Conditional Spending

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CONDITIONAL SPENDING

The United States Constitution allocates legislative authority between a federal Congress and state governments. Congress may legislate or regulate only pursuant to specific powers expressly delegated in the Constitution; excepting implied powers, all powers not delegated to the national government are retained by the state governments. The power to spend money for the common defense or the general welfare, however, is a power separate from, and in addition to, all of Congress's other enumerated powers. Thus, Congress may spend federal funds for any purpose that can be thought to contribute to the general welfare, even though none of Congress's enumerated powers encompasses the subject of the expenditure. Congress may not impose regulatory requirements, however, even though admittedly in the interest of the common defense and general welfare, unless the area regulated is one over which regulatory control is delegated to Congress.

The power to spend carries with it the power to attach certain conditions to the expenditure. Those conditions in effect specify how federal grants will be used. For example, if Congress grants the states funds to build highways, Congress has the concomitant power to specify where the highways should run or how they should be built. This power to impose conditions permits Congress to ensure that its money is actually spent as Congress intends.

The conditional spending problem is presented when Congress seeks to purchase, not the usual goods and services, but compliance with a legislative objective that normally would be pursued by a simple regulation backed by a regulatory penalty such as a fine. When Congress uses its spending power to offer a financial inducement—a reward—for conduct that it could not directly require or regulate under any of its other enumerated powers, the core constitutional conception of specifically delegated powers is threatened. The problem posed by conditional spending is the extent to which federally induced state reliance on federal moneys gives Congress effective regulatory authority over the states beyond the powers delegated to Congress in the Constitution.

The question is of central importance to the basic constitutional scheme of federalism. Over the course of the last several decades, the federal tax burden on individuals has increased substantially, making it increasingly difficult as a political matter for state legislatures to raise state taxes. At the same time that the federal tax burden has deterred states from raising their own revenue, national grant programs for general welfare purposes, such as highways, education, and health, have induced states to rely increasingly on national funds to finance state services. Substantial state reliance on the distribution of money raised by national taxation is now a fact of political life in the federal system. This financial dependence of the states on Congress's beneficence invites Congress to extract concessions from the states, to require the states to accept "conditions" in return for the revenues now under Congress's control. If there are no constitutional limitations on the conditions Congress can attach to federal grants, Congress may extract tax revenue from the citizens of the several states, pursuant to the taxing power, and then return that revenue to the states, under the spending power, on the condition that the states impose on themselves or their citizens some regulation that Congress constitutionally could not have imposed under its other enumerated powers.

There are two competing views on the constitutionality of conditions attached by Congress to federal grants. The first view holds that offering a government benefit as a reward for compliance with some congressional objective is in effect identical to regulatory coercion by imposition of a fine to obtain the same end. Under this view, if achievement of an end is beyond Congress's delegated regulatory powers, it also should be constitutionally invalid when pursued through a conditional spending scheme. The second view is that the use of the spending power to offer a reward for compliance with some congressional objective is distinguishable from regulatory coercion in the form of a fine for noncompliance because the latter removes the freedom of choice while the former does not. According to this view, a state or individual confronted with the offer of a conditional grant may refuse the reward and persist in noncompliance, while one confronting a regulatory fine has no freedom of choice. Moreover, a fine takes money but a spending scheme awards it; refusing takes no money. Under this view, then, direct congressional regulation is confined to the enumerated powers, but Congress's purchase of compliance through a scheme of conditional spending is not similarly restrained.

Early spending power cases asserted that there is no conceptual difference between withholding a benefit and imposing a fine to achieve a regulatory end, and applied this principle to protect states ' rights. united states v. butler (1936) involved a challenge to the agricultural adjustment act of 1933 (AAA). Under the act, processors of agricultural goods were taxed and the proceeds from the tax were used to pay farmers to allow their land to lie fallow. The purpose of the scheme was to stabilize farm prices by reducing the supply of farm goods in the market. Respondents challenged the scheme as beyond the scope of Congress's delegated powers, primarily the interstate commerce power, because the act sought to regulate the purely local activity of agricultural production. The United States did not attempt to defend the scheme as a valid commerce regulation, but argued it could be sustained as a valid exercise of Congress's authority to spend "for the general welfare."

The Court disagreed in Butler, holding that the scheme was invalid precisely because Congress used its spending power to achieve a regulatory effect on agriculture, otherwise outside the scope of its delegated powers and subject only to state control. The Court expressly endorsed the Hamiltonian view that although Congress had limited powers, the spending power is not limited to the subjects of the enumerated powers; but the Court said the scheme was not a simple exercise of Congress's power to spend. It was "at best … a scheme for purchasing with federal funds submission to federal regulation of a subject reserved to the states." The Court distinguished between a conditional appropriation where the condition specifies how the money is to be spent, which is valid, and a conditional appropriation where the goal of the condition is regulation: "There is an obvious difference between a statute stating the conditioms upon which moneys shall be expended and one effective only upon assumption of a contractual obligation to submit to a regulation which otherwise could be enforced.… If in lieu of compulsory regulation of subjects within the states' reserved jurisdiction, which is prohibited, the Congress could invoke the taxing and spending power as a means to accomplish the same end, clause 1 of Section 8 of article I would become the instrument for total subversion of the governmental powers reserved to the individual states."

By modern standards B utle r was decided wrongly. Butler 's real error, however, was not in holding that spending legislation could not be used to accomplish regulatory ends outside Congress's delegated powers; rather, it was in adopting a narrow interpretation of Congress's power under the commerce clause that disallowed price-support legislation. Such a result would not hold up today. But in Butler the Court's perception that the AAA was regulation, not spending, seems unassailable.

The conceptual foundation of Butler—that a reward for compliance is regulation, not spending—has been carried forward and expanded by the modern Court in some civil liberties cases, first amendment cases in particular. In those cases, the Court has recognized that offering a governmental benefit on the condition that the individual refrain from engaging in protected activities is the economic and constitutional equivalent of imposing a fine for the violation of a regulation prohibiting the activity. For example, the Court has held that if government offers a financial reward in return for the recipient's agreement to forgo a practice commanded by her religion, the conditional grant presents the same religious liberty problem that would be presented by a fine for engaging in the religious practice. Either presents the same governmental interference with the individual's constitutionally protected liberty. In either case, the individual may choose to continue the protected activity and suffer the economic loss or forgo the protected activity and avoid the economic loss. In individual liberties cases this proposition is known as the doctrine of unconstitutional conditions and is often identified with the Court's decision in sherbert v. verner (1963).

In its most recent encounter with conditional spending, the Supreme Court appears to have abandoned the conceptual foundation of Butler and ignored its currency in the individual liberties area. In South Dakota v. Dole (1987) the Court confronted a challenge to the national minimum drinking age (NMDA) amendment to the National Surface Transportation Act. The act authorizes federal grants to the states for the construction of national highways. The NMDA instructed the secretary of transportation to withhold up to ten percent of a state's federal highway funds if that state fails to enact a minimum drinking age of twenty-one within the next year. Thus, by attaching a condition to a grant, Congress sought to impose a uniform national minimum drinking age. In Dole the Court assumed for purposes of the case that Congress, after the twenty-first amendment, could not have enacted a regulation requiring each state to adopt such a minimum drinking age for the state. Nor, the Court assumed arguendo, could Congress constitutionally have enacted a simple regulation directly prohibiting the purchase or consumption of alcohol by persons under twenty-one years of age. Thus, the only issue left for the Dole Court to resolve was whether the MNDA was constitutional as a condition accompanying a grant of federal funds to the states, even assuming that Congress could not regulate drinking ages directly under any of its delegated legislative powers.

The Dole Court observed that "Congress has acted indirectly under its spending power to encourage uniformity in the States' drinking ages." Thus, the legislation was held to be "within constitutional bounds even if Congress may not regulate drinking ages directly." In essence, the Court held that although Congress lacks regulatory authority to achieve a legislative end directly, Congress may "purchase" state compliance through the use of conditions attached to spending grants. The basis of the Court's holding is that there is a difference between coercing compliance (an exercise of regulatory power) and buying compliance (an exercise of the spending power). The Dole holding is in tension with other Supreme Court precedents, notably Butler and the individual liberties cases, which recognize that conditional spending can be the conceptual and economic equivalent of direct regulation. In effect, the Court in Dole, voting 7–2, reverted to the notion that compliance with a condition attached to a benefit is "voluntary" as long as the potential recipient can choose to forgo the benefit in order to avoid compliance with the condition.

The Supreme Court's decision in Dole appears to invite the complete abrogation of all limits on delegated federal legislative power through the simple device of burdensome taxes accompanied by "financial incentives" to comply with any federal legislative objective that is outside the range of concerns constitutionally delegated to Congress. Chief Justice william h. rehnquist's opinion in Dole, however, suggested some limitations on the breadth of the Court's holding.

First, said the Chief Justice, Congress may "induce" or "tempt" voluntary compliance, but may not "coerce" compliance. The difficulty with the coercioninducement test as a limit on congressional action is that it simply restates the distinction—discredited in some modern individual liberties cases—between achieving an end by regulation and achieving an end by withholding a benefit. The question of "how much benefit" simply is beside the point, for as Sherbert v. Verner concluded, any benefit withheld is tantamount to a fine in that amount. One who is subject to the threat of a regulatory fine may choose to violate the regulation and pay the fine because the amount of the fine is modest. But that "freedom" of choice does not eliminate constitutional objections to the substance of the regulation.

The facts of the Dole case suggest that Chief Justice Rehnquist was relying upon a distinction Congress would not even credit. Congress's very purpose in enacting the NMDA would have been undercut seriously if not every state had complied; it is clear that Congress had no intention of offering a choice, but threatened to withhold a benefit to obtain regulatory compliance.

Second, in a footnote Rehnquist suggested a constitutional requirement that any condition attached to a federal grant bear some relationship to that grant. In applying this suggestion to the facts of Dole, however, the Chief Justice simply noted that the condition related to the national problem of teenage drunk driving. Teenage drunk driving may well be a problem national in scope, but the condition did not in any way specify the characteristics of the highways that the conditioned funds were intended to purchase. Requiring only that the condition relate to a national problem rather than specify characteristics of the particular goods and services to be purchased by the grant seems tantamount to a statement that Congress can regulate perceived national problems through the spending power. Of course, Congress may with greater legitimacy reach many of the same subjects by the exercise of its wide-ranging commerce powers.

Thomas R. McCoy

Barry Friedman
(1992)