Eight Reasons to Cut Federal Aid to the States

Published February 21, 2011

Federal aid-to-state programs undermine constitutional federalism, and they don’t make any practical sense. The theory behind aid is that the federal government can efficiently solve local problems, but decades of experience have shown it cannot. Following are eight reasons to terminate federal aid-to-state programs.

1. No Magical Source of Federal Funds.
Aid supporters bemoan a “lack of resources” at the state and local level and believe Uncle Sam has endlessly deep pockets to help them out. But he does not: Every dollar of federal aid sent to the states is ultimately taken from taxpayers who live in the 50 states.

It’s true the federal government has a greater ability to run deficits than state governments, but that’s an argument against the aid system. By pushing government funding up to the federal level, the aid system has tilted American government further toward unsustainable debt financing.

2. Aid Spurs Overspending.
Aid programs spur overspending by every level of government. Politicians at every level enjoy expanding programs to satisfy special interest groups, but with aid programs they rely on other levels of government to pay part of the cost. That gives them the political benefits of more spending while paying only part of the political cost of raising taxes.

Aid programs often contain rules that encourage overspending. Some programs have a “matching” feature that rewards state politicians with more federal funds when they expand a program. Other programs have a “maintenance of effort” feature that prevents states from cutting program costs.

3. Aid Allocation Is Inefficient.
The myth of aid is that impartial federal government experts can rationally distribute funding to the most needy local communities and activities. But the aid system has never worked that way. A 1940 news report lamented:

“The grants-in-aid system in the United States has developed in a haphazard fashion.

“Particular services have been singled out for subsidy at the behest of pressure groups.”

It’s the same today. Politics substantially determines the activities and congressional districts that receive the most aid. For example, states with the greatest need for highway funding but weak members of Congress may get less federal aid than less-needy states.
Even if politics were taken out of the equation, the federal government does not have the knowledge to plan efficiently for the education, housing, and other needs of a diverse nation of 309 million people. Such knowledge is generated only in the private marketplace, the mechanism that allocates most goods and services. Services that must be provided by governments are generally allocated more efficiently by state and local policymakers without federal subsidies and interference. 

4. Aid Reduces Innovation.
Federal aid reduces state policy innovation because it comes with top-down rules that encourage or mandate policy conformity. States and local governments can’t be “laboratories of democracy” if they operate under one-size-fits-all rules written in Washington.

The former 55-mile-per-hour national speed limit was the classic example of a federal mandate that ignored the states’ diverse needs. More recently, the No Child Left Behind education law extended federal regulatory tentacles into local classrooms.

5. Aid Is Intensely Bureaucratic.
The aid system imposes a huge paperwork burden on all three levels of government. Federal agencies that hand out state aid consume roughly 10 percent of the value of the aid in administration. That money stays in Washington.

For state and local governments, each of the 1,122 aid programs involves tasks such as filling out applications, filing reports, auditing, litigation, and regulatory compliance. For each program, federal rules can run from dozens to thousands of pages in length.  

6. Aid Distracts Federal Politicians.
The huge scope of the aid system means that federal politicians spend much of their time on local issues. Rather than focusing on truly national issues, such as defense and security, they are busy steering funds to their districts for local projects.

President Calvin Coolidge was prescient in arguing state aid should be cut because it was “encumbering the national government beyond its wisdom to comprehend, or its ability to administer” its proper roles.  

7. Aid Breeds Irresponsibility.
The three levels of government would work more efficiently if they resembled a tidy layer cake with separate functions. Instead, they are like a marble cake with jumbled lines of accountability, and that makes it difficult for citizens to know who is in charge of each policy activity and outcome. When every government has a hand in an activity, no government is responsible, as we saw, for example, in the disastrous lead-up to, and aftermath of, Hurricane Katrina in New Orleans. 

8. Common Problems Aren’t Necessarily Federal.
Politicians and special interest groups often claim that certain state, local, and private activities need federal aid because they are “national” priorities. The Bush administration, for example, claimed a “compelling national interest” in providing federal aid for the K-12 schools.

But the schools are a “national interest” only in the sense that many families are interested in them.

In Canada, families are also interested in K-12 education. But in that nation, the federal government is generally not involved in the schools, and yet their kids do much better on international tests than do U.S. kids.

Thus, the desire of members of Congress to try to solve state, local, and private problems needs to be tempered with an understanding that federal involvement is usually counterproductive. 

— Chris Edwards, Cato Institute