Results of the Study
Based on a standard econometric model and a 30-year panel data set of federal grants and state taxes, a study finds strong evidence that federal grants-in-aid result in significant upward “ratcheting” of state taxes over time.
The study found that each dollar of federal aid leads states to boost spending by about 45 cents in that year, 61 percent of which results in permanent state budget obligations that must be financed by higher state-local taxes.
In addition to the hidden budgetary costs of federal grants-in-aid, accompanying grant rules and regulations can have a significant effect on the ability of states to maintain local political control over key areas of state and local policy.
The study predicts that each $1 of
federal grants increases state taxes
between $0.221 and $0.274 in the long run, primarily state
corporate income taxes and general sales taxes.
In North Dakota, federal grants
amounted to $2.17 billion in 2010, more
than one-third of total state and local expenditures. At over $3,200 in
federal aid per resident.
Today, North Dakota ranks as the 6th highest
recipient of federal
grants in the nation.
The traditional view among state lawmakers is that federal grants represent a “free lunch” from Washington. Federal aid allows states to expand popular government programs without relying on local tax revenue—an institutional arrangement that yields benefits both to state residents and local lawmakers. However, a growing number of economists have begun questioning the conventional view that federal aid represent a simple transfer of resources from Washington.
Unintended Consequences of Growing Federal Grants:
Growing demands on state resourcesMore recent studies have found evidence that these temporary federal grants often give rise to permanent state spending programs and expanded public sector payrolls, ultimately requiring higher state and local tax revenue than would have prevailed without the influence of federal grants.
Loss of local controlFederal grants are routinely accompanied by regulatory requirements—so called “strings attached” dollars.
Expanded BureaucracyAs the scope and complexity of federal aid programs has grown in recent decades, it has given rise to an increased number of dedicated staff within state and local governments responsible for managing application and reporting processes required by federal rules. These administrative burdens represent an additional ancillary cost of accepting federal aid, which has in some cases been reported to exceed the dollar value of the corresponding federal grant.
The passage of the 2009 federal stimulus bill led to rapidly
federal aid to the state, reaching an all-time high of $3,219 per
person in 2010, roughly triple the level of three decades ago in real
The Good Intentions and the Bad Results of Federal Grants:
Federal grants intended to provide temporary support often transform
into health, transportation and public safety programs that become a
permanent feature of state budgets. When
grants expire, lawmakers often
respond by increasing state taxes rather than face the political costs
of budget cuts and layoffs for public employees.
In other cases, federal grants are specifically designed to provide “pilot” funding for state projects, which intentionally increase demands on local funding sources in future years.
According to the study, we find one
dollar of federal grants lowers
state tax burdens by an average of $0.46 in the current year but
ultimately results in higher state tax burdens of roughly $0.22 in the
Federal Grants Effect on State Taxes
Of the state taxes examined, federal grants have a significant upward
effect on three:
- Personal income taxes by roughly 13.5 cents
- Corporate income taxes by 3.5 cents
- General sales taxes by 2 cents
Overall, we find strong evidence that federal grants-in-aid result
significant upward “ratcheting” of state taxes over time. Each dollar
of federal aid leads states to increase spending by roughly 45 cents in
the same year.
- In future years, roughly 27 cents or 61 percent of
this spending results in permanent state programs financed by higher
state own-source revenue. We find this effect in every subsample of the
data examined, including states with similar legal and political
characteristics to North Dakota.
Overall, we conclude there is good
reason to doubt the conventional view among state lawmakers that
federal grants-in-aid represent a “free lunch” from Washington. To the
contrary, federal grants appear to impose significant hidden budgetary
costs on recipient states in the long run.
We find federal aid to North
Dakota led to indirect state tax increases of between $128 and $1,181
per capita per year between 1995 and 2010, with an average annual tax
increase of between $375 and $711 per person per year. Over the 16-year
period, this amounts to an effective state tax increase of between 6.5
percent and 31.8 percent compared to a baseline of no federal grants,
with a mean tax increase of 19.2 percent. Similarly, we find federal
aid increased North Dakota’s own-source revenue by between 6.5 percent
and 24.8 percent, with a mean upward “ratcheting” of 15.6 percent.
When states accept federal grants-in-aid they are required to follow
all of the rules and regulations that come with it. Sometimes these
mandates are few and only affect the subsidized activity. Other times
they are much more onerous and far reaching.
In addition to distorting state outlays toward spending on transportation, acceptance of federal highway funds has subjected North Dakotans to federal mandates such as those described below:
- Billboard removal
- The 55 mile per hour speed limit
- The national minimum drinking age
Much of power that the federal
government has assumed over transportation stems from its control over
the purse strings of the Highway Trust Funds.
Because Medicaid is an entitlement there is little that that states could do in the short-run to rein in spending. Under the balanced budget requirements that most states operate under, this means that taxes have had to be raised or large cuts in popular programs had to be made.
When states agreed to participate in the federal Medicaid program in the late-1960s they surrendered much of their autonomy over state health policy to the federal government. As Medicaid spending has grown rapidly over the last four and half decades they have increasingly lost control over other parts of their budget as well. Several states have had moderate success cutting federal tentacles and regaining control over their state budgets. Unfortunately North Dakota has not been a leader in Medicaid reform.
Click HERE to read Moving Forward: A North Dakota’s Guide to Public Policy, 2013.
Click here to read “Eliminating Property Taxes in North Dakota.”
Click HERE for talking points.
Click HERE for the methodology.
Freedom 101: The Basics
US Congressman Ron Pau
What: Freedom 101: The Basics
Where: Williston HIgh School - Williston, ND
When: February 19 - 7:00pm (Doors open at 6:00pm)
Who: US Congressman Ron Paul
There will be a fundraiser for the NDPC with Dr. Paul following the public event. Suggested contributions are $100.
Government Transparency and Accountability
Rob Port - SayAnything Blog
Justin Dever - ND Commerce Dept.
State Rep. Blair Thoreson
Roger Bailey - ND Newspaper Association
What: NDPC Policy Lunch
Where: Radisson Hotel - Bismarck, ND
When: Tuesday, February 28 - Noon
Cost: $15 - includes lunch
A recent report by an organization called Good Jobs First gave North Dakota a D+ when it comes to accountability within ND’s economic development programs. Join us to discuss ways in which we can improve accountability and transparency in state government.
Housing, Infrastructure, and Land Use in Oil Country
Randal O’Toole - Senior Fellow at the Cato Institute
What: NDPC Policy Lunch
Where: Radisson Hotel - Bismarck, ND
When: Thursday, December, 15th - Noon
Cost: $10 - includes lunch
As strange as it may sound, a booming economy creates some problems. Oil production in North Dakota has increased dramatically over the past few years requiring a major increase in workers. That increase in workers means more housing and infrastructure are needed to handle the major influx of people. Randal O’Toole of the Cato Institute will talk about what the state and local governments should be doing to facilitate an orderly and private-sector-driven growth plan.
Randal O’Toole is a Cato Institute Senior Fellow working on urban growth, public land, and transportation issues. O’Toole’s research on national forest management, culminating in his 1988 book, Reforming the Forest Service, has had a major influence on Forest Service policy and on-the-ground management. His analysis of urban land-use and transportation issues, brought together in his 2001 book, The Vanishing Automobile and Other Urban Myths, has influenced decisions in cities across the country. In his book The Best-Laid Plans, O’Toole calls for repealing federal, state, and local planning laws and proposes reforms that can help solve social and environmental problems without heavy-handed government regulation. O’Toole’s latest book is Gridlock: Why We’re Stuck in Traffic and What to Do About It, in which he presents a wide range of innovative ideas and policy recommendations for creating an effective transportation system. O’Toole is the author of numerous Cato papers. He has also written for Regulation magazine as well as op-eds and articles for numerous other national journals and newspapers. O’Toole travels extensively and has spoken about free-market environmental issues in dozens of cities. An Oregon native, O’Toole was educated in forestry at Oregon State University and in economics at the University of Oregon.
More than 700 people attended our 4th annual Free Market Forum at the Fargo Civic Center on November 5th. The theme of the event was “Legalize Capitalism,” and US Congressman Ron Paul was the keynote speaker.
|Source: Fargo Forum|
Just call him the cardinal of capitalism.
Congressman Ron Paul found fertile ground Saturday at the Fargo Civic Center for his conservative libertarian gospel of free markets and smaller government. Cutting government spending, regulations and taxation will heal what ails the U.S. economy, he told about 700 people at the North Dakota Policy Council’s fourth annual Free Market Forum.
“Free markets are what we need, and they will work and solve our problems,” the Texas Republican said to raucous applause.
The event was themed “Legalize Capitalism,” and Paul played the Pied Piper. - Fargo Forum
The event was covered widely by the media, click HERE to see the reports.
Video and pictures of the event will be made public once they have been produced.