr. Hyde treatment of state governments. One heady victory places control over billions in tobacco settlement money with state legislatures and governors. But landmark financial services legislation weakens the control that state officials traditionally have had over this major sector of the nation's economy.

This has been the federalism fight of the 1990s. In this corner, wearing red, white and blue trunks, a native of 50 state capitals, representing devolution and flexibility, we have Dr. Jekyll. In the opposite corner, wearing green trunks with a dollar sign motif, stands Mr. Hyde, representing Washington, D.C., national solutions and preemption.

FEDERALISM SCHIZOPHRENIA

Will this federalism schizophrenia persevere during the first congressional session of the new century? The answer is almost certainly yes. Perhaps the best predictor of the congressional agenda for 2000 is what it has left over from last year. Many of these items have the potential for preemption and centralization. The presidential campaigns and the intense fight for control of Congress could increase the number of proposals that would supplant state decision making with national standards. Yet, there will also be opportunities to protect and even enhance state prerogatives.

INTERNET TAXATION: FIRST BIG FIGHT OF THE CENTURY

The Federal Advisory Commission on Electronic Commerce is scheduled to issue its recommendations on taxation of Internet transactions in April. The 19-member commission, which was created in 1998 by the Internet Tax Freedom Act, has been the vehicle for a contentious and fundamental debate over the future of state and local revenue systems. The debate is also over preemption and the federal government's role in state tax policy.

The often acrimonious fight has been led by two Republican governors who are members of the federal commission. The chair, Virginia Governor James Gilmore, wants to make the Internet a "tax free zone." He and his allies, who include Ohio Congressman John Kasich, advocate federal legislation that would ban state and local governments from collecting sales taxes on electronic commerce. Gilmore argues that the Internet is an indispensable component of the growth and vitality of the nation's economy. "The Internet is the most transforming technological development since the Industrial Revolution," he told USA Today. "Its growth must not be thwarted by taxation."

Utah Governor Michael Leavitt, on the other hand...