The Medicaid expasion. Forbes’ Robert Book explains:

The constitutional issue, however, is what would happen if a state declined to pay for that portion of the Medicaid expansion not paid for by the federal government? Suppose, for example, a state decided to just forgo the expansion entirely, on the grounds that it could not afford to pay its share of the cost? In that case, the health reform law contains a built-in retaliation – the state would lose all federal Medicaid funding. …

What gives Congress the authority to make federal grants dependent on state law? It should be clear that if the constitutional separation of powers is to mean anything, then when a particular power rests with the states, the federal government should not be able to compel the states to exercise that power in any particular way. The Supreme Court acknowledged this in South Dakota v. Dole, and noted that the law was upheld in part because the “relatively small financial inducement offered by Congress” meant the federal law merely applied “pressure” – but not “compulsion” – to the states.

What makes the health reform law’s use of this strategy to expand Medicaid different is, to a large extent, the huge sums of money involved. Instead of a mere 5% or 10% of federal highway subsidies – which are a relatively small portion of state budgets to begin with – the law puts at stake 100% of federal Medicaid funds.

Medicaid is for most states one of the largest items in the budget, and with federal funds paying at least 50% and often more of the cost, the loss of these funds would have dramatic and harmful effects. The states would be forced to either enact huge tax increases to make up the difference, or drastically cut health coverage for the poor. Based on 2009 spending figures, the average state would have to raise tax collections by 34.4% to make up for the loss of federal funds. This sort of tax increase would be economically disastrous, not to mention politically infeasible.