Rethinking Federal Transfers: Lessons from Wisconsin’s Budget Strategy
In 2011, Wisconsin faced a significant budget shortfall despite raising taxes in prior years. Newly elected Governor Scott Walker, a Republican, implemented a plan to balance the budget by cutting funding for local governments and school districts. The idea was to let local governments utilize their own taxing and spending powers, allowing the state to stabilize its budget.
This approach proved successful. Wisconsin’s budget was balanced, state taxes remained unchanged, and state workers retained their jobs. Reduced state aid for school districts didn’t adversely affect students’ performance. Relative to other states, Wisconsin students have shown strong academic results. Since then, the state’s fiscal stability has been maintained, even with changes in the governorship.
The core strategy of balancing the budget through reduced intergovernmental transfers could serve as a blueprint for the federal government. However, implementing such a plan at the federal level wouldn’t require changes in government workers’ collective bargaining or benefits contributions, unlike Walker’s plan.
In 2025, the federal government allocated $1.2 trillion to state governments, which represented 17% of federal spending, a substantial increase from about 5% in the 1950s. The escalation is largely attributed to Great Society programs. Although President Ronald Reagan’s “New Federalism” sought to cut intergovernmental transfers, the aid to states as a share of the federal budget has continued to grow. Since 1995, it remained around 15% or more annually.
In fiscal year 2024, 68.8% of federal grants to states went toward Medicaid, managed by states. Schools, roads, and law enforcement, while typically state responsibilities under the 10th Amendment, also receive significant federal funding.
Over time, federal control over state and local activities expanded, often seen by state officials as free money. Dependence on federal funds increased from 22% of state revenue in 1989 to 34% in 2024. States, however, have their own taxing and borrowing authority.
Federal solutions tend to be delayed rather than directly addressed, and shifting more financial responsibility to states could reduce the federal deficit. This shift might initially challenge state governments but could be viewed as an opportunity for states to enhance residents’ quality of life.
Removing federal involvement would eliminate conditions linked to government funding, enabling states to better meet local needs. A decentralized system might ease national political tensions and empower citizens as originally envisioned by the nation’s founders.
Currently, many states enjoy strong financial positions. The covid pandemic prompted a surge in federal aid amid concerns of reduced state tax revenue, but tax revenues actually increased for many states. Rainy-day fund balances reached near-record highs, and several states reduced income tax rates.
This shift towards greater state responsibility could promote fiscal sustainability over time. State governments, unlike the federal government, cannot print money, and most have balanced-budget mandates. Their comprehensive budget processes ensure politicians face trade-offs, contrasting with federal practices of overlooking such constraints.
The existing federal system of taxing state residents and redistributing funds back to them is inefficient and complicated. Empowering states could impose tougher budget restraints without constitutional amendments, potentially leading to more prudent spending.