1996 National Public Policy Education Conference
Tom Stinson
Minnesota State Economist;
public finance economist,
University of Minnesota
The American public has fully signed on to the idea of reducing
the federal deficit. But it’s not fully aware of the consequences, the
personal sacrifices that will be required.
When those consequences become apparent, the move to devolve
federal government may stall. This could leave both the deficit and the
federal government smaller, but with spending still exceeding revenue.
The Implications
of Changing
Federalism:
State View
Even so, for the next six years the impact of shifting programs
from the federal to state levels will affect each state’s economy, as well
as its government. Removing $1.3 trillion from the nation’s economy—
even over several years—will affect everyone’s pocketbook.
This impact will vary from state to state. The federal government
is a more important economic sector in some places. States also differ in
their capacity to absorb programs, if not given full funding.
The U.S. Census Bureau’s 1994 data provide some context:
■ Nationally, federal moneys account for about $5,000 per capita,
with Alaska receiving the most at $7,600 per capita and Indiana the
least at just over $3,800 per person. [See Table 1.]
■ More than half of all federal spending goes for direct payments,
with 80 percent of this category tied up in Social Security, Medicare
and federal∕military pensions. Typically, Social Security accounts for
almost one-fourth of all federal spending and Medicare for one-eighth.
■ Some $170 billion or 13 percent of all federal payments is in
salaries and wages. This category varies widely, with the Postal Service
accounting for more than 80 percent of such outlays in some states.
■ Procurement is 15 percent of federal spending. This category’s
data are geographically misleading, however, due to subcontractors.
■ A,l^nt 3.5 percent of federal outlays go for research contracts,
federal employee fringe benefits, farm programs and such.
■ The best known part of federal spending is the $214 billion or
16 percent of the budget going to StateZlocal grants and aid (G&A) for
social safety net programs and for aid to education, retraining programs,
wildlife protection, etc. G&A accounts for $1 in $6 Washington spends.
■ Nearly 40 percent of all federal assistance to StateZlocal govern-
ments is Medicaid. The Congressional Budget Office projects Medicaid
baseline spending will grow 10 percent a year through 2002. But
Medicare cuts could exacerbate Medicaid’s woes.
Fortunately, the largest proposed baseline budget cuts are delayed
until after the turn of the century. It seems unlikely states will be able or
willing to make up the entire difference. Nonetheless, they have time to
focus on reordering priorities and on designing, testing and modifying
delivery systems for the future.