Which states rely the most on federal funds?

Currently, the Trump Administration is in a battle with the courts to freeze federal spending of billions of dollars.

Acting Office of Management and Budget Director Matt Vaeth said the goal of the freeze is to reduce waste by reducing use of “Federal resources to advance Marxist equity, transgenderism, and green new deal social engineering policies.” Programs targeted by the freeze include foreign aid, grants to non-governmental organizations, diversity, equity, and inclusion (DEI) initiatives, and environmental programs. Groups that have been hit swiftly by the funding freeze are farmers and rural businesses invested in renewable energy projects and global humanitarian efforts.

Another constituency at risk with federal spending in turmoil is state and local government. In our federal system, state and local governments rely on the federal government for a large proportion of their funding. This amount ranges, though, according to the Census Bureau. For instance, North Dakota receives less than 20% of their state revenue from the federal government. On the opposite side of the spectrum, Alaska receives nearly 40% of their revenue from the federal government.

State Total State Revenue Revenue from Federal Government Percentage Federal
Alaska $ 15,667,334.00 $    6,160,971.00 39%
Kentucky $ 57,911,686.00 $    22,085,818.00 38%
Vermont $ 11,232,873.00 $    4,237,732.00 38%
West Virginia $ 22,420,270.00 $    8,389,354.00 37%
District of Columbia $ 20,055,882.00 $    7,464,202.00 37%
Arkansas $ 37,010,485.00 $    13,633,748.00 37%
Louisiana $ 59,715,604.00 $    21,879,544.00 37%
Arizona $ 89,076,443.00 $    32,415,044.00 36%
South Dakota $ 10,549,378.00 $    3,771,835.00 36%
Rhode Island $ 16,093,147.00 $    5,573,332.00 35%
Mississippi $ 35,802,048.00 $    12,256,551.00 34%
Montana $ 13,725,435.00 $    4,657,041.00 34%
Missouri $ 68,260,987.00 $    21,715,343.00 32%
New Mexico $ 42,233,407.00 $    13,421,271.00 32%
Oklahoma $ 48,271,122.00 $    15,307,503.00 32%
Alabama $ 64,777,600.00 $    20,229,466.00 31%
Maine $ 18,317,563.00 $    5,666,935.00 31%
Michigan $ 122,032,979.00 $    37,439,964.00 31%
Indiana $ 85,344,253.00 $    25,378,951.00 30%
Pennsylvania $ 171,577,131.00 $    50,519,392.00 29%
Ohio $ 148,265,683.00 $    43,575,300.00 29%
Oregon $ 68,290,949.00 $    19,908,513.00 29%
Nevada $ 37,682,330.00 $    10,825,535.00 29%
Maryland $ 89,612,692.00 $    25,199,517.00 28%
North Carolina $ 129,216,170.00 $    36,222,639.00 28%
Idaho $ 20,594,801.00 $    5,656,225.00 27%
South Carolina $ 68,387,664.00 $    18,443,484.00 27%
Delaware $ 15,569,155.00 $    4,166,816.00 27%
Illinois $ 182,611,763.00 $    48,785,747.00 27%
New York $ 442,057,068.00 $    117,525,817.00 27%
Florida $ 242,920,560.00 $    63,400,621.00 26%
Massachusetts $ 115,529,854.00 $    30,043,910.00 26%
New Hampshire $ 15,874,696.00 $    4,112,203.00 26%
Texas $ 346,395,677.00 $    88,920,949.00 26%
Minnesota $ 85,328,127.00 $    21,901,865.00 26%
Tennessee $ 76,677,348.00 $    19,651,768.00 26%
Wisconsin $ 69,139,173.00 $    17,456,814.00 25%
Iowa $ 46,012,142.00 $    11,209,676.00 24%
Washington $ 120,010,103.00 $    28,146,897.00 23%
Georgia $ 112,024,120.00 $    26,207,436.00 23%
Connecticut $ 53,800,618.00 $    12,192,573.00 23%
Hawaii $ 24,781,244.00 $    5,585,436.00 23%
Kansas $ 39,440,642.00 $    8,795,251.00 22%
Colorado $ 83,113,844.00 $    18,380,857.00 22%
Nebraska $ 30,506,889.00 $    6,704,898.00 22%
California $ 739,308,929.00 $    161,662,728.00 22%
New Jersey $ 140,427,448.00 $    30,659,868.00 22%
Utah $ 46,530,335.00 $    10,138,408.00 22%
Virginia $ 111,838,708.00 $    23,433,620.00 21%
North Dakota $ 14,589,875.00 $    2,818,355.00 19%

From this table, you can get an idea of which states rely the most on federal funding. For instance, let’s consider Alaska. Between national parks, conservation land, and military bases, 60% of Alaska’s land is federally owned. This not only requires federal funds to maintain this land, it also limits Alaska’s state and local governments’ ability to raise revenue through property taxation, which nationally makes up 27% of total state and local tax revenue.

Alaska also requires more federal investment due to its small population of less than a million people flung over the area of the country’s largest state. This requires high per-capita infrastructure costs on roads, utilities, and airports. On a recent project I did where I had to dig through a list of each airport in the United States, I recall seeing line after line of Alaska airports. This is because flying is often the most economical mode of travel due to the size of the state. And airports usually require federal funding to operate. The low population density also requires the federal government to invest in transportation, broadband, and other rural infrastructure.

Alaska also has a unique revenue structure compared to other states. Due to its vast oil resources, the state relies heavily on oil revenues, to the point that they share with New Hampshire the distinction of being one of two U.S. states without either a state income tax nor a state sales tax. The volatility of oil revenues and their lack of other state taxes make Alaska especially reliant on federal revenues for state budget stabilization.

Alaska is unique in the number of communities they have that are not connected to the rest of the continent by roads. Being off the road system requires goods be shipped in via air or water transportation, which drives up the cost of goods and services. This increases the state’s demand for federal health care, food assistance, and energy programs. In the event that Greenland became a part of the United States, it would suffer from similar problems.

Alaska relies on federal programs due to unique elements of its economy. Native American and Alaska Native programs bring federal dollars into the state. Alaska’s strategic Arctic location makes it a hub for military bases like Anchorage’s Joint Base Elmendorf-Richardson (JBER), Fort Wainwright in Fairbanks, and Fort Greely near Delta Junction. Its large coastline gives it a large Coast Guard and fishery management system and its high healthcare costs lead to high spending on Medicaid and health care subsidies.

Alaska experiences severe weather and earthquakes, making it a receipt of federal disaster assistance. Coastal communities are dealing with climate change, which makes the state a recipient of support for climate adaptation and relocation.

All of these above factors make Alaska one of the top states per capita for federal spending.

The two states that come after Alaska are two other rural states that are very different from it: Kentucky and Vermont.

Kentucky is a rural state with high poverty rates and a relatively low median income. This leads to higher reliance in Kentucky on programs like Medicaid, SNAP, and TANF. It also has a large population requiring medical assistance, which contributes to federal spending on Medicaid. Kentucky also receives educational support from the federal government in low-income areas.

Both Vermont and Kentucky, as rural states, deal with a lot of the same dynamics as Alaska. They have small populations per capita, giving them smaller tax bases and large areas to maintain services across. Roads, healthcare, and infrastructure cost more to provision per capita in rural areas than in urban areas. 

Vermont has some health care dynamics that lead to higher federal costs. One-third of the state’s population is enrolled in Medicaid and Vermont has one of the oldest populations in the United States, leading to higher medical costs. The state receives rural assistance in the form of transportation and infrastructure investment, agricultural subsidies, and energy efficiency projects.

Vermont has budget focuses that bring in federal dollars. Its investment in education, social services, and sustainability and conservation programs bring in federal dollars to help support them in those efforts. Vermont was a large recipient of COVID-19 relief funds. Funds supporting public health, hospitals, and economic recovery helped bolster Vermont’s economy during those years.

What does this tell us about states that rely on federal funds? Well for one, they are rural. Vermont, Kentucky, West Virginia, and Arkansas are all in the top 5 for highest percentage of revenue coming from federal sources and are also in the top 10 for most rural states. They also tend to be high-poverty: Kentucky, West Virginia, Arkansas, and Louisiana are in the top 10 states for reliance on federal funds and for poverty rates.

In an era of uncertainty around federal funding what we do know is this: different states will be impacted by uncertainty more than others depending on their reliance on federal funds.