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Blue States Are Getting More Federal Money Than They Should

National Review

October 12, 2023

The late New York senator Daniel Patrick Moynihan long complained — and commissioned data — about New York’s status as a “donor state,” for sending more in tax dollars to Washington than it received in return in the form of grants. This was always a misunderstanding of the virtues of the U.S. being a vast free-trade zone; New York benefited, not least through its role as a financial center, in the development of the markets of the South and West.

But, more recently, the Empire State is not even nominally a “donor.” The most recent data from the New York Comptroller’s office show that for FY2020, the state received $146 billion more in federal funds than its taxpayers paid. But even that math overlooks another way in which New York — and its peer high-tax blue states California and Illinois — have come to benefit from the manner in which billions in federal grants-in-aid are distributed. Aid formulas protect them from the effects of their ongoing population loss.

When it comes to determining representation in Congress, population — both gains and losses — matter. That’s why the three largest “blue states” — California, New York, and Illinois, which, between 2010 and 2020, together lost a total of 1.1 million residents, or more than all other states combined — each lost one seat in Congress. Fast-growing Texas and Florida each gained two.

But those same blue states were also protected from what should logically be another side effect of population loss: a reduction in federal grants, the annual waves of aid distributed for everything from public assistance to public education.

Instead, some of the largest of the more than 1,200 federal grants to states and localities don’t adjust for population loss — meaning that states whose policies drive residents away are buffered from the fiscal effect of doing so.

In a forthcoming paper for the American Enterprise Institute, I analyze the twelve largest federal grants programs and find that, because the funding for many is either set by statute or relies on formulas that mitigate the effect of population change, California, New York, and Illinois are avoiding fiscal losses of $233 million annually. By extension, that means that growing states are not receiving assistance they might need for highways, education, or environmental infrastructure, or that the federal spending is higher than it should be.

Washington — in a non-pandemic years — sends some $750 billion in grants to state and local governments, accounting for about a third of state budget spending. Such grants-in-aid are a core feature of modern U.S. government, having been negligible in the pre-New Deal era. In FY1930, for example, total grant-in-aid outlays were 0.109 percent of gross domestic product (GDP), whereas in FY2018 grant-in-aid outlays were 3.392 percent of GDP. A few large programs account for much of the spending.

Just twelve programs accounted for $757.4 billion in FY2022, when federal grant-in-aid programs totaled $1.2 trillion, a figure that includes temporary programs such as the $106 billion Coronavirus Relief Fund. Major ongoing grant programs include federal highway assistance, Temporary Assistance for Needy Families (including cash welfare), the National School Lunch Program, water and sewer infrastructure, and education at the elementary and secondary levels. They include both “categorical” grants — that can be used for only one program — and “block” grants, which allow for more spending discretion. Both kinds of grants, however, can be buffered from the effects of population loss.

TANF block grants, for instance, have been fixed in amount by statute since 1996. That means that states which are losing population receive more funds per capita for public assistance over time.

The big winners are New York — whose $2.5 billion TANF grant in July 2022 is a 2.7 percent increase per capita from April 2020; California, which saw a 1.3 percent increase; and Illinois, which saw a 1.8 percent increase. In contrast, Florida, Texas, Utah, and Arizona all received less of such aid per capita.

A major HUD program — the Community Development Block Grant, intended to assist lower-income communities — is similarly buffered from population loss. Communities in which a major percentage of their housing dates from 1940 or earlier can be protected by aid formulas from cuts — even if, like the brownstones of Brooklyn, such homes are worth millions. Sunbelt cities’ housing is, of course, much newer.

Big city school districts have lost large numbers of students — but they won’t lose federal aid as a result. “Hold harmless” provisions prevent a recipient from receiving less than a certain portion of prior-year funding — for Title I Education Grants, local school districts are protected by “hold harmless” rules from aid cuts so long as they retain enough “formula” children — children in poverty as a percentage of the district’s population. A district losing middle-class families because of poor performance will be rewarded nonetheless.

Then there’s Medicaid, the largest federal aid program of all at $593 billion. Its federal spending is determined by matching state spending. So long as states continue to offer generous Medicaid plans — even if that drives high tax rates and crowds out other types of programs — Washington rewards them.

What would be the impact on state budgets if the twelve largest federal grants were all tied to population gain or loss? It’s a common-sense idea. I’ve calculated what I call “avoided reductions” — the change in funding versus the smaller-sized federal grants that would result from factoring in population. That simple math leads to the conclusion that, for the years 2020-2022, California would have received $89 million less in federal aid, New York would have received $114 million less, and Illinois would have received $30 million less.

All, of course, are states with high state income-tax rates and local property-tax levies. Indeed, their tax burden is such that their legislators are begging for federal tax relief — in the form of an unlimited federal income-tax deduction for state and local taxes (SALT). It turns out, however, that these big blue states already have a friend in Washington, protecting them from the effects of driving their residents away.