Policy Position

Federal Aid Dependency

in Budget, Taxation, and the Economy
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Every state in the nation relies on the federal government for some portion of its budget. Over the last decade, many states have developed a higher reliance on federal funds than they have had historically, and North Carolina is no exception. For the fiscal year ending June 30, 2013, North Carolina spent $20.8 billion in federal grants, which is a 47 percent increase in inflation-adjusted dollars over the last 10 years.

Reliance on federal aid can cause lasting problems for state budgets and lawmakers. Federal funding incentives often cause the state to engage in programs or projects it might otherwise choose to avoid. After years of reliance on federal aid, North Carolina lawmakers find that federal edicts drive up the cost of government services. Even contractors who work with state agencies are vulnerable to these onerous federal requirements, which often increase the cost of their work to the state.

North Carolina has become too dependent on federal aid, which leaves the state vulnerable when Washington cuts federal funding to the state in the future. Whether it’s due to sequester, shutdown, or unsustainable spending, North Carolina needs to reduce its dependence and develop a plan to operate when this funding goes away. The question is not if the federal aid will go away, but when.

Key Facts

  • “Free” federal money is not really free. Every tax dollar Washington sends to North Carolina is a dollar taken from taxpayers in North Carolina and the other states. Economists have found that federal subsidies to the states lead to higher state taxes and spending in the long run, because the federal “seed money” creates a demand for more government with current and future commitments.
  • According to the most recent NC Auditor’s report, the state has received an average 42 percent of its total budget from the federal government over the last ten years, with the exception of 2010 and 2011, when the American Recovery and Reinvestment Act (the so-called “stimulus”) helped to boost federal funding to over 50 percent of the state’s total budget.
  • In the 2012-13 fiscal year, federal funds made up 40 percent of the state’s total budget, more than $20.8 billion, mostly in the areas of Medicaid, social services, education, and unemployment benefits.
  • North Carolina has set a powerful precedent by not accepting the federal funding to expand Medicaid as well as rejecting the federal government’s extension of unemployment benefits. Both of these decisions will lower the state’s dependence on the federal government and should further reduce dependency on the federal government as Congress passes new legislation.


  1. Study and assess the risk of a significant reduction in the receipt of federal funds. Also establish a process for making a revenue estimate of the amount of federal funds that the state expects to receive in the near future.
  2. Discuss methods of preparing for, and responding to, a significant reduction in the receipt of federal funds to North Carolina.
  3. Implement measures to respond to a significant reduction in the receipt of federal funds by the state, including a contingency plan and increasing the amount in the rainy day fund.



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