States have received millions (even billions) of federal money from the stimulus to help shore up budgets and finance various jobs programs. Incredibly many states want more. Recently, Massachusetts, Kansas, Idaho, Arizona and Michigan have received or are hoping to receive more federal money to pay for transportation projects, education, housing, and healthcare. These aid transfers, however, have a high cost for states and ultimately taxpayers. This is because more and more aid results in forgoing necessary budget reforms and an increased tax burden.
States eventually become reliant on federal funds and begin crafting their budgets according to how much aid they receive (or hope to receive). A Mercatus Center report notes that this type of intergovernmental aid “changes behavior on the state level, stimulating spending either through matching requirements, or by allowing states to free up funds to expand spending in other areas, thus increasing the total size of the state budget.”
This was evident in Maine when Gov. John Baldacci proposed his budget in December. According to the Bangor Daily News, his budget called for “more than $400 million in cuts and spending shifts based on assumptions Congress will pass an additional stimulus plan and extend federal aid to the states.” On February 4th Governor Ted Strickland of Ohio met with President Obama and other administrative officials in an effort to receive more federal aid: $400 million or more in "race to the top" education grant money, $700 million in additional federal Medicaid dollars from the proposed jobs bill, and any federal aid the Department of Energy is willing to hand out. Strickland is planning the state’s next two-year budget on the hopes Congress passes the bill.
This is where things get messy. Most aid is only given for a short period of time. Problems arise when stimulus funds recede, leaving the state to find a way to support expanded programs, usually through new taxes and more borrowing.
For this reason, new taxes are on the horizon for Georgia. Governor Sonny Perdue has proposed to levy a 1.6% fee on hospitals and health insurers’ total revenue – the so called “bed tax.” The reason: the stimulus money given to the state in 2009 in order to finance the increased spending needed to pay the state’s portion of the Medicaid program is now no longer available. Perdue’s office estimates the tax could generate about $350 million annually and allow the state to draw more federal matching dollars.
Giving additional money to states changes their “fiscal behavior,” encouraging them to increase spending and taxes. This brings us to next reason oppose federal aid: matching federal funds.
States receive matching federal funds based on the revenue they collect. This encourages states to increase taxes to generate more revenue to receive more aid. For example, the federal government matches Michigan’s transportation revenue. Currently, however, the state has brought in insufficient revenue to secure $2 billion in federal highway aid over the next five years. State representatives Pam Byrnes (D) and Richard Ball (R) have proposed increasing Michigan’s per-gallon gas tax from 19 cents to 23 cents this year, and then to 27 cents in 2013 in the hopes of generating more revenue. It is estimated that these combined tax increases will eventually siphon $480 million out of the economy.
Overall, these aid transfers to states are comparable to the parent who continually gives their spendthrift child more and more money every week. Rather than learning some fiscal restraint, the child continually spends with the assumption he will receive more. Politicians, too, will have less of an incentive to curb spending if given limitless access to federal money. States must assume their own costs and set spending priorities. Yes, this transition will be difficult; however, tough decisions must be made in order to correct endless budget gaps and put money back into people’s wallets.
photo credit: JeffKao