The Federal Role in State Fiscal Stress

Abstract

This article examines the extent to which the federal government's policies were responsible for the fiscal stress experienced by most state governments in the early 1990s. Federal policies have contributed considerably to recent state fiscal stress, particularly through the Medicaid program-the fastest growing part of state budgets-and the recession, which depressed revenue and increased welfare and Medicaid spending. Federal aid reductions have not been an important source of recent state fiscal stress. The real value ofper capita federal aid other than for welfare programs fell considerably in the 1980s, but the reductions were much greaterfor local governments thanforstates. The largest reductions were in the early 1980s. Federal policies have affected state finances in several other ways-through tax policy, unfunded mandates, and the federal failure to cope effectively with problems like health and poverty. Federal court rulings have also caused budget problems (as have state court decisions). In some respects, state fiscal problems are not a federal responsibility. Rising school enrollments, new corrections policies, and inelastic tax systems have createdfiscal stress for many states. Excessive state spending in the 1980s has contributed to recent fiscal problems in some states, but not generally.