Budget & Tax, Law & Principles

Shining a Light on ‘Free’ Federal Money

February 5, 2015

Trent England

Should the state officials you elect be informed about federal funds spent in Oklahoma? For that matter, should citizens have access to data that reveal the strings attached to federal dollars in our state?

Oklahoma legislators are poised to debate these questions thanks to a transparency measure introduced by state Rep. Tom Newell (R-Seminole).

More than a third of Oklahoma state revenue actually comes from Washington, D.C. The same is true in more than half the states. Many federal and state officials like to talk and act as if that money is simply a free gift. In fact, the increasing reliance of states on federal funding is one more way government officials are able to ignore or obscure the truth and, in some cases, violate the law.

It is more fun to spend money than it is to earn it. This is true in politics: creating a new program or increasing funding to an existing one is a likelier path to popularity (and thus to power) than raising taxes in order to pay the bill. Of course, earning the money (or, in the case of politics, justifying raising the revenue) is not merely an unpleasant prerequisite. Spending money is always about tradeoffs, and recognizing the costs is just as important as seeing the benefits. This is what the late economist Milton Friedman meant when he pointed out that no one spends somebody else’s money as carefully as he spends his own.

Government starts out with this problem; moving tax dollars between governments makes it much worse. Part of the inherent inefficiency of government comes from the fact that it is always spending somebody else’s money. This is why revenue bills must start in the U.S. House and terms for House members are just two years, to maximize responsibility when it comes to spending those taxpayer dollars.

Unfortunately, due to changes to the original constitutional design, Congress today is able to raise money with few constraints. In 1913, the 16th Amendment gave Congress the power to create a progressive income tax. That same year, the creation of the Federal Reserve made deficit spending easier. Those changes set the stage for the New Deal, when total federal spending, federal transfers of money to state and local governments, and the national debt all surged.

The New Deal was designed, in part, to make it clear that the federal government was in control. Part of this was done by making local governments and projects dependent on federal funds. This established a precedent for programs and congressional earmarks that sent federal tax dollars to state and local officials. Many of those officials as well as their constituents were overjoyed to have this “free” federal money.

All this time the Supreme Court largely stood by and allowed federal power to grow, with one important exception. Attempts by Congress to force states to enact policies like motorcycle helmet laws or to otherwise commandeer state resources to enforce federal priorities were struck down as unconstitutional.

Now the Congress became more crafty than the judges and state officials; instead of commanding states, Congress began to attach conditions to federal funds. Today, many of the federal dollars that arrive in Oklahoma come with strings attached. What Congress could not do directly it does indirectly, foisting policy decisions on state and local programs. This means federal dollars sometimes drive up the costs of the very programs they are supposed to support.

Federal funding also violates at least the spirit of the law. The Oklahoma state constitution prohibits deficit spending. Most state constitutions contain a similar requirement. Congress faces no such requirement and routinely spends money it does not have. When states spend borrowed federal funds, they ignore or evade their own balanced budget laws.

Federal funds that flow into the states distort decision making, extend federal power, and often carry hidden costs of their own. Accepting borrowed federal funds also allows states to evade their own constitutional balanced-budget requirements. It is time to have a conversation about federal funds, in Oklahoma and across the country.

Utah recently passed a law that required state agencies to report on the federal funds they receive and any strings attached to those funds. Rep. Newell’s plan would do the same for Oklahoma, allowing policymakers and citizens to finally pull back the curtain and begin an informed conversation about federal funds.