Which States Rely the Most on Federal Aid?

by Jared Walczak, The Tax Foundation, January 6, 2016

While state-levied taxes are the most evident source of state government revenues, and typically constitute the vast majority of each state’s general fund budget, it is important to bear in mind that they are not the only source. State governments also receive a significant amount of non-general fund revenue, most significantly in the form of federal governmental transfers. In Fiscal Year 2013, a full 30 percent of state revenues derived from federal grants-in-aid.

Such aid takes many forms. It includes federal Medicaid payments, education funding assistance, support for infrastructure projects, housing grants, and more. Federal grants-in-aid to state and local governments have reached $600 billion per year, with Medicaid by far the largest (and most rapidly growing) component. How much states receive in federal aid, and how reliant they are on such assistance, can vary widely.

Mississippi, for instance, relied on federal assistance for 42.9 percent of its revenue in FY 2013, the largest share in the country. Also on the high end are Louisiana (41.9 percent), Tennessee (39.5 percent), South Dakota (39.0 percent), and Missouri (38.2 percent). States with heavy reliance on federal grants-in-aid tend to have a combination of modest tax collections (reducing the denominator) and sizable low income populations (correlating with greater per capita reliance on Medicaid, housing assistance, and other low income and poverty relief programming, and with a greater share of federal education support).

On the other end of the spectrum are states like North Dakota (19.0 percent), Hawaii (21.5 percent), Alaska (22.4 percent), Virginia (22.9 percent), and Connecticut (23.4 percent). These states tend to have higher per capita tax collections (growing the denominator) and populations with lesser reliance on federal assistance (shrinking the numerator). Notably, although North Dakota and Alaska impose relatively modest taxes on residents, they are resource-rich states which export much of their tax burdens through severance taxes and thus experience some of the highest tax collections per capita in the nation.

The map below shows how reliant each state is on federal aid. Note that the measure we use of general revenues includes state taxes and fees, but excludes utility revenue, liquor store revenue, and insurance trust revenue.

For more information on this topic, you may wish to consult:

• The original data from the Census Bureau's Survey of State and Local Government Finance.
• A 2013 Congressional Budget Office report reviewing federal grants-in-aid to state and local governments.
• A more detailed description of Census Bureau categorizations with regard to federal aid, and analysis of programs supported by federal grants-in-aid.