In 2011, Wisconsin faced a severe budget shortfall. Despite previous tax increases, the state struggled financially. Newly elected Governor Scott Walker, a Republican, proposed a solution: reduce funding for local governments and school districts.
A significant portion of the state budget was used to support other jurisdictions. The reasoning was simple. Local governments possessed their own taxing and spending authorities along with elected officials who understood community needs. By reducing these redundancies, the state government aimed to control its own expenses.
The strategy proved effective. Wisconsin balanced its budget without raising state taxes or laying off state employees. Despite lower state aid to school districts, students performed well compared to other states. This fiscal approach put Wisconsin on stable financial footing, even as its leadership changed.
Walker’s plan—balancing the budget by cutting intergovernmental transfers—offers a potential model for the federal government.
Federal Government Considerations
Implementing Walker’s plan at the federal level would not necessitate copying every facet. Walker faced protests due to changes in government workers’ collective bargaining and benefits contributions. For the federal level, it would not require altering state or local employment terms.
In 2025, the federal government allocated $1.2 trillion in transfers to states, comprising 17% of its expenditures. This marks a significant increase from the 1950s when it was around 5%. Great Society programs significantly drove this funding surge.
Though President Reagan’s “New Federalism” initially reduced transfers, aid to states grew again in the 1990s. Since 1995, it has been about 15% or higher annually. In fiscal 2024, Medicaid accounted for 68.8% of federal grants to states, which states manage.
Impact on State Independence
The expansive fiscal power Washington holds over state and local activities has grown over time, with few restrictions. State politicians often regard federal funds as free money, increasing dependence on the federal government.
The portion of state revenue from federal funding rose from 22% in 1989 to 34% in 2024. Both blue and red states have relied on federal funds to address various budgetary needs, often utilizing Medicaid to boost reimbursements.
To curb the federal deficit, Congress could require states to assume more financial responsibilities. Although an immediate increase would challenge state governments, it presents an opportunity for innovation.
Potential Benefits of Greater State Responsibility
Removing the federal middleman removes the strings often tied to federal dollars, allowing states to address needs locally. Decentralization may also alleviate national political tensions, bolstering self-governance.
Currently, many states enjoy sound financial positions. Federal aid during the COVID-19 pandemic exceeded expectations, as tax collections rose for many states, boosting rainy-day funds.
Increased state responsibility enhances fiscal sustainability. States cannot print money like the federal government and usually have balanced-budget requirements. These comprehensive processes demand trade-offs, unlike the federal tendency to avoid them.
The existing system—in which the federal government collects taxes from residents and returns some funds for programs already managed by states—is inefficient. Empowering states to handle their own affairs imposes stricter budget constraints without constitutional amendments.