As New Congress Begins, Federal-State Connections Are as Important as Ever

States will need to respond to changes in federal tax and spending policies

As New Congress Begins, Federal-State Connections Are as Important as Ever

This month, Washington welcomed 113 new members of Congress. They’ll hit the ground running on a range of complex and challenging issues, starting with funding the federal budget—the trillions of dollars that the government spends on programs that affect every American, including the military, health, education, and Social Security.

Although lawmakers come to Washington with diverse backgrounds and ideologies, they share a common responsibility to recognize the link between federal policy—especially tax and spending decisions—and the fiscal and economic health of their states. Today, federal dollars represent nearly $1 of every $3 in state coffers—and are second only to state taxes as a source of income for states. Federal grants to states are about 40 percent higher than they were in 2008, after adjusting for inflation.

Federal policy choices, led by those affecting health care spending, have been driving the increase in federal funds going to states. Medicaid spending is up 71 percent compared with 2008 levels, in part because many states opted to expand the program under the Affordable Care Act.

But the connection between federal policy and state revenue does not end with Congressional spending decisions. Federal tax policies can also significantly affect states. For example, most states use federal measures of income to compute taxes, and some states link to the federal code to determine itemized deductions and credits. When these federal provisions change, as they did in the Tax Cuts and Jobs Act passed by Congress in 2017, states may see a change in their revenue collections. To address issues raised by the new law, states have begun to update their links to the federal code—including replacing the federal personal exemption, which was eliminated in the law, with a state-level one. Many states will continue to address these issues in 2019.

The effects of federal rules and regulations on state and local governments were explored by the 115th Congress’ Speaker’s Task Force on Intergovernmental Affairs, a task force created in 2017 by then-House Speaker Paul Ryan (R-WI) and then-Minority Leader Nancy Pelosi (D-CA) and charged with developing recommendations around federalism—or the division of power across levels of government. Many of the largest federal programs, including education, transportation, Medicaid, and disaster assistance, are carried out in partnership with the states. That means, to govern effectively, federal and state policymakers must work together.

Most recently, the partial government shutdown put the linkages between states and the federal budget into stark relief. With funding lapsed for the National Park Service, some states stepped in with money to keep parks open because of their importance to the local economy. And facing the prospect of a longer shutdown, states are beginning to assess their capacity to run major programs and projects that normally rely on federal funding, from food security to transportation and infrastructure.

The complexities of American federalism remain a critical component of every budgetary decision made by policymakers in the nation’s capital. Newly elected officials arriving in Washington should keep these federal-state connections in mind because the decisions they make about policy, spending, and taxes will have major effects on the budgets and economies of the states they represent.

Anne Stauffer directs the fiscal federalism initiative at The Pew Charitable Trusts in Washington, D.C.

This originally published on The Hill on Jan. 22, 2019.