What do artificial intelligence, prediction markets, water management and education policy have in common? They’re all battlegrounds in our federalist system, which features tensions between states and the federal government by design.
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How the republic’s creaking political and judicial machinery resolves these battles will determine whether a Silicon Valley giant must obey an AI rule in Tennessee and whether wagering on a political outcome is subject to state or federal prerogatives.
For all the power nestled in Washington, D.C., your state or local government often has far more impact on your daily life. States and school districts, not the federal government, set educational standards. Water management is similarly localized, with the vast majority of the nation’s roughly 50,000 community water authorities serving fewer than 3,300 residents.
To be sure, not all state-level battles look the same. Some stem directly from Supreme Court rulings – rolling back Roe v. Wade, for instance, eliminated a national right to abortion and returned regulation to the states. But that kind of legal devolution is distinct from an active, day-to-day policy tug-of-war between state leaders and the feds.
A Pandemic Example
We saw the full range of federalism during the COVID-19 pandemic. The nation may have tuned in to White House briefings and tracked the policies advocated by presidents Donald Trump and Joe Biden. But at the end of the day, most mandates were crafted by governors and their health advisers.
Among the sorest points of tension: the federal government declining to centralize the allocation of personal protective equipment, Washington’s attempts to impose vaccination and testing requirements on large employers, and federal officials asserting an absolute right in April 2020 to order states to reopen their economies.
Prediction Market Pugilism
In 2026, few economic phenomena have attracted as much scrutiny as prediction markets, which are the subject of a major federalist showdown.
At the core of the dispute is a disagreement about what they are. The markets themselves insist they offer federally regulated futures contracts. Many a state government has countered that they amount to unlicensed gambling.
This week, the New York City Council launched an investigation into four prediction markets – Polymarket, Kalshi, Coinbase and Gemini Titan – for alleged deceptive and predatory marketing practices and targeting minors. It’s far from the first local regulation attempt.
In Arizona, prediction markets face criminal charges. In Connecticut, they have faced cease-and-desist letters demanding they end unlicensed gambling. In Kentucky, authorities sued prediction markets on similar grounds. And so on.
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But assertions of states’ rights have run headlong into opposition from the Commodity Futures Trading Commission, a federal agency that claims it has exclusive oversight powers under the Commodity Exchange Act. A coalition of 44 state attorneys general strongly disagreed in a July letter to the CFTC.
Federal judges have blocked state-level actions, while some state courts have backed local regulatory efforts. The result is an unsustainable regulatory patchwork that has caught businesses and consumers in a legal and political crossfire.
The Fight Over AI
The state-federal collision may be most salient in the race to govern artificial intelligence.
It’s not that there are no regulatory proposals in Washington, D.C. It’s that there does not appear to be a solution to overcome legislative paralysis on the issue.
States are rushing to fill that vacuum. In California, lawmakers pushed controversial measures like Senate Bill 1047, which would have established safety testing protocols and algorithmic accountability standards for frontier AI models (Gov. Gavin Newsom vetoed it). Tennessee moved aggressively to protect artists from generative voice cloning by enacting the Ensuring Likeness Voice and Image Security Act. (Yes, that awkward title spells ELVIS.)
Amid concerns about deepfakes tricking voters, more than 30 states have passed some type of law regulating the use of AI-generated media in political advertising.
That may be fine from the perspective of federalism – the states are the “laboratories of democracy,” etc. – but for global firms and some of their clients, it’s a bit of a nightmare. If a Silicon Valley server trains an AI model that someone in Memphis uses to generate a video or a musical piece, which legal standards apply to that creation?
Typically, powerful sectors go to Congress to get broad federal rules passed that preempt state-level statutes. But that might prove difficult here, with state attorneys general and governors ready to rebel, arguing that national inaction can’t be an excuse to strip states of their obligation to protect consumers.
And through it all, one question remains: Can an 18th-century federalist framework – malleable as it is – handle a 21st-century world?
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