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Federal aid fuels spending by states
Yahoo News/USA Today
By Dennis Cauchon, USA TODAY
February 17, 2006

State and local governments have used big increases in federal aid to help cover higher spending since 2000, a move away from the tradition of using local taxes to pay for local programs.

The shift could accelerate this year as about two dozen state legislatures consider tax cuts before the November elections.

State and local government spending was $6,214 per capita in 2005 - up about $675 since 2000 in inflation-adjusted dollars, according to a USA TODAY analysis of data from the Bureau of Economic Analysis and the Census Bureau. Federal money was the biggest factor in the increase, accounting for one-third of the rise. Borrowing ranked second. (Related story: Cash influx aids wide range of services)

The strategy of spending more and taxing less makes states vulnerable to federal cost cutting and rising borrowing costs. President Bush's new budget proposes increasing state and local aid just 2% next year to $459 billion in an effort to trim the federal deficit. Still, that's up from $285 billion in 2000.

Bush and the Republican-led Congress have increased federal aid to state and local governments twice as fast as in the last five years of the Clinton administration. About half the additional aid has gone to Medicaid, the health care program for the poor.

But federal money has increased in many other categories. It has been used to hire more reading teachers, vaccinate children and pay local police. The aid includes a record amount, more than $53 billion in 2004, for specific projects in lawmakers' districts.

State governments increased their reliance on federal money from 26% of their revenue in 2000 to 31% in 2004, the most recent year available, according to the Census Bureau. States say money from Washington is crucial to their operations and helps offset costly federal requirements in education, health care and other programs.

"Federal dollars are absolutely vital to lifting people out of poverty. There's no way a state like Kentucky could make up the difference," says state auditor Crit Luallen. She expects Kentucky to receive $7.3 billion in federal money next year, up from $4.8 billion in 2003.

State and local governments experienced slow growth in tax revenue in 2001 and 2002 during an economic downturn. State tax collections are soaring now, setting the stage for tax cuts.

Some budget watchdogs say the federal government, which faces $400 billion in annual deficits, is promoting undisciplined spending by states.

"States are dumping more and more expenses on federal taxpayers," says Brian Riedl, a budget analyst at the conservative Heritage Foundation. "States love to spend federal money because state voters don't pay for it - or at least think they don't pay for it."

Adds Maya MacGuineas, president of the Committee for a Responsible Budget, a group of Republican and Democratic budget experts concerned about deficits, "States that proceed with tax cuts will be squeezed when the federal government reduces spending, as it ultimately will have to do."