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Federal Grants to States and Localities at Risk

February 24, 2017 at 11:30 AM

Federal grants to state and local governments help fund a number of critical programs and services on which residents rely. But they’re already at historically low levels as a share of the economy, and proposals from President Trump and congressional Republicans would shrink them further — potentially diminishing or eliminating the programs they support.

Federal grants provide roughly 31 percent of state budgets and 22 percent of state and local budgets combined. They fall into two broad categories:

Grants from the discretionary, or annually appropriated, part of the federal budget support education (particularly for low-income and special needs children), the WIC nutrition program for pregnant women, infants, and children, mental health and substance abuse services, training and employment, and low-income housing assistance. also support transportation infrastructure (such as maintenance and safety improvements for airports, highways, and mass transit), state and local law enforcement, prevention and prosecution of violence against women, and environmental programs.

Discretionary grants were 1.05 percent of gross domestic product (GDP) in fiscal year 2015, lower than in all but one year since 1980. If the caps in the 2011 Budget Control Act (BCA) — as lowered by sequestration — remain in place, these grants will likely shrink further over the next few years, even if policymakers make no cuts on top of the BCA reductions.

Grants from the mandatory part of the federal budget include Medicaid and the Children’s Health Insurance Program (CHIP), school meal programs, child support enforcement, foster care, child care assistance, Temporary Assistance for Needy Families (TANF), and social services.

Mandatory grants other than Medicaid and CHIP fell to 0.42 percent of GDP in 2015, the lowest since 1980.

 

Both categories of grants are at risk:

  • The “Penny Plan” that President Trump proposed during the campaign would slash discretionary spending outside of defense by about 29 percent by 2026, after accounting for inflation. The budget that the Republican majority on the House Budget Committee approved in the spring of 2016 would cut $1 trillion out of that spending over ten years. Grants to states and localities make up nearly one-third of non-defense discretionary spending, so they would face severe cuts under these or similar proposals that may appear in 2017.
  • House Republicans have proposed imposing a per capita cap on federal Medicaid funding or transforming Medicaid into a block grant. These proposals are designed to cut funding by amounts that grow steeper over time, likely forcing states to sharply limit eligibility or health care services for families, seniors, and people with disabilities. House Republicans have also proposed ending the Affordable Care Act’s Medicaid expansion, which has enabled 11 million people to get coverage.

State and local governments don’t have the funds to replace lost federal funds for these programs. Many states face revenue shortfalls this year and struggle in most years to find adequate revenues to support services. In all likelihood, states and localities would have to respond by eliminating services and programs.

Moreover, even if they did raise some taxes to continue funding some services, there would be consequences for low-income residents. State and local tax systems are, on the whole, regressive—lower-income people pay a larger share of their income in these taxes than higher-income people do. Shifting responsibilities for funding services from the federal government, which has a progressive tax system, to states and localities would increase the burden on many of the same low-income people who would lose some services.