Fractious and Fractured Federalism

The U.S. Capitol on April 22, 2026. Madalina Kilroy/The Epoch Times

Commentary

In theory, a federal system of government would feature a sort of “division of labor” whereby state governments and the federal government would each have their own specific areas of jurisdiction. In practice, the federal government’s historical purview has been primarily foreign affairs and the development of a coherent national policy for immigration and foreign trade.

Domestically, the government in Washington was expected to provide a national money, standardize the rules of commerce between states, and ensure a nationwide rule of law and system of courts that would buttress the rights and freedoms of individual citizens (see the U.S. Constitution, Article 1, Section 8). The states were not to intrude upon those federal prerogatives, but were left with great leeway for taking such actions as seemed necessary to provide a stable and just administration on an everyday basis, and to address problems and challenges that would arise from time to time.

In recent years, we have all been aware of considerable friction between Washington and various state governments. Perhaps most prominent has been the immigration issue. State governments have asserted that they have the right to grant permission to illegal immigrants to reside in their states in defiance of the federal prerogative to determine whether a foreign individual has permission to be in the United States. State governments and Uncle Sam also have clashed over diversity, equity, and inclusion policies; rules governing rapidly developing artificial intelligence technology; environmental standards; and more.

The current fractious state of federalism is being exacerbated by fiscal issues. Ironically, the problem stems from the federal government and state governments attempting to cooperate on major social welfare policies. I am referring to the plethora of jointly run welfare policies. The crux of the problem is that many federal assistance programs are set up so that Washington provides most of the funding while the states administer disbursement and decide who the recipients are. The incentives such programs create are a powerful formula for friction.

Why should state governments try to defend fiscal soundness by carefully screening applicants for assistance when increasing enrollment can bring millions or billions of dollars into the state treasury without raising taxes on the state’s residents? It is so much easier to let Uncle Sam and oblivious federal taxpayers foot the bill.

Multiple federal programs operate in this fashion. The massive outflow of dollars from Washington explains why the U.S. Treasury is nearly $40 billion in debt and why it is so difficult to balance the federal budget.

It is impossible to say with precision how many billions of dollars each year that states are siphoning by dubious means from the federal government into their own treasuries. For example, a 2024 Government Accountability Office report concludes that between 2018 and 2022, the federal government was defrauded of $233 billion–$521 billion every year, with slightly more than half the fraud happening through Medicare and Medicaid.

The federal Medicaid structure acts like a sieve through which federal moneys “leak” into state coffers. In investigating the huge scandal that came to light in Minnesota late last year, acting U.S. Attorney Joe Thompson concluded that as much as half of $18 billion of Medicaid funds disbursed from Uncle Sam to Minnesota since 2018 could have been fraudulent. He pointed out how easy it was for the federal government to be bilked, stating: “By design, the Program had low barriers to entry for new providers and for beneficiaries. The Program also had minimal requirements for reimbursement.” (It turns out that federal “medical spending” encompasses such things as housing, sports club fees, gym memberships, bicycles, scooters, and music and art lessons.)

Medicaid isn’t the only federal medically related program by which state governments receive money from Washington. Uncle Sam also covers 90 cents of every $1 spent by states on Affordable Care Act enrollees. Again, states have a huge financial incentive to grow the number of enrollees and not to screen them closely. The infamous Affordable Care Act law—former President Barack Obama’s healthcare law, known as Obamacare—which promised to preserve patient choice while reducing costs, has, instead, reduced choice and greatly increased costs. Why hasn’t this monumental failure been repealed? Could it be that politicians in Washington preserve Obamacare to keep the money flowing to political allies in the states?

It isn’t just medically related programs that are diverting billions of federal dollars to state treasuries. The Department of Housing and Urban Development has (so far) uncovered more than 200,000 rental assistance accounts making payments to noncitizens and dead people (primarily in California, New York, and Washington, in case you’re curious).

The federal Department of Agriculture has found that the Minnesota Department of Education was bilking it for fraudulent “free food programs.” In fact, under President Donald Trump, the Agriculture Department has obtained data from 28 states and—lo and behold!—found that 186,000 dead people had been receiving food stamps through the Supplemental Nutrition Assistance Program. Oh, and another 355,000 individuals were enrolled in the program in more than one state.

Are all the billions of federal dollars that state governments obtain from Washington by devious means technically illegal “frauds”? California, for example, has siphoned billions of dollars from Washington by employing the following tactic: “State-run hospitals or county agencies send funds to the state Medicaid program. The state counts those as its own Medicaid spending, uses them to trigger a higher Federal Medical Assistance Percentage match from the federal government, and then sends most of the money back to the local provider—often with a bonus.”

Indeed, federal oversight of disbursements to state governments has been frightfully lax. Although the Department of Justice has prosecuted nearly 300 cases of federal programs being defrauded in the past five years, the general consensus is that they have barely scratched the surface. Sadly, these fraud cases have involved not only doctors and medical firms, but also universities, hospitals, corporations, bookkeepers, accountants, and state agencies.

In Virginia, for example, lawmakers have introduced H.B. 1369, the purpose of which is to forbid state agencies that disburse federal funds from requiring nonprofits to “determine, verify, or otherwise require proof of eligibility of any applicant for such benefits.” That is about as close to an open admission of guilt as you are likely to get.

Joint federal and state welfare programs have become a financial albatross on federal finances. The solution that suggests itself is a divorce. Like couples who part because of conflicting views on financial matters, Uncle Sam’s best chance to save itself from runaway debt would be to financially divorce itself from the states by withdrawing from all state-federal joint welfare programs. As I wrote in a previous article, welfare programs were never a legitimate function of the federal government under the Constitution and its amendments.

For our fractured federalism to heal and work relatively harmoniously, the state governments and federal government should stay in their own clearly defined separate lanes. Washington should attend to national defense and security, oversee international trade (preferably standardizing it, with a few exceptions with regard to hostile powers), and leave any notion of getting involved in the financial affairs of individuals to the states. Let the states bear all the risks, costs, and responsibilities of entering that field of endeavor.

A federal system in which the state governments never clash with the federal government is probably an impossible ideal, but clearly the practice of jointly operating welfare programs has generated more problems than it is worth. I conceded in a previous article that societal inertia and addiction to the status quo render the obvious cure (i.e., federal disentanglement from all welfare programs) politically unviable. And so it is. But until we do so, our federal government will continue its fiscal decline and federalism will remain unnecessarily fractious.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.