Federal influence over state budgets increases almost every year. Today, every state is critically dependent on federal funds just to make ends meet. North Carolina is by no means an exception to this trend. According to the state’s FY2006 Comprehensive Annual Financial Report, “The state receives significant financial assistance from the federal government in the form of grants and entitlements, which are generally conditioned upon compliance with terms and conditions of the grant agreements and applicable federal regulations, including the expenditure of the resources for eligible purposes.”
Over the past 10 years alone, the state’s dependency on federal dollars has grown by almost one-third. In 1996, the federal government paid a quarter of every dollar of the state’s total revenues. In 2005, they contributed 32 cents of every dollar of total state revenues.
Put differently: from 1996 to 2005, the state’s total revenues from taxes, fees and other sources – including federal funds – increased by 173 percent; during the same period, federal funds distributed to the state of North Carolina grew by 217 percent.
The majority of federal dollars go to Medicaid and transportation – always with strings attached. In particular, states that accept federal funds must adhere to federal regulations regarding the use of this money. Take Medicaid, for example. North Carolina pays 39 percent of Medicaid expenditures, 1 with the federal government paying the remaining 61 percent. In return for accepting this money, the state must provide health insurance to the groups that the federal government requires be covered – for example, low income families that qualify for welfare, as well as elderly and disabled people eligible for Supplemental Security Income. The state must also provide all the services that are specified by federal mandates. The result is a loss of control over who the state can and cannot cover.
Federal funding also hinders states from exercising financial independence by preventing cuts in services that a state no longer wants or can no longer afford. By being forced to subsidize these services, state expenditures become automatic – preparing the way for virtually automatic tax increases. As federal money pays for a larger and larger share of the state budget, voters and taxpayers in North Carolina have less and less say in how to run the state’s business. In addition to limiting financial independence, federal dollars are also used to force certain social agendas – for instance, regarding tax-paid healthcare, abortion, or the environment – on the states.
The chart above illustrates the long-term impact of federal funding for North Carolina by delineating the relation of state tax revenues to federal dollars in the N.C. state budget. As the history of the founding of the United States suggests, the right to set tax rates is an important part of state sovereignty. At current rates, federal funds will soon replace state tax collections as North Carolina’s primary source of revenue. As the chart shows, in 1996 the state took in $2.19 per federal dollar it received; by 2005, this ratio had fallen to $1.56 per federal dollar.
Since 1996, federal funds to North Carolina have grown at an average rate of 9.2 percent per year. State tax revenues have grown at 5 percent per year. If we extrapolate this trend, federal funds will overtake state tax revenues as the state’s single largest revenue source by 2016.