Effect of federal grants on future local taxes


Grants.gov logo“Nothing is so permanent as a temporary government program.” — Nobel Laureate Milton Friedman

Is this true? Do federal grants cause state and/or local tax increases in the future after the government grant ends? Economists Russell S. Sobel and George R. Crowley have examined the evidence, and they find the answer is yes.

The research paper is titled Do Intergovernmental Grants Create Ratchets in State and Local Taxes? Testing the Friedman-Sanford Hypothesis.

The difference between this research and most other is that Sobel and Crowley look at the impact of federal grants on state and local tax policy in future periods.

This is important because, in their words, “Federal grants often result in states creating new programs and hiring new employees, and when the federal funding for that specific purpose is discontinued, these new state programs must either be discontinued or financed through increases in state own source taxes.”

The authors caution: “Far from always being an unintended consequence, some federal grants are made with the intention that states will pick up funding the program in the future.”

The conclusion to their research paper states:

Our results clearly demonstrate that grant funding to state and local governments results in higher own source revenue and taxes in the future to support the programs initiated with the federal grant monies. Our results are consistent with Friedman’s quote regarding the permanence of temporary government programs started through grant funding, as well as South Carolina Governor Mark Sanford’s reasoning for trying to deny some federal stimulus monies for his state due to the future tax implications. Most importantly, our results suggest that the recent large increase in federal grants to state and local governments that has occurred as part of the American Recovery and Reinvestment Act (ARRA) will have significant future tax implications at the state and local level as these governments raise revenue to continue these newly funded programs into the future. Federal grants to state and local governments have risen from $461 billion in 2008 to $654 billion in 2010. Based on our estimates, future state taxes will rise by between 33 and 42 cents for every dollar in federal grants states received today, while local revenues will rise by between 23 and 46 cents for every dollar in federal (or state) grants received today. Using our estimates, this increase of $200 billion in federal grants will eventually result in roughly $80 billion in future state and local tax and own source revenue increases. This suggests the true cost of fiscal stimulus is underestimated when the costs of future state and local tax increases are overlooked.

So: Not only are we taxed to pay for the cost of funding federal and state grants, the units of government that receive grants are very likely to raise their own levels of taxation in response to the receipt of the grants. This is a cycle of ever-expanding government that needs to end, and right now.

An introduction to the paper is Do Intergovernmental Grants Create Ratchets in State and Local Taxes?.


3 responses to “Effect of federal grants on future local taxes”

  1. Larry

    Fish & Game is a Prime example of this. Before Brownbeck Elderly were exempted at age 65 from hunting & fishing licenses. Then the elderly were required to buy a hunting & fishing license so that more federal funds could be obtained. The additional monies the Fish & Game received did not build elderly accessible fishing piers or docks,,, it did not put up hunting blinds for the elderly. It did nothing but reduce the fixed income of the elderly and increase spending of Fish & Game. The increased spending will demand that future license prices be increased to cover the added spending costs.

  2. Ictator

    The bigger problem than the grant dependence is the mandates contained within the grant that requires modified or new mandates to be issued by the city or county receiving the federal grant. This is also a similar but less issue with state grants.

    The biggest threat to life, liberty, and property within the grant environment is the so-called “sustainability” grants coming out of the fed’s EPA/HUD/DOT agencies. It is unfortunate that the local governments in south central KS have lusted after these grants that are filled with all kind of federal mandates once the “implementation” phase of this process begins.

  3. Karl Peterjohn

    An excellent article. Please keep up the good work.

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