Rich state, poor state, red state, blue state: who gets the most from federalism?

Countering the conventional wisdom on who depends on federal funding

WalletHub recently took a look at the 50 states to compare their intake of federal funding relative to state revenue, taxes paid to the federal government, and the states’ share of federal jobs. The idea was to figure out which states benefit most from federal dollars.¹

Conservatives have long railed against federal “handouts” and the strings attached to receipt of federal dollars. When the bipartisan Infrastructure Investment and Jobs Act was passed in 2021, allocating more than $35 billion to Texas for infrastructure upgrades, Texas Governor Greg Abbott cautioned state agency leaders about accepting the money, urging them to consider the requirements and implications. There has even been talk of Texit, with the state seceding from the United States, because of frustration with the federal government.

Republicans also claim to be champions for business-led growth, arguing that government needs to embrace the private sector and get out of its way. For instance, the Trump administration proposed a “skinny budget” in March 2017 that made cuts to programs supporting small businesses on the grounds that the private sector could better provide those services.

So, you might be forgiven for assuming that policymakers in pro-business states who like to rail against Washington DC would rely less on federal dollars. But the opposite is true. According to Wallethub, 8 of the top 10 most dependent states were red (voted for Trump in the 2020 election), while 7 of the 10 states identified as least dependent were blue. These results contradict the conventional wisdom that conservative states reject reliance on federal support.

If you are a close observer of fiscal federalism, this result is actually not all that surprising. One simple explanation is the blue states are typically richer, and generate more tax revenue relative to red states. There is a negative correlation between state GDP and dependency on federal dollars.

Source: Washington Post

State spending per person is actually relatively balanced between red and blue states. But it is difficult for red states to overcome the tax contribution gap. To give a sense of the size of the gap, the average resident in Connecticut, the biggest per person tax contributor, sent the federal government $17,193 in taxes in 2021, about three times as much as the average resident in bottom-ranked Mississippi.

Source: Washington Post

Additional analyses that we performed to understand the WalletHub rankings surfaced more nuance and surprise.

First, conservative states’ greater dependency on federal dollars arises despite the distribution of federal employment, which is lower, on average, in red states, while higher rates of federal civilian employment are associated with less federal dependency and better business climates among the states.

Red state governors like to establish their pro-business bona fides. The claim that “our state is open for business" has become a political cliché, sometimes bordering on the ridiculous.

“Pro-business" in red state parlance can be boiled down to low taxes and less regulation. But a more sophisticated business climate ranking that assessed business friendliness also considered workforce quality, infrastructure, education, technology and innovation, the cost of doing business, and other factors. Using those metrics, blue states, in fact, had better business climates than red states. (Arkansas ranked 44th out of 50, California was 25th).

Despite receiving more resources from the federal government, conservative states are less generous in their social welfare benefits for state residents. Federal funding for monthly grants to the poor (Temporary Assistance for Needy Families, or TANF) is distributed to states in block grants that allow states to determine the level of monthly benefits provided to families that qualify. Red states provide substantially lower monthly benefit payments to poor families.

Moreover, we find that lower TANF benefits are negatively correlated with the business climate, implying that this does not help with business friendliness. Perhaps not surprisingly, conservative states also have higher rates of child poverty and higher rates of residents without health insurance. The top five states in terms of the percent uninsured—Mississippi, Texas, Georgia, Tennessee, and Kansas—have not expanded the federal Medicaid program that helps to cover the healthcare costs of low-income families.

Months away from elections in which we will choose new state and national leaders, these analyses underscore an important point—the government leaders most opposed to public benefits and federal largesse (in conservative states) represent the people who most rely on and could benefit from them.

Federal funds are typically allocated to states to serve needs that enhance societal good or to redistribute resources to address inequities. A prior analysis in the Washington Post points out that higher poverty, lower education, less economic innovation and higher disability rates are all associated with higher receipt of federal dollars. As red states lag on these metrics, more money flows in from the federal government.

However, policymakers in red states often make it harder to access federal benefits flowing to their states. For example, former Kentucky Governor Matt Bevin developed a plan to impose work requirements as a condition for qualifying for Medicaid coverage, despite research showing it would cost more to implement than any savings that would be yielded. After Bevin lost his bid for re-election, this plan was rescinded via executive order by the current Democratic Kentucky Governor, Andy Beshear. Still, more Governors in red states are embracing Medicaid work requirements, despite well documented problems with them in states like Arkansas. Georgia’s alternative to Medicaid expansion includes work requirements. Thus far, the state has spent at least $26 million, but almost all of that money has gone to administrative and consulting costs, while just 3,500 people have received the insurance.

Political ideology, and more specifically, suspicion and distrust of federal government enflamed by conservatives, drives a gap between what people perceive the federal government is doing for them, and how it is actually helping them. The political scientist Suzanne Mettler has warned about the basic problems that democracies face if citizens are unable to see how the government is helping them. The ideology of red state politicians appears to compound that problem. More conservative ideology at the state level is associated with lower trust in government. Politicians in red states disparage a federal government that is actually providing them greater help relative to their blue state neighbors. Those calling for Texas to leave the union are probably unaware that federal dollars count for about one-third of the state government budget, and every Texan would have to kick in an extra $9,000 in tax dollars every year to close the gap. Given that those complaining about the federal government also tend to be anti-tax, how many want really want to make that choice?

Maintaining such views while taking federal dollars might seem like hypocrisy, but it beats the alternative, which is a toxic anti-federalism that leads red state policymakers to refuse resources that their citizens truly need. Just this year, politicians in 14 red states have turned down federal food aid for low-income families. In Tennessee, state legislators advanced a proposal to reject $1.9 billion in federal Title I funds from the U.S. Department of Education for the state—which are very flexible and support school districts in more effectively meeting the needs of their economically disadvantaged students—despite the fact that Tennessee’s child poverty rate is in the top 10 (highest) of the states.

As U.S. voters contemplate who they will select to lead federal and state governments this election year, we encourage them to move beyond distracting ideological appeals and inaccurate framings about who benefits from federal dollars. Instead, just look at the facts about how voters are served by their federal and state governments and benefit from the funds redistributed to them.

Guest co-author for this piece, Carolyn Heinrich, is a University Distinguished Professor of Leadership, Policy, and Organizations and Political Science and the Patricia and Rodes Hart Professor of Public Policy, Education and Economics at Vanderbilt University. She also holds secondary appointments as Professor of Health Policy in the Vanderbilt University School of Medicine and Professor of Economics in the Department of Economics, College of Arts and Science.

1. Apologies to Andrew Gelman and a slight mangling of his book title Red State, Blue State, Rich State, Poor State: Why Americans Vote the Way They Do.