A new study from economists Russell Sobel and George Crowley finds that federal subsidies to the states results in higher future state taxes. Specifically, the authors find that future state taxes increase by between 33 and 42 cents for every dollar the states receive in federal subsidies. A similar effect was found for federal and state aid to local governments.
This finding has important implications for state fiscal policy considering the recent rise in federal subsidies to state and local government:
[S]pending programs create their own new political constituency, in that the government employees and private recipients whose incomes depend on the program, and their families, will use political pressure to fight against any discontinuation of the program…With more government funds comes additional fights over political resource allocations, and an expansion in the rent-seeking industry occurs…[F]ederal grants may result in an expansion in state lobbying activity that is successful in gaining influence over future state spending.