How independent are states if Washington pays the bills?
Federalism debates often get theoretical, revolving around constitutional powers and legal boundaries. But if we want to understand the real balance of power between Washington and the states, sometimes the best advice comes from the “follow the money” line in “All the President’s Men.”
A new breakdown from the Pew Charitable Trusts shows just how much money flows from Washington to the states. Federal dollars are the second-largest source of state government funding and have historically accounted for around a third of total state revenue. As pointed out on numerous occasions here, Louisiana has been hovering around half of all dollars coming from the federal government for a number of years.
And much of that dependence is concentrated in one program. Medicaid accounts for nearly 70% of all federal grant dollars going to states in fiscal year 2026. Wyoming is the only state where Medicaid is not the largest source of incoming federal funds. Another 11% of incoming federal funds across the states stems from Temporary Assistance for Needy Families (TANF) and school lunch programs. Transportation, health, and education spending make up the bulk of the rest of the federal dollars.
Now that the national debt has surpassed $40 trillion, an obvious question is how risky it is for states to rely so heavily on federal dollars? CBO projects debt held by the public will rise from 101% of GDP in 2026 to 120% by 2036. Many people seem to assume the federal government can simply keep borrowing more money indefinitely. But debt has consequences, and federal policy can change quickly when those consequences become painful enough for the public.
But the biggest question is certainly one of autonomy. And while the Trump administration is relaxing some strings tied to federal dollars, they certainly aren’t non-existent. A future administration can quickly change that quite dramatically in the future. At the end of the day, the more state governments depend on federal money, the more consequential Washington’s rules and priorities become for state policymaking.
States that rely heavily on Washington should at least be preparing for the possibility that those dollars could shrink. Utah requires agencies to develop contingency plans when federal grants account for more than 10% of an agency’s budget or exceed $2 million.
Federalism is ultimately about much more than the constitutional lines we all should love and be more diligent to embrace. A state may possess considerable legal authority, but exercising that authority independently becomes more difficult when Washington pays such a large portion of the bills.
Sometimes, to really understand where the power really lies, you have to follow the money.
—Ray Nothstine
— The Federalism Beat