Federal Money to the States Isn’t ‘Free’

Richmond Times‐​Dispatch columnist A. Barton Hinkle recently made what should be a simple point to understand, but it’s unfortunately one that few people seem to appreciate. Writing about the supposed win‐​win situation whereby states expand Medicaid coverage and the federal government foots most of the bill, Hinkle reminds readers that the “free” federal money isn’t really free: 

In Virginia, officials estimate expanding Medicaid would cost the state $137.5 million over nine years, while the state would receive $23 billion from Washington.


Other states report similar figures. California expects to enroll up to 910,000 residents for a cost beginning at only $46 million a year, while collecting $44 billion in federal funds over a six‐​year period. An Illinois study estimates that state would spend about $2 billion on expanded Medicaid over the next decade, while reaping $22 billion in federal funds. According to Danielle Holohan, who is in charge of New York’s insurance exchange, Medicaid expansion “actually works out to be an enormous savings” for the Empire State. And so on.


This all sounds great—if you are a state official. But if you are a lowly taxpayer, it leaves out one rather significant point: Where is all that federal money coming from?


No great mystery: Most of that money would come from taxpayers who live in the very states that are looking forward to these supposed windfalls. According to the Kaiser Family Foundation, if every state signed up for Medicaid expansion, then the federal government would spend nearly $1 trillion over the next nine years—paid for by you.


So you don’t have to wait for Medicaid expansion to reap this sort of “windfall.” Just take 5 bucks out of your left pocket and put it in your right. As far as your right pocket is concerned, you’re 5 bucks richer. It’s free money!

In addition to not being free, federal subsidization of state spending makes it harder for taxpayers to understand and appreciate where their money is going and how it’s being spent. A Cato essay on fiscal federalism explains:

The three layers of government in the United States no longer resemble the tidy layer cake that existed in the 19th century. Instead, they are like a jumbled marble cake with responsibilities fragmented across multiple layers. Federal aid has made it difficult for citizens to figure out which level of government is responsible for particular policy outcomes. All three levels of government play big roles in such areas as transportation and education, thus making accountability difficult. Politicians have become skilled at pointing fingers of blame at other levels of government, as was evident in the aftermath of Hurricane Katrina. When every government is responsible for an activity, no government is responsible.

As we’ve been arguing over at Downsizing Government, it is well past time that the trend toward greater centralization of power in Washington is reversed. With the country bouncing from manufactured fiscal crisis to manufactured fiscal crisis, the need for a return to fiscal federalism has never been greater.


Of course, getting federal policymakers to give up power is like asking a starving pit bull to part with a slab of beef. And even though state policymakers often complain when the feds get heavy‐​handed, their attitude is different when it comes to taking federal money. Why ask your state’s taxpayers to pony up the funds to feed your spending appetite when Uncle Sam can do the dirty work (or just use his credit card)?