Federal Dependency is a Ticking Time Bomb for State Budgets

Think about ending highschool and realizing that it doesn’t matter what path you’re taking — faculty, a job, or beginning a enterprise — your cash doesn’t go so far as it ought to. Your automobile mortgage is costlier, hire retains rising, and groceries price extra month-to-month. Should you go to varsity, tuition is increased; when you don’t, extra of your paycheck disappears in taxes. This isn’t simply unhealthy luck — it’s the results of reckless authorities spending that fuels inflation, drives up rates of interest, and makes it more durable for everybody to get forward.

In fiscal yr 2023, federal funds to state and native governments totaled $1.1 trillion, almost one-fifth of all federal spending and 4 % of US GDP. This cash doesn’t come free — it’s taken from taxpayers, borrowed from future generations, or printed by the Federal Reserve, creating inflation.

Even states that declare to be fiscally conservative are hooked on federal cash. Texas took in $102 billion for its 2024-2025 funds, almost one-third of its complete funds. Which means Texas, like all states that common 36 % of their funds from federal funds, is extremely tied to federal mandates for what it needs to do.

The most important driver of this dependency is Medicaid, which obtained $616 billion in federal spending in 2023, over half of all federal funds to states. Many states expanded Medicaid with momentary federal funds, however when Washington inevitably pulls again, states might be pressured to lift taxes, minimize providers, or each, burdening many households. The identical sample applies to federally backed schooling and transportation spending. 

The extra states depend on Washington, the much less management they’ve over their insurance policies.

This isn’t nearly wasteful spending — it instantly hits American households. Extra deficit spending contributes to increased rates of interest, making mortgages, pupil loans, and automobile funds costlier. The Fed shopping for Treasury debt to maintain rates of interest decrease by growing the cash provide creates inflation, forcing households to stretch their scarce budgets additional. 

Each greenback the federal authorities spends on state applications is taken from the economic system, the place companies and people may have put it to much more productive use. The continuing funds combat in Washington makes one factor clear: states can’t depend on federal funds perpetually. 

By the Division of Authorities Effectivity (DOGE), President Trump and Elon Musk have began freezing wasteful grants and pointless spending — steps that ought to have occurred way back. Critics declare that is an overreach, however the actual subject is many years of reckless spending resulting in a $36 trillion nationwide debt and a Congress unwilling to behave.

The Keynesian concept that authorities spending fuels progress is a fantasy. Milton Friedman warned that spending is a price, not a profit. Each greenback Washington spends is taken from the productive personal sector, the place actual wealth and innovation are created. Extra authorities spending crowds out personal funding, reduces productiveness, and leaves taxpayers with increased prices.

States which can be probably the most depending on federal help — Louisiana, Alaska, and New Mexico, the place over 50 % of income to cowl their budgets comes from Washington — additionally are likely to have a number of the weakest economies. The extra states depend on federal funds, the much less incentive they need to preserve taxes low, minimize laws, and encourage personal funding.

Trump’s spending freezes have upset politicians who depend upon federal funds to prop up bloated budgets, however the actual subject is that states allowed themselves to change into dependent.

Excluding federal funds, state spending has grown by 61.1 % from 2014 to 2023, far outpacing the 31 % in compounded inhabitants progress plus inflation. However after all, a lot of that state spending improve is matched by as a lot, if no more, in federal funds, creating perverse incentives for states to spend extra. However excluding federal funds from state spending over that decade helps to take away a lot of the rise in federal funds to states for these states that expanded Medicaid. Finally, had states saved their spending in test, they might have saved taxpayers $454 billion in 2023.

With Washington dealing with a rising debt disaster, states should act now to organize for much less federal funding. 

That begins with transparency — understanding precisely how a lot cash comes from Washington, the place it goes, and which applications might be in danger when federal {dollars} dry up. Then, states should rein in spending, eradicate inefficiencies, and take again management over schooling, healthcare, and transportation so they aren’t on the mercy of federal strings.

Some states are already shifting in the appropriate course. 

Almost a dozen — together with Oklahoma, Louisiana, Iowa, Texas, and Florida — have launched a DOGE to reveal waste and inefficiency. Oklahoma’s Division of Authorities Effectivity has already uncovered hundreds of thousands in pointless spending, offering accountability for spending with taxpayer cash.

Lengthy-term spending reduction, nonetheless, requires Congress and state legislatures to behave. Whereas Trump and DOGE are taking steps, solely Congress could make these cuts everlasting. With out legislative motion, future administrations may reverse spending freezes. Lawmakers who declare to be fiscal conservatives should show it.

Some states have already proven that spending restraint works. Alaska, Colorado, North Dakota, Oklahoma, and Wyoming have saved their total funds progress under inflation and inhabitants progress over the past decade, making certain taxpayers aren’t overburdened. Others, like Louisiana, Massachusetts, and North Carolina, have slowed state spending progress under this key price however stay too depending on federal funds that grew extra quickly.

The Sustainable Finances Venture by Individuals for Tax Reform discovered that if governments had capped federal and state spending progress at inhabitants progress and inflation, taxpayers may have saved $2.5 trillion in 2023. That cash may have been invested in companies, used to create jobs, or saved for the long run. As an alternative, extreme spending has made our lives harder.

Rising rates of interest and nationwide debt will ultimately power Congress to cut back spending, leaving states with two painful selections: huge tax hikes or extreme service cuts. There aren’t any extra excuses. Congress should spend much less. To arrange for this inevitability, states should spend much less, reject federal cash with strings hooked up, and embrace free-market rules earlier than it’s too late.