The share of total revenue made up by federal dollars declined in 37 states during fiscal 2019. Nonetheless, the U.S. government has provided roughly one-third of all revenue collected by states for a decade. Since the COVID-19 pandemic led to a historic contraction in the U.S economy in February 2020, the federal government has pumped billions of dollars into states’ budgets to offset the increased costs of pandemic response and help stabilize their finances—infusions that are expected to increase the share of federal funds during fiscal 2020 through 2024.
In fiscal 2019, 31.4% of states’ revenue came from federal dollars, a slight dip from 32% a year earlier. Nationwide, states collected an additional $21 billion, or 3% more, in federal dollars than in fiscal 2018, while total state revenue—including taxes and other sources, such as public university tuition, tolls, and lottery receipts—increased at a higher rate of 4.9%, or nearly $104 billion. The spike coincided with the first full fiscal year of implementing the 2017 federal Tax Cuts and Jobs Act, which led to higher state tax bills for some residents and businesses because of the way state and federal tax codes are linked, unless states counteracted the changes.
Still, federal funds were among their highest level as a percentage of 50-state revenue in more than a half century, based on data going back to 1961, underscoring the significant role that federal dollars play in financing state government.
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 “Pandemic-Related Funding Boosts Federal Grants to States.”) 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% in fiscal 2010 and 34.7% in fiscal 2011.
Medicaid accounts for about two-thirds of federal grants to states and recently has been a factor in the long-term growth of the federal share, prior to the COVID-19 pandemic. The third-highest percentage of the federal share of state revenue was in fiscal 2016 (32.7%), due in part to the 30 states participating in the Medicaid expansion under the Affordable Care Act, as well as an overall increase in Medicaid enrollment. Under the provisions in the act, the federal government reimbursed states for 100% of Medicaid costs incurred by the expansion population from January 2014 to December 2016. As of November 2021, D.C. and the 38 states that currently have expansion programs are responsible for covering 10% of those costs in calendar year 2020 and beyond, after most of those states gradually assumed a larger role.
Looking ahead to fiscal 2020 through 2024, the share is expected to swell again as the federal government awarded hundreds of billions of dollars in aid to states to combat the widespread fiscal and economic impacts of the COVID-19 pandemic and bolster public infrastructure spending. In response to the pandemic specifically, states have been awarded over $500 billion in direct aid from the federal government—more than states received during the entire Great Recession. Since March 2020, federal COVID-related aid to states has focused on enhanced support for Medicaid costs, pandemic-related expenses, and funds to help offset revenue declines and invest in water, sewer, and broadband projects, among other things.
Over time, the role of federal dollars in state finances has been expanding. The fiscal 2019 share of 31.4% was 0.6 percentage points higher than the 20-year average of 30.8% since 2000 and 6.4 percentage points greater than the average between 1980 and 1999, which was 25%.
Federal shares vary across the country. Fiscal 2019 data shows:
- Louisiana reported the highest percentage of state revenue from federal funds at 44.8%.
- In addition to Louisiana, the percentage of state revenue from federal funds was roughly twice as great in Montana (43.7), Alaska (42.7), Mississippi (42), Wyoming (41.2), and, Arizona (40.2) —the states where federal shares were highest—as in Hawaii (20.1), North Dakota (20.5), and Virginia (20.7), the states where the shares were lowest.
- Federal funds accounted for the largest revenue source—rather than state tax dollars—in four states: Alaska, Louisiana, Montana, and Wyoming.
- In fiscal 2019, Connecticut had the biggest percentage-point gain in the federal share of state revenue, up 3.3 points from the previous year. The state with the steepest decline—of 6.3 percentage points—was New Mexico.
Federal dollars remained the second-largest source of states’ revenue in fiscal 2019, accounting for about $692 billion, or about a third of the $2.2 trillion collected by state governments. Tax collections are states’ leading revenue generator and reached $1.1 trillion in fiscal 2019, or nearly half of state revenue.
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