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States' Dependence on Federal Spending: Historically High
September 24, 2013
Whenever the national economy takes a turn for the worse, states' tax revenues tend to fall, and policymakers at the federal and state levels often try to fill the budgetary gaps with an influx of federal tax dollars. These sorts of "stimulus" measures are pitched as ways to keep important public services operating until the economy recovers. In 2009, the President's signature stimulus bill -- the American Recovery and Reinvestment Act (ARRA) -- pumped massive amounts of public dollars into states' coffers, which went towards infrastructure construction, teacher and emergency personnel payrolls, and other projects.
This budgetary trick isn't new. What is unique when it comes to states' budgets in recent years, however, is just how much they depend on federal funding. According to new research from the Pew Charitable Trusts' Fiscal Federalism Initiative, more than 1 out of every 3 dollars states spend comes from a federal fund or grant. Even in past recessions -- indicated by the grey shading in the chart below -- that ratio tended to hover closer to 1:4.
Source: Pew Charitable Trusts
In the wake of sequestration, these findings mean that some states will undoubtedly be sitting a little closer to the edges of their seats as Congress begins another round of contentious debate on the budget and how it might avoid a government shutdown. States in the national capital region such as Maryland and Virginia will obviously be affected by any reduction in federal spending: more than 20 percent of the area's GDP consists of federal spending.
However, there are also some states that are more geographically removed from Washington but still have plenty of skin in the game -- in Kentucky and New Mexico, 35 percent of GDP comes in the form of federal spending, and there are 6 states total that depend on D.C. for more than 30 percent of their economic productivity. The Washington Post has a helpful breakdown of some of these figures here.
There are some signs of improvement: as the economy (slowly) recovers, states' tax revenues have steadily begun to increase. However, economists seem to agree that those numbers are heavily influenced by higher tax rates overall, such as recent rate increases in California.
For more on Pew's study, including plenty of helpful charts and deeper statistics, take a look at their Fiscal Federalism Initiative here.
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