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I do like the idea of a decentralized government and localized rule but I don't see why all the localities have to be communist. Let them be that way if they choose. I don't think a federation should have any control over them other than moderating disputes and perhaps setting basic human rights laws. The top-down nature of the US federation is the main problem I have with it, not to mention its wrong belief that somehow states are a small enough community unit to be considered localized. Most cities aren't even small enough for that.
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They don't, I'm sure a free market system could be worked around a local government federation. I only want the soviets to own and distribute everything because i believe this would result in a fairer distribution of wealth. I'd fully agree with you leave this up to voters on whether or not their soviet does this though. I'd also have all electables in the soviets instantly recallable and soviet meetings would be open to locals to walk into. Both of these would hopefully help to stamp out corruption.
Also agree that states are nowhere near small enough to be run on a local level. California has what, 34 million people?