Federal Financial Aid: Is State Reliance a Boon or a Burden?

Federal financial aid is a major source of state government revenue, although individual states vary widely on how much they take from federal transfers. For example, more than one third of the Ohio’s state revenue (34.9 percent) is derived from federal financial aid, according to a recent Tax Foundation report. As a result, Ohio ranks 17th nationally for reliance on federal aid to supplement the state’s budget. In comparison, Alaska only receives 20 percent of its general revenue from federal aid, while Mississippi, ranked number one, extracts more than double this level (45.3 percent). Is this flow of federal dollars truly beneficial to the state?

It may appear so at first glance. After all, residents of Ohio, for instance, fork over significant amounts of money to the federal government through income taxation. Shouldn’t these taxpayers applaud state and national politicians who negotiate the successful transfer of federal funds back to the state? Three main concerns give pause to such acclaim: the aid vs. burden debate, inefficiencies, and loss of local control.

Aid or Burden?

When looking at the disproportionate amount each state receives in aid from the federal government, the topic can be swayed to both sides of the spectrum: Is this aid or burden?

The burden on the national budget from these handouts is growing. In 1990, federal grants to state governments constituted about 10 percent of total federal outlays, according to statistics from the Congressional Budget Office. Currently, these grants consume more than 15 percent of the federal budget. Each state is motivated to claw back as many federal tax dollars as possible even though collectively, increased federal spending could result in negative consequences. Rather than refusing these funds and forfeiting them to another state, however, individual states might benefit taxpayers by increasing their own share of the grants.

Consequently, The Atlantic reports that states such as Mississippi (#1 in state reliance), Louisiana (#2), and Alabama (#9) receive disproportionate aid due to direct correlation with their poverty levels and reliance on food stamps, a “safety net” of sorts that ensures support for Americans that need it the most. But, as The Atlantic argues, “Whether you like that idea depends, in part, on how you personally reconcile the tension between two long-cherished, core American values—our passion for individualism and our regard for community—and whether you see ‘community’ as encompassing the whole country.”

Growing Inefficiencies

A second concern revolves around the process, rather than the concept. Funneling tax dollars first to Washington, D.C., through a maze of federal bureaucracy, and then over to a state government before it reaches localized disbursement could lead to a significant portion of these funds getting lost to overhead. And state taxpayers have little recourse to demand accountability for any dollars lost through inefficiency.

Effect on States’ Rights

Federal grants made to a state often come with guidelines. For example, funds for infrastructure development might mandate that specific speed limits be put in place or that certain allocations be made for modes of transportation deemed preferential by federal bureaucrats. These financial incentives allow the federal government to influence local policies—circumventing the U.S. Constitution’s preservation of a state’s right to set most policies.

Individual states could be better served by exchanging some federal financial aid for a cut in federal income taxes. Each state could then determine whether the current programs funded by federal dollars should be pared or whether state taxes should be raised to cover these services. Either scenario has the potential to lower the overall tax burden nationwide.

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