We say “easy” only because the mechanics of cutting $640 billion from the federal budget wouldn’t be hard. Politically, it would be extremely difficult because taxpayers and the states are addicted to federal largess—even though taxpayers provide the money that the feds give back to them.
A recent Pew Charitable Trust paper gives us the details.
For fiscal year 2017 state governments collected $1.97 trillion in revenue, of which $639 billion—about a third of state budgets—came from the federal government. That money is used for education, health care, welfare, infrastructure and other expenses.
States understandably do their best to maximize the federal funds they receive. That has often included questionable, if not illegal, tactics, such as juggling Medicaid funds in a way to increase their federal Medicaid reimbursements.
And elected officials take some pride in boasting that they worked hard to get as much money returned to the state as possible—which, they explain, is why voters need to reelect them.
We like competition among the states—e.g., lowering taxes and reducing regulations to attract individuals and businesses. But state competition to soak up more federal tax dollars isn’t really what we had in mind.
Encouraging this effort are loads of state and local rent seekers who do their best to rake in as much of those federal dollars as possible, even “subsidy shaming” anyone who questions whether the states should be striving so hard to siphon off more federal money.
You saw that process in the Affordable Care Act’s Medicaid expansion proposal. Under the law, the federal government would cover 100 percent of the additional costs for states willing to expand their Medicaid program. After three years, the federal share would begin a gradual decline to 90 percent—which is substantially more than the average 63 percent of Medicaid costs the federal government currently picks up.
Leftists, and some who were more practically than politically motivated, pleaded with states to take the expansion. It’s “free money”!
Except, of course, it isn’t free money. Taxpayers send their federal taxes to Washington, and Washington gives a portion of that money—$639 billion—back to the states.
And so the obvious question is, Why not eliminate the middle man? Why send money to Washington and then connive and beg to get it back? Cut the federal tax rate and let state taxpayers pay for all the services they want for their state.
Incidentally, cutting $639 billion from federal spending still wouldn’t balance the federal budget—but it would be a lot closer.
Of course, this proposal would likely mean raising state taxes in some states to offset the federal tax cut, but at least the ones receiving the services would be the ones paying for them.
December 3, 2019