Federal debt takes the United States into the unknown, pushing the boundaries of how far financial markets are willing to lend to our government. And when lawmakers spend a trillion dollars more than they collect in revenue, it sounds like they are enthusiastic to find the limits of federal debt.
The prudent course is to spend less. Congress should start with its grants to states, which now account for a third of state government spending. States can do everything Uncle Sam funds without that money. And it would be better if the federal government did less and state governments did more.
There are many federal grants to states. The largest federal grants are for Medicaid, to ensure that poor people receive medical treatment. Federal grants also go to cash assistance for poor families and pay the bulk of the costs of food assistance benefits. States receive major grants for education and transportation funding, and minor amounts for dozens of other state functions.
HEGSETH CONFIRMS $200 BILLION PENTAGON REQUEST FOR IRAN WAR
In 2025, state and local governments received nearly $1 trillion in federal support. It’s tough for state legislators to say no to these checks. Their residents are subject to the same level of taxation regardless of whether they accept the money or not. Lots of politically potent stakeholders, including hospitals serving Medicaid recipients and the school districts in every legislative district, would prefer state lawmakers to agree when the federal government offers to pay. Turning down federal cash is all cost and no benefit.
These funds come with strings attached, also known as the “transactional mode of control.” The terms and conditions of funding allow the federal government to influence state and local policy in ways it could not otherwise accomplish by passing laws through Congress. The federal government can’t force states to provide medical care to needy families. State lawmakers can be paid off, however, and the money comes with controls.
Either the federal money gets states to do something state lawmakers would have done without it, or it gets state lawmakers to provide services they wouldn’t otherwise do. Both are bad. It is bad to go into new depths of debt to pay states to do something they would do with their own money. And it is bad to bribe state lawmakers to do something that would otherwise be unpopular and infeasible without federal dollars.
Federal money distorts state decisions. For instance, state lawmakers argued about whether they should spend $1 to get $9 from the federal government in the Obamacare debate. They were not arguing about whether the $10 spent on the service was the most efficient and effective way to help people in need. State policymakers focus on spending more for federally subsidized activities, especially those supported by interest groups, and less on other activities that state residents may value more.
State legislators tend to care whether they get the grants and don’t care whether the grants are spent well. It’s not their money that they’re losing to food assistance fraud. Federal officials rarely care, either. It took a scandal that resonated around the country before the federal Department of Health and Human Services froze child care and family assistance in five states.
It will be hard for federal policymakers to stop their grants to states. Yet they’ve already taken some steps. The strategy will likely not appear as an outright rug pull, but rather as adjustments to matching rates for programs such as Medicaid.
That’s what Congress did with food assistance benefits. States have to pay a portion of the benefits costs if too much of the money gets into the wrong hands or is spent on ineligible products.
GOP FISCAL HAWKS OPEN TO NEW IRAN WAR FUNDING WITHOUT SPENDING OFFSETS
States can provide some leadership in fiscal federalism, too. The least they can do is talk through what happens when federal funds dry up. Utah did this in 2013 as part of its Financial Ready Utah plan. The Beehive State now has a commission to monitor the effect of federal grants on the state and requires state agencies to develop emergency action plans in expectation of a 5% to 25% federal funding cut.
That’s only a start. The federal government has been paying for too much that ought to be left to states alone, and people ought to look to their state capitals when trying to make a difference on the next big domestic issue.
Thomas Savidge is a research fellow at the American Institute for Economic Research. Follow him on X @thomas_savidge.
James M. Hohman is the director of fiscal policy at the Mackinac Center for Public Policy, a research and educational institute in Midland, Michigan. Follow him on X @JamesHohman.
