The share of states’ revenue made up by federal dollars held steady at roughly one-third in fiscal year 2017, with nearly equal numbers of states posting upticks and drops in the percentage of their money coming from federal funds. Overall, the U.S. government provided 32.4 percent of all the revenue collected by states in fiscal year 2017—down slightly from 32.6 percent a year earlier.
A slim majority of states—26—saw declines in the share of their revenue coming from federal dollars in fiscal 2017, including states that accepted as well as states that did not accept federal money to expand eligibility for Medicaid health care coverage. Still, federal funds were at their fourth-highest level in more than 50 years as a percentage of 50-state revenue, based on data going back to 1961, underscoring the significant role that federal dollars play in financing state government.
Nationwide, states collected an additional $17 billion, or 2.8 percent more, in federal dollars than a year earlier amid a slowdown in the flow of health care grants—the largest portion of federal aid to states. It was the smallest increase since a group of states first began receiving extra Medicaid funding in 2014 after opting to cover newly eligible low-income adults under the Affordable Care Act (ACA). While federal funds rose, total state revenue—including taxes and other sources, such as public university tuition, tolls, and lottery receipts—increased in fiscal 2017 at a greater rate: 3.2 percent.
Fiscal 2017 marked the first time that the 31 states with expanded Medicaid coverage then in effect had to pick up 5 percent of the costs of insuring enrollees who became eligible under the ACA, though it was just for the second half of the fiscal year, which ends in June for most states. Under the Medicaid provisions in the ACA, the federal government from January 2014 to December 2016 reimbursed states for all costs incurred by the expansion population. States gradually will become responsible for 10 percent of those costs by Jan. 1, 2020. The federal government’s reduced share of Medicaid expansion costs combined with slower growth in overall Medicaid enrollment likely contributed to the slowdown in federal health care grants to states.
The federal share of state revenue reflects how much funding states receive from the federal government to help pay for public services such as health care, education and training, transportation, and other infrastructure. (See “Federal Spending Decisions Affect State Budgets.”) The indicator measures the combined effects of swings in state and federal funds. Changes in either revenue source affect the ratio of federal to total dollars. A higher or lower percentage does not necessarily indicate a problem for state budgets.
Historically, the federal share of 50-state revenue has ranged from about one-quarter to one-third. The highest shares occurred just after the Great Recession, when a temporary influx of federal economic stimulus dollars and falling state tax revenue caused the federal share of states’ revenue to reach 35.5 percent in fiscal 2010 and 34.7 percent in fiscal 2011. The third-highest share was in fiscal 2016, largely because of growth in Medicaid grants to states. Medicaid accounts for about two-thirds of federal grants to states.
The role of federal dollars in state finances has been expanding. The fiscal 2017 share of 32.4 percent was 2.2 percentage points higher than the 20-year average of 30.2 percent since 1998, and more than 7 percentage points greater than the 25 percent average from 1978 to 1997, based on rounded data.
Federal shares vary across the country. Fiscal 2017 data show:
Federal dollars remained the second-largest source of states’ revenue in fiscal 2017, accounting for about $639 billion, or about a third of the $1.97 trillion collected by state governments. Tax collections are states’ leading revenue generator and reached $943 billion in fiscal 2017, or nearly half of state revenue.