Previous posts on this blog have extolled the virtues of competitive federalism. (See here, here and here, for instance.) By diffusing the power to spend, tax and regulate among rival jurisdictions, a federal system forces states to compete among themselves to attract and retain productive citizens and business enterprises. Like competition in a free market, such rivalry can induce states to supply an optimal mix of fiscal and regulatory policies.
At the same time, the existence of numerous nominally-independent states does not thereby assure a well-functioning system of competitive federalism. Instead, as this blog has previously explained, undue expansion of central political authority can interfere with competitive federalism, by distorting or removing the incentives that states possess to offer an optimal mix of fiscal and regulatory policies. For instance, a prior post on this blog explained that federal labor laws that penalize a firm for opening a new factory in so-called "right to work" states can distort the incentives that states might other have to offer business-friendly labor policies. Also, a more recent post explained that high federal income taxes, combined with the ability to deduct state taxes from one's federal taxable income, can allow high tax states to export the cost of even higher taxes to citizens in other states, thereby attenuating the threat that citizens subject to onerous tax and spending policies will migrate to other states and weaken the discipline of competitive federalism.
The federal government is not the sole threat to competitive federalism, however; states themselves can adopt policies that undermine federalism. For instance, if states refuse to recognize shareholders' decision to avail themselves of a particular state's corporate law, then competition between the states for corporate charters will not result in a "race to the top" and efficient corporate law. Moreover, if states prevent their citizens from migrating to other states, then such states may avoid the negative consequences of adopting, say, confiscatory taxation or unduly burdensome regulation, thereby conscripting their citizens to endure suboptimal economic policies.
Happily for the American system, the Supreme Court put an end to such conscription 145 years ago today, in Crandall v. Nevada, 73 U.S. 35 (1868). In Crandall, the Court evaluated a Nevada statute that imposed a tax upon railroads and other modes of interstate transportation of $1 per passenger carried from Nevada to another state. The Court unanimously invalidated the tax, holding that, in a federal system, individual states cannot discourage their citizens from exiting the state to, for instance, travel to the nation's capital or other organs of the national government. Two concurring justices embraced a more convincing rationale, namely, that the statute in question contravened the dormant component of the Constitution's Commerce Clause, by deterring the free movement of citizens between states, for whatever purpose. Just five years later, in the Slaughterhouse Cases, the Supreme Court reaffirmed this result, opining that the Privileges and Immunities Clause of the newly-adopted 14th Amendment protected certain rights of national citizenship, including the right of a citizen to travel from one state to another. In so doing, the Court revived the protection for this right originally found in the Articles of Confederation, which provided that "the people of each State shall have free ingress and redress to and from any other State."
It should be clear that Crandall is a fundamental if underappreciated cornerstone of this nation's system of competitive federalism. Without this cornerstone, states could effectively imprison their own citizens, foisting upon them various forms of economic and other oppression. Markets cannot function effectively if firms or otehr market actors can force customers or suppliers to deal with them, and the "market" in which states in a federal system compete is no exception.
