Louisiana second most dependent in nation, 50 percent of state spending from federal aid

NEW ORLEANS, La. – New research indicates 2011 will be the first year that federal aid becomes the largest component of state revenues. Already 27 states, including Louisiana, rely on federal aid as their primary source of funding, but the report’s author describes this year’s level as a critical breaking point.

“It sends a profound message,” says Sven Larson, a research fellow with the Wyoming Liberty Group. “There is a growing consensus among the states that dependency on the federal government is tolerable, even desirable.”

While state revenues have declined during the Great Recession, debt-financed federal aid has risen. Nationwide it now stands at more than one third of total state revenues, with greater state conformity over the level of federal aid dependence.

In 2010, Oklahoma and Louisiana were the most dependent, with federal aid comprising 50 percent or more of their revenue. Ten other states were more than 40 percent dependent, compared to only one state in 2005 – Louisiana at 45 percent. (Click here for a ranking of state financial dependency.)

Total State Revenue Sources*

Larson, author of Remaking America: Welcome to the Dark Side of the Wefare State and an immigrant from Sweden, says the federal funding trend is part of a broader decline of federalism toward a European-style unitary United States. And he believes the nation is at a critical threshold in that direction.

“Evidence from Sweden primarily, but also from other European welfare states, indicates that once government passes 40 percent of GDP [precisely where the United States hovers] the productive sector can no longer keep up with the tax obligations that government puts on it.” (Click here for Larson’s full explanation.)

Chris Edwards, editor of DownsizingGovernment.org, in his February Tax and Budget Bulletin also documented and denounced the large and growing federal presence in state policy. He attributes state entanglement and dependency to the 1,122 federal aid programs in 2010, up 29 percent from 2005 and more than triple the 1985 level. (Click here for a program-per-department breakdown.)

Federal Aid-to-State Programs

“[These programs] combine federal subsidies with top-down regulations to micromanage state and local affairs… Furthermore, aid ties up the states in bureaucratic knots and reduces state policy innovation,” he says.

Robert Higgs, a senior fellow with the Independent Institute and a Louisiana resident, is a specialist on the growth of American government, most notably with his book, Crisis and Leviathan. Like Larson, Higgs warns that federal funding makes a mockery of genuine federalism, since states then have less independence to act in the interests of local people.

“Fearing the loss of such a large part of their funding, state authorities become nothing more than puppets of the federal authorities.”

*State general funds are for the ordinary expenses of the executive, legislative, and judicial departments, for debt servicing, and for capital outlay. Other funds include program specific taxes and fee revenues that are not available for discretionary spending.

Fergus Hodgson is the capitol bureau reporter with the Pelican Institute for Public Policy and editor of The Pelican Post. He can be contacted at fhodgson@pelicanpolicy.org, and one can follow him on twitter.