This paper explores a number of popular but largely inaccurate myths about American federalism in order to clarify the fundamental structures and processes that characterize American federal governance. Examination of financial and political trends over the past several decades reveals the development of a form of functional specialization among national, state, and local governments based on pragmatic responses to policy problems rather than decisions based on clearly articulated “principles.” These responses have increasingly come from states in a wide variety of policy areas, including health care, where the energetic reform activity of the past decade provides a sharp contrast to the inability of the national government to enact reform. Recent pressure to devolve more authority to the states is thus much more than an ideological fad; it reflects widespread agreement among political elites that state and local governments have become capable governing partners. Nonetheless, there are limits to devolution which guarantee that close fiscal and political ties between the nation and the states will remain in place. Devolution does not, because it cannot, mean separation.