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Glenn Hegar
Texas Comptroller of Public Accounts
Glenn Hegar
Texas Comptroller of Public Accounts
Glenn Hegar
Texas Comptroller of Public Accounts

Federal Funding in TexasA Vital Part of the State Budget

By Kevin McPherson and Bruce Wright

Federal funding plays an essential role in state finances, supporting a variety of programs and services. In fiscal 2016, for instance, nearly 20 percent of federal tax dollars went directly to state governments as grants to pay for programs in education, health care and infrastructure.

Texans sent the federal government $261 billion in taxes in 2016, and the state government received $39.5 billion in grants in return, or about 15 percent of our total federal tax tab. Those grants were the state’s second-largest revenue source, providing more than a third of its net revenue in that year. (State taxes, by contrast, supplied nearly 44 percent.)

But what determines how much we receive, and where does it go?

How Federal Funding is Distributed

According to the Office of Management and Budget (OMB), the federal government received more than $3.2 trillion in total taxes in 2016. Of that, $1.5 trillion or 47 percent came from personal income taxes, which in 2018 are expected to comprise more than half of all federal revenue for the first time in our nation’s history.

After taxes are collected, they’re appropriated to various federal agencies, some of which then allocate funding to individuals and state and local governments.

The largest share of federal aid represents direct payments to individuals for Social Security, disability, Medicare, unemployment compensation and other programs. But these payments don’t flow through state governments.

Some grants to states are based on formulas, such as block and categorical grants, while others are awarded on a competitive basis, such as highway project grants. Block grants such as Temporary Assistance for Needy Families (TANF) have relatively few “strings” attached, meaning states have broad latitude in using the money; categorical grants, such as those for the Head Start program, are more restrictive. States must follow each grant program’s guidelines to continue receiving funds. And some grant programs, such as Medicaid, require the state to contribute matching funds.

Much of federal funding to states is driven by population. The most populous states receive more money simply because they’re larger and have more people in need of services. For this reason, federal funding to the states often is examined on a per capita basis.

Federal funding also can vary due to each state’s specific circumstances. Military bases, national parks, federal offices and the occurrence of natural disasters all can help determine how much federal funding a state receives in any given period.

The different types of grant programs also can account for variability in federal funding. Grants for community development usually rise after natural disasters, while competitive grants by their very nature mean that some states won’t receive as much as others.

Medicaid, one of the largest aid programs, is linked to personal income. Each state’s share is determined by its Federal Medical Assistance Percentage (FMAP), set annually based on per capita income. By federal law, the FMAP must be at least 50 percent; for federal fiscal 2018, Texas’ FMAP is 56.88 percent, meaning that the federal government will pay a larger share of Texas’ Medicaid funding than the state. Similarly, poverty rates determine needs-based funding for programs such as TANF.

Comparing the States

OMB reports state governments received federal grants totaling more than $661 billion in 2016. The Comptroller’s most recent Annual Cash Report estimated that 35.5 percent of Texas’ net revenue for fiscal 2016 came from the federal government (Exhibit 1).

Exhibit 1: Percentage of Net Revenue by Source, All Funds Excluding Trust, Fiscal 2016

Category Net Revenue
Total Tax Collections 43.6%
Federal Income 35.5%
Licenses, Fees, Fines and Penalties 10.4%
Other 5.4%
Net Lottery Proceeds 2.0%
Interest and Investment Income 1.2%
Land Income 1.0%
Settlements of Claims 0.6%
Sales of Goods and Services 0.3%

Source: Texas Comptroller of Public Accounts

From 2000 to 2015, federal funds comprised between 29.9 and 40.8 percent of all Texas state revenue, and averaged about 34 percent (Exhibit 2). The federal share in all states tends to rise during recessionary periods and decline in better economic times. In each year of the period, however, Texas’ reliance on federal funds was higher than the average among states.

Exhibit 2: Federal Share of State General Revenue, Texas vs. 50-State Average, 2000-2015

Year Texas Share 50-State Average Share
2000 29.9% 26.3%
2001 29.8% 27.5%
2002 33.4% 29.9%
2003 35.5% 30.9%
2004 34.8% 31.3%
2005 34.1% 30.0%
2006 33.3% 28.6%
2007 31.1% 28.1%
2008 29.8% 27.8%
2009 35.7% 31.8%
2010 40.8% 35.5%
2011 39.4% 34.7%
2012 34.5% 31.7%
2013 32.6% 30.4%
2014 31.8% 30.7%
2015 33.4% 31.9%

Source: Pew Charitable Trusts

According to Pew Charitable Trusts, in fiscal 2015 Louisiana was the most dependent on federal funds, at 42.2 percent of total revenues, while North Dakota had the lowest at 18.4 percent.

On a per capita basis, however, the picture looks considerably different. In fiscal 2016, Texas ranked 43rd among states in federal funds per resident, receiving $1,493, well below the national average of $1,871 (Exhibit 3).

Exhibit 3: Federal Grants Received Per Capita, Fiscal 2016

Top 10 States Per Capita Amount
Alaska $3,700
New Mexico $3,225
Vermont $3,100
Wyoming $3,044
New York $2,854
West Virginia $2,699
Kentucky $2,671
Rhode Island $2,556
Oregon $2,492
Arkansas $2,466
Bottom Ten States Per Capita Amount
Virginia $1,081
Utah $1,203
Florida $1,228
Nebraska $1,287
Kansas $1,297
Georgia $1,372
Nevada $1,477
TEXAS $1,493
Colorado $1,496
New Hampshire $1,499

Source: Federal Funds Information for States

What do the federal grants pay for?

Today, health care dominates federal grants to state and local governments. In 1980, health care received only 17.2 percent of these grants, but this share rose to 43.7 percent by 2000 and 60 percent by 2016 (Exhibit 4).

This increase has been driven largely by rising costs for Medicaid, which accounts for more than 90 percent of all federal health care spending.

Exhibit 4: Federal Grants to State and Local Governments by Category, 2000-2016

Percent by Year
2000 43.67% 24.02% 12.83% 11.27% 8.21%
2001 43.73% 23.88% 12.6% 11.5% 8.29%
2002 44.96% 23.1% 12.7% 11.62% 7.62%
2003 44.73% 22.26% 13.27% 10.56% 9.18%
2004 46.59% 21.1% 13.3% 10.18% 8.83%
2005 46.22% 21.23% 13.37% 10.13% 9.03%
2006 45.46% 20.69% 13.94% 10.75% 9.15%
2007 46.94% 20.5% 13.09% 10.8% 8.67%
2008 47.26% 20.83% 12.77% 11.1% 8.04%
2009 49.87% 19.18% 13.75% 10.3% 6.89%
2010 47.69% 18.93% 16.04% 10.02% 7.31%
2011 48.26% 18.73% 14.69% 10.05% 8.27%
2012 49.26% 18.84% 12.51% 11.16% 8.23%
2013 51.82% 18.71% 11.48% 11.08% 6.91%
2014 55.47% 17.48% 10.48% 10.79% 5.78%
2015 58.95% 16.19% 9.69% 9.74% 5.43%
2016 60.03% 15.85% 9.21% 9.66% 5.24%

* Includes social services and training and employment programs.
Source: U.S. Office of Management and Budget

In Texas, more than 95 percent of federal grants received in fiscal 2016 went to three functional areas of government: health and human services; public and higher education; and business and economic development, primarily highways and transportation (Exhibit 5).

Exhibit 5: Federal Grants to Texas by Category, Fiscal 2016

Dollar Amounts in Millions
Category Grant Amount Percent of Total
Health and Human Services $43,156 63.5%
Business and Economic Development $11,132 16.4%
Agencies of Education $10,443 15.4%
Natural Resources $1,745 2.6%
Public Safety and Criminal Justice $741 1.1%
General Government $716 1.1%
Other $69 0.1%

Source: Legislative Budget Board

Medicaid received more funding than any other single program — $24 billion in fiscal 2016, according to the Legislative Budget Board, or more than half of all federal funding for health and human services in Texas.

The National Highway Performance Program, which builds and maintains roads in the National Highway System, received the second most grant funds in Texas, with $2 billion. FN

To learn more about federal funding in Texas, visit the Legislative Budget Board and read Top 100 Federal Funding Sources in the Texas State Budget. (PDF)

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