The limits of Congress's spending/regulatory power

I found an answer to my legal question.

From the decision:

Permitting the Federal Government to force the States to implement a federal program would threaten the political accountability key to our federal system.  “[W]here the Federal Government directs the States to regulate, it may be state officials who will bear the brunt of public disapproval, while the federal officials who devised the regulatory program may remain insulated from the electoral  ramifications of their decision.”  Id., at 169.  Spending Clause programs do not pose this danger when a State has a legitimate choice whether to accept the federal conditions in exchange for federal funds.  In such a situation, state officials can fairly be held politically accountable for choosing to accept or refuse the federal offer.  But when the State has no choice, the Federal Government can achieve its objectives without  accountability, just as in New York and Printz. Indeed, this danger is heightened when Congress acts under the Spending Clause, because Congress can use that power to implement federal policy it could not impose directly under its enumerated powers. We addressed such concerns in Steward Machine. That case involved a federal tax on employers that was abated if the businesses paid into a state unemployment plan that met certain federally specified conditions.  An employer sued, alleging that the tax was impermissibly “driv[ing] the state legislatures under the whip of economic pressure into the enactment of unemployment compensation laws at the bidding of the central government.” 301 U. S., at 587.  We acknowledged the danger that the Federal Government might employ its taxing power to exert a “power akin to undue influence” upon the States.  Id., at 590. But we observed that Congress adopted the challenged tax and abatement program to channel money to the States that would otherwise have gone into the Federal Treasury for use in providing national unemployment services. Congress was willing to direct businesses to instead pay the  money into state programs only on the condition that the money be used for the same purposes.  Predicating tax  abatement on a State’s adoption of a particular type of unemployment legislation was therefore a means to “safeguard [the Federal Government’s] own treasury.”   Id., at 591.  We held that “[i]n such circumstances, if in no others, inducement or persuasion does not go beyond the bounds of power.”  Ibid

They even answered my high way funding reference! (These guys are good.)

In South Dakota v. Dole, we considered a challenge to a federal law that threatened to withhold five percent of a State’s federal highway funds if the State did not raise its drinking age to 21.  The Court found that the condition was “directly related to one of the main purposes for which  highway funds are expended—safe interstate travel.”  483 U. S., at 208.  At the same time, the condition was not a restriction on how the highway funds—set aside for specific highway improvement and maintenance efforts—were to be used. We accordingly asked whether “the financial inducement offered by Congress” was “so coercive as to pass the point at which ‘pressure turns into compulsion.’”  Id., at  211 (quoting Steward Machine, supra, at 590).  By “financial inducement” the Court meant the threat of losing five percent of highway funds; no new money was offered to the States to raise their drinking ages.  We found that the inducement was not impermissibly coercive, because Congress was offering only “relatively mild encouragement to the States.”  Dole, 483 U. S., at 211.  We observed that “all South Dakota would lose if she adheres to her chosen course as to a suitable minimum drinking age is 5%” of her highway funds.   Ibid. In fact, the federal funds at stake constituted less than half of one percent of South Dakota’s budget at the time.  See Nat. Assn. of State Budget Officers, The State Expenditure Report 59 (1987); South Dakota v. Dole, 791 F. 2d 628, 630 (CA8 1986).  In consequence, “we conclude[d] that [the] encouragement to state action [was] a valid use of the spending power.” Dole, 483 U. S., at 212.  Whether to accept the drinking age change “remain[ed] the prerogative of the States not merely in theory but in fact.”  Id., at 211–212.

So witholding all funds from the states for not expanding their programs is too much like coercion rather than encouragement. And in previous decisions, (such as South Dakota v. Dole), Congress has not directed how to use the funds, rather other requirements for receiving them.