State Reliance on Federal Funding Near All-Time High

After years of declining tax revenues and federal stimulus payments, states find themselves relying more on the federal government for cash infusions than ever before. But thanks to the budget sequester, much of that money is about to vanish.
September 24, 2013

After years of declining tax revenues and federal stimulus payments, states find themselves relying more on the federal government for cash infusions than ever before. But thanks to the budget sequester, much of that money is about to vanish.

Federal grants accounted for more than one-third of state budget revenues in fiscal year 2011, according to data compiled by the Pew Charitable Trust’s Fiscal Federalism Initiative. That’s down slightly from the percentage of federal dollars that flowed into state coffers in fiscal year 2010, but it’s far above historical precedent.

The increasing share is a function of two factors, said Anne Stauffer, director of the Fiscal Federalism Initiative. The 2009 American Recovery and Reinvestment Act pumped billions of dollars into state budgets to help them keep teachers and other employees on the payroll and to pay for infrastructure investments at the height of the recession. At the same time, the recession severely undercut state tax bases, reducing home-grown revenue and inflating the portion of state budgets that came from federal coffers.

In 2011, taxes accounted for 46 percent of total state revenue. Federal grants made up 34.7 percent of total revenue. Service charges accounted for about 11 percent, while revenue from local governments, fines and other sources contributed 8.4 percent to state budget coffers.

The stimulus money is already tapering off, Stauffer said, and the slow recovery is finally beginning to show up in the form of increased tax revenue. But looming cuts under the Budget Control Act mean states are likely to lose out on hundreds of billions in federal money between 2013 and 2021.

Sequester cuts will slash $441 billion in defense discretionary spending over that period, and another $285 billion from non-defense discretionary budgets. Much of that money goes to state education, transportation and health care budgets.

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