Many of the proposals listed in this paper recommend eliminating or reducing programs that are either partially or entirely federally funded.  Undoubtedly the wisdom of such proposals will be questioned. Many people will say "Why turn down our share of federal funds?  This is essentially free money.  We should take it while we have a chance."  And on first glance this appears to be a rational reaction.  Yet, when one examines the issue more carefully, one sees that refusing federal funds is not only rational, it is imperative.

Federal Funds as a Share of the Total Michigan Budget

Over the past thirty years--since the beginning of Lyndon Johnson's Great Society--federal funding as a percentage of Michigan's total budget has increased dramatically--as demonstrated by Table 1.  Indeed, for fiscal year 1995-1996 federal funds will account for over 25% of the total budget.  If the state of Michigan is going to replace failed political society programs with civil society institutions--as advocated in the introduction--then it cannot neglect over one quarter of the total state budget.  Those who believe that state government can, and should, be significantly downsized must realize that the only way to do this is to cut programs that are both funded from the general fund and from federal revenues.

If federal funds as a percentage of the total Michigan budget continue grow during the next thirty years as they did during the last thirty, then nearly 40% of the state budget will be funded federally by the year 2025.  Are we at that time going to say that we cannot cut a program simply because its funding comes from Washington instead of from Lansing?  The answer is clearly "no." Michigan needs to set an example for all the states.  It needs to begin the long process of reclaiming power from Washington. And the only way to do that is to realize that federally funded programs must be held to the same scrutiny that non-federally funded programs are.  If they are not, real reform cannot take place in Michigan, or any other state.

From Where Do These Federal Funds Come?

One of the most destructive myths regarding federally funded state programs is that these programs are "free" to the citizens of Michigan; that they are essentially gifts. This myth ignores common sense. Michigan citizens are also United States citizens and hence subject to the same federal laws and regulations to which all United States citizens are subject--including federal tax laws. In addition to state taxes, Michigan citizens also pay federal income taxes, federal capital gains taxes, as well as numerous other federal taxes, seen and unseen. It is these taxes that pay for Michigan's supposedly "free" federally funded programs. And unfortunately the size of these taxes have increased over the last several years.

Consider that in 1900 per capita federal taxes, in 1990 dollars, were less than $100; by 1960 that number had risen to approximately $2,500; and by 1990 that figure had skyrocketed to over $4,000.[217] Similarly, federal taxes as a share of median family income rose from just 5% in 1950, to 24% in 1990.[218] What this growth in taxation has meant is that government is slowly but surely beginning to crowd out private investment and, hence, lowering America's productivity. For example, consider that in 1900, federal outlays amounted to less than 5% of total gross domestic product, but by 1993 that number had climbed to over 25%.[219] Increased federal taxation has very real effects--effects that are felt by all citizens, not just the wealthy.

The only way to lower the federal tax burdens of Michigan citizens and, in the process, help achieve sustained economic growth is to eliminate or reduce the size of the programs that these taxes fund. That means that all federal programs must be considered--including ones that purportedly benefit Michigan.

Should We Retain Harmful Programs Just Because They are Federally Funded?

As we have shown above, if Michigan is going to seriously address the problem of increased state spending and increased federal taxes it must reject the idea that federally funded programs should be exempt from budget cuts. But an even more fundamental issue must be addressed. That is, should bad programs that are federally funded be retained just because of the source of their funding?  Many would have us believe that this question is a non sequitur because to states, no federal money can ever be seen in a negative light; states should get their slice of the federal pie in whatever way they can.  Fortunately, several states have moved beyond this logic and begun to realize that federally funded programs, like all other programs, are fallible and should be judged accordingly.  Michigan should do the same.

Within the past year, four states--Alabama, New Hampshire, Montana, and Virginia--rejected federal grants from the Department of Education. The grants were intended to be used for the implementation of President Clinton's Goals 2000 program. Fearing that the program would unduly restrict the ways in which they could operate and manage their educational systems, these four states simply refused to accept the funding and the strings that went along. Michelle Easton, a member of the Virginia Board of Education, recently told a congressional committee why her state decided to take the course of action that it did:

 In exchange for the first year's Goals 2000 planning money, about a penny per day per student in Virginia, why would we agree to submit our new standards to the federal government and then to get federal permission before we made changes to these standards?  Why would Virginia want to participate in a program where the first draft of the federal history standards were so bad that the United States Senate voted 99-1 to oppose them?  Why would Virginia want to participate in a federal education program that required the state to spend time and energy developing new nonacademic standards called "Opportunity to Learn'" (OTL) standards?  Some lawyers call the OTL standards "Opportunity to Litigate," since they provide the basis for more equity-financing lawsuits against the state.[220]  

Michigan, like the four states who refused funding for the Goals 2000 program, must realize that many of the federally funded programs for which they are eligible are not always gifts ready to be taken. Many, in fact, are nearly the opposite: ill-conceived projects waiting to be unleashed upon the states. Michigan should identify these programs for what they are and eliminate them. As Paul Neal of the Center for the Study of Federalism has said, "States have different political cultures. There is no one policy from Washington that will meet all of those different preferences."[221]

Summary

If Michigan is going to achieve significant budget reform, it cannot exempt federally funded programs from the reform process. These programs should be held to the same scrutiny to which all others are held. Contrary to popular wisdom, these programs are burdens, not boons, to the Michigan taxpayer, and many of them have counterproductive effects. If it is determined that a program is unnecessary or counterproductive, it should be eliminated--regardless of whether it is funded by Washington or Lansing.

Table 1

Sources:

  Prior to FY 1994-1995, "Michigan Comprehensive Annual Financial Report." Senate Fiscal Agency.

  For FY 1994-1995, "FY 1994-1995 Appropriations Report." Senate Fiscal Agency.

  For FY 1995-1996, "FY 1995-1996 Appropriations Report." Senate Fiscal Agency.

* FY 1975-1976 was a 15 month fiscal year, beginning July 1, 1975 and ending September 30, 1976.

** The numbers for Fiscal Years 1994-1995 and 1995-1996 reflect appropriations, not actual revenues.