reported by the states indicated that tax collec-
almost half in real terms, from $144.7 billion to
tions came in at $328 billion, a $22 billion
$215.9 billion.21 So real federal aid is about 40
windfall over and above the original estimate
percent higher now than it was in 1980.
of $306 billion. Furthermore, although the
It is not even clear that federal aid is an
governors had originally called for only a 3.6
unmixed blessing for states as they attempt to
percent increase in spending in FY98, when all
balance their budgets. Federal dollars almost
was said and done, spending rose by 5.7 per-
always come with costly strings attached. The
cent.
federal government collects those dollars from
As a result, instead of increasing spending
taxpayers all over the country, skims some off
by $13.8 billion in FY98, as the governors had
the top for administrative and other costs, and
originally proposed, the states increased
then sends the remainder to the 50 states with
spending by $22.1 billion. That amounts to
numerous one-size-fits-all restrictions on how
more than $8 billion in unexpected spending
the money can be spent. Invariably, that cre-
hikes in a single year. In addition, by allowing
ates enormous winners and losers among the
their budget reserves to rise well above the rec-
states, often attributable primarily to the
ommended level of 3 to 5 percent of expendi-
political seniority of each state's congressional
tures, state governments held onto another
representatives. In fact, in Mississippi and
From 1990 to
$16 billion of taxpayer funds. So, while many
West Virginia, homes of influential Sens.
1998, federal aid
state legislators argue that tax cuts are "unaf-
Trent Lott and Robert Byrd, the federal gov-
fordable," last year they collected about $25
ernment spends more than $1.50 for every
rose by almost
billion of unexpected tax receipts--more than
dollar of federal taxes paid by residents.22 In
half in real terms,
$350 per family of four--that could have been
contrast, federal spending in Connecticut and
from $144.7
used to provide additional tax relief, but were
New Jersey amount to only about 70 cents for
not.
every dollar of federal taxes paid by the resi-
billion to $215.9
dents.
billion.
Why State Budgets Should Be Falling, Not
It is true that there are certain high-priority
Rising
areas of state budgets for which the public is
State lawmakers allege that their budgets
demanding more funding. One of those areas
are rising because they are facing increased
is law enforcement. As the public continues to
demands to spend in the 1990s. For example,
adopt a "lock `em up" attitude toward crimi-
state policymakers typically argue that with
nals, state spending on prisons, police, and the
the renewed emphasis on states' rights and
courts has more than roughly doubled.
federalism under the Republican Congress,
Yet there is a series of factors that have
the federal government is devolving more
generated substantial budgetary savings for
spending responsibilities to the states--for
states in the 1990s and should be contributing
example, in the areas of welfare and criminal
to shrinking state budgets. Most of those fac-
justice--without a commensurate increase in
tors are related to the robust U.S. economy.
resources.
The first factor is declining interest rates.
The truth is, however, that federal spending
States are large net borrowers. They borrow to
on grants to states and localities has been
fund highways, school construction, prisons,
growing, not falling. Federal grants to state
and other capital spending. In 1997 state gov-
and local governments did decline in the
ernments spent $26.3 billion on interest pay-
1980s, from $155.7 billion in 1980 to $144.7
ments. But long-term interest rates over the
billion in 1990 after adjusting for inflation--a
past six years have fallen by more than 200
reduction of 7.1 percent. But as Figure 11 indi-
basis points. Therefore, as Table 1 indicated,
cates, the largest reductions occurred in the
after doubling in the 1980s from $13.2 billion
first two years of the Reagan administration,
to $26.5 billion, interest payments on state
1981 and 1982. Real federal aid remained level
debt (in real terms) have actually declined
throughout the mid-1980s and has surged
slightly in the 1990s. Hence, debt service has
since 1987. From 1990 to 1998, federal aid rose by
cost states less in recent years.
19