One of the reasons Michigan lawmakers say they can’t do away with this or that government program is because the program in question is either partially or entirely federally funded. Whenever anyone suggests that the state voluntarily do without such programs, the response is incredulity: “Why turn down our share of federal funds? This is essentially free money. We should take it while we have a chance.”

At 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 if we expect to pare down the size and scope of state government and get Michigan’s budget under control.

Over the past 30 years — since the beginning of Lyndon Johnson's “Great Society” — federal funding as a percentage of Michigan's total budget has increased dramatically. Indeed, for fiscal year 2003, federal funds accounted for over 29 percent of the total budget. The state of Michigan cannot neglect such a large portion of its budget and expect to reverse the trend toward ever-larger and ever-more intrusive government. Those who believe that state government can and should be significantly downsized must realize that to do this, lawmakers cannot exempt programs that are both funded from the general fund and from federal revenues.

Indeed, the quest for federal matching funds is part of the reason Michigan has a budget deficit. If we must spend state money to "get" federal money, but we don't have enough state money, then accepting federal funds actually causes us to overspend. To put this in easily understandable personal terms, if you had a personal financial crisis and had to cut spending to solve it, how would it help if your uncle offered to give your neighbors each a thousand dollars on the condition that you only give them a hundred?

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 this 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 in any other state.

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. But Michigan citizens also are U.S. citizens. They pay federal income taxes, federal capital-gains taxes, as well as numerous other federal taxes. It is these taxes that pay for Michigan’s supposedly “free” federally funded programs.

For example, consider an item in Michigan’s budget for fiscal year 2003, called “Employment placement and training services.” This program funds a host of activities carried out by the Michigan Department of Career Development. In fiscal year 2003 this program was funded at $70,836,500, with more than $58 million coming from the federal government and $7.9 million from the state’s General Fund.

In its budget analysis released in March, “Recommendations to Strengthen Civil Society and Balance Michigan's State Budget,” the Mackinac Center for Public Policy recommended eliminating this program on the grounds that the activities it funds “either duplicate the services provided by, and in many cases actually harm, private for-profit and nonprofit organizations.”

In this case the state would have to refuse more than $58 million in federal funds. But does that actually mean the state would be worse off? Of course, not. These taxes unfairly subsidize government job search and placement services that duplicate and displace the efforts of private, for-profit staffing services in Michigan.

In this instance, refusing federal funds would level the competitive playing field for Michigan businesses, save state taxpayer dollars, and underscore the importance of our civil institutions. The actual dollar savings for Michigan would equal the $7.9 million from Michigan’s General Fund, plus roughly one-fiftieth of $70,836,500, or around $9.3 million. But the true savings over time, not only in dollars, but in a stronger ability to place Michigan’s unemployed into available jobs, would be far more substantial.

By setting such an example for other states, Michigan could help the federal tax burden of Michigan citizens and, in the process, contribute to sustained economic growth. If the Legislature and Gov. Granholm are serious about getting Michigan’s fiscal house in order, they would do well to place all government programs operating in Michigan “on the table” for downsizing or elimination, even those funded by the federal government.

# # #

Note: Michael LaFaive is fiscal policy analyst for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich.