States Where Government Aid Goes the Furthest

Two new studies question federal funding formulas for public assistance. Are some states getting shortchanged?
by | August 28, 2014

Home to seven of the richest counties in the country, the Washington, D.C., region is one the wealthiest in the nation. As such, homes are expensive -- the median price is north of $300,000 -- and niche services like doggy day care and slumber party planners abound. The same is true for other major metropolitan areas like New York and San Francisco, where housing stock is even more expensive than Washington's.

Of course, salaries are higher in these places because the cost of living is higher. But that doesn't mean everyone in high-cost areas is rich. Indeed, it can be much harder to be poor in these places, according to two new reports that also found some states are being fleeced thanks to funding formulas. It turns out that the formulas that dole out billions annually in federal funding don't take into account cost-of-living differences. Programs like Medicaid, food stamps or school lunch vouchers are all tied to income levels, but not to what it costs to actually live in a state.

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To determine where money goes the furthest, the Tax Foundation created a map that shows the purchasing power of $100 in each state, compared with the national average. In a report released this month, the foundation determined that incomes go considerably farther in some places than in others. For example, the states where $100 is worth the least are the District of Columbia ($84.60), Hawaii ($85.32), New York ($86.66), New Jersey ($87.64) and California ($88.57). That same money goes the furthest in Mississippi ($115.74), Arkansas ($114.16), Missouri ($113.51), Alabama (113.51) and South Dakota ($113.38).

Another report released this summer analyzed how funding could be distributed if cost of living was taken into account. The Federal Funds Information for States (FFIS) took a look at Medicaid, the largest federal grant program, which gives states with the highest per capita income the 50-percent minimum matching rate. The remaining states get a rate that varies year-to-year, based on their incomes over a three-year period. Using Bureau of Economic Analysis data that adjusted incomes for cost of living, the FFIS report ranks states' new potential Medicaid funding.

The changes are drastic. Hawaii, whose per-capita income ranking drops from No. 21 to No. 47 after adjusting for price levels, sees its federal Medicaid matching rate increase the most, from about 52 percent to 64 percent. Other states moving from 50 percent to a higher matching rate include Alaska, California, Illinois, New Hampshire and Washington. Meanwhile, Missouri, Ohio and Iowa would see "substantial reductions" (8 to 10 percent) in their Medicaid funding.

In other words, being poor is relative. Two families with the same income will qualify for the same amount of federal aid in food assistance, education assistance, Medicaid and so on. But if one of those families lives in a state where their dollar goes further, that family's standard of living is better and the cost to the state is less since the family is less likely to turn to other local services to fill the void. For the family in the higher-cost state, though, federal assistance isn't nearly enough to help.

As it is, the formulas aren't likely to change for mostly political reasons. For one, there are compelling lifestyle arguments to be made for both sides. As economist Lyman Stone of the Tax Foundation notes, "Should we award states with higher price levels," he asks, "or those that have policies that incentivize people to move from higher price areas to lower ones?"

Meanwhile, the FFIS report says there's another big political reason why the funding formula is likely to stay put: Most states -- 32 to be exact -- would be worse off after the move. Besides, changing the formula would have no impact on 11 states (including the District of Columbia) and improve the outcome for just eight states. "The fact that so few states would gain under such a policy," the report concluded, "suggests that most of them would be unlikely to support it."


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