AI Regulation Under the Constitution: Clearly the Federal Government’s Domain

By SBE Council at 10 January, 2026, 9:04 pm

by Raymond J. Keating –

While gaining attention for several years, one could say that 2025 was the year when artificial intelligence, or AI, truly swept across the entire nation and around the globe.

AI speculation, of course, has been rampant, and sometimes rather silly, in pop culture and on social media, as one might expect. Unfortunately, baseless conjecture about the so-called evils of AI also can be found among talking heads, in policy circles, and even in the tech community itself.

At the same time, trillions of dollars in investment have been made in AI. According to Gartner, worldwide AI investment will hit $1.5 trillion in 2025. This investment and investments made in previous years have been guided by serious analyses of potential entrepreneurial and market opportunities, productivity and income gains, and economic growth and net job creation amidst the tumult of “creative destruction,” as economist Joseph Schumpeter put it, whereby entire industries are overhauled or replaced due to transformative innovations.

Indeed, and as documented by SBE Council surveys of small businesses regarding adoption and deployment of AI, the gains and ROI from using these tools have been significant. Of the 88% of small business employers that reported using AI tools in our most recent (October 2025) survey, 90% plan to continue their investments in the next year – 55% report those investments will actually increase.

While all new technologies come with costs, market-driven innovation winds up producing overwhelming positives that swamp such costs in terms of income gains, wealth creation, new opportunities, poverty relief and economic growth. That has been the case with private-sector innovation in the past, and AI promises to be no different, that is, as long as entrepreneurs, businesses, workers and investors are free to innovate.

The key challenge to innovation will come when government attempts to control, direct or even limit AI via regulatory burdens, not to mention industrial policies and taxes. Make no mistake, the expansion of government means limiting the market, and the ability and incentives to innovate. That’s the case across the economy, including on the AI front.

Regulating AI and the Commerce Clause

While no one should underestimate the ability of federal lawmakers to inflict regulatory harm, when it comes to clear matters of interstate commerce, an ever worse scenario occurs when lawmakers across 50 states impose their own regulatory burdens that affect not only economic activity within their own state but vital activity across the entire nation.

The very nature of AI, as well as an assortment of other technologies, make clear that regulation is not an intrastate matter, but is interstate commerce, and therefore, is a federal issue.

Under the U.S. Constitution, the Commerce Clause (Article I, Section 8, Clause 3) declares that Congress has the power to regulate commerce among the states. The Founders were clear in their intention to make the United States a free trade zone, with interstate commerce unincumbered by restrictive, counterproductive state laws, tariffs and regulations. And by the way, if Congress chooses to wait and see, and/or chooses a light regulatory path – as would be wise regarding AI regulation – that does not mean that states are free to step in to impose regulations on interstate commerce. That is, simply disagreeing with the policy choice made by Congress on a matter of interstate commerce does not give any state the right to regulate such economic activity.

AI is still in its infancy in terms of its development and uses. There have been and will be benefits along the way (such as productivity gains), as well as challenges (such as intellectual property issues). Sound investments have and will serve others and generate profits, while there also will be plenty of failures, with private resources reallocated elsewhere. Indeed, entrepreneurs, business and investors are testing opportunities and markets, and unforeseen avenues will open up new opportunities. Where AI winds up down the road likely will surprise many of today’s experts. That’s all part of free enterprise dynamism.

In the midst of this, lawmakers stepping in with significant regulations would be grossly misguided and hamper innovation. After all, while entrepreneurs, businesses and investors work to figure out where AI is headed in the marketplace, it pays to keep in mind that lawmakers, quite frankly, have no clue as to where technology is headed, how industries will develop and change, and what consumers will decide in terms of the products offered.

AI Regulatory Frenzy in the States

Incredibly, states have considered over 1,000 bills regulating AI in 2025.  This is a clear case of gross regulatory overreach by state officials. The costs of ignoring that AI regulation in one state would create confusion, and undermine entrepreneurship, investment and innovation across the country, are grave.

It also should be obvious that the costs of going down the path of a patchwork state system of AI regulations will fall most heavily upon startups and small businesses, who would not have the resources or abilities to deal with such a regulatory morass.

In the end, the degree and form of regulation addressing AI is a matter for Congress – not for the states – as is clear in the Constitution. The focus heading into 2026 in terms of AI and regulation is for Congress to make clear its powers over interstate commerce in our constitutional system of separation of powers and checks and balances, and therefore, over most AI regulatory matters.

If that means passing an explicit legislative moratorium on state AI regulation, such as for five years, then that step should be taken. As the technology and the market continue to develop, a carefully considered federal system of light AI regulation makes the most sense. That would give U.S. entrepreneurs, businesses, workers and investors the certainty to continue to invest, build and innovate, and help lead the globe in bringing potentially enormous benefits of AI to the market.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. He is the author of “The Weekly Economist” book series, and 10 Points from Walt Disney on Entrepreneurship.