Remarks delivered to the Sedgwick County Commission as it considered accepting a federal grant. The terms of this grant required that the commission hold a public hearing.
Commissioners: With regard to the wisdom of accepting this grant.
Milton Friedman said: “Nothing is so permanent as a temporary government program.”
Is this true? Or is it just rhetoric and speculation by the brilliant and freedom-loving economist?
If we ask the question: Do federal grants cause state and/or local tax increases in the future after the government grant ends? We now have an answer.
Economists Russell S. Sobel and George R. Crowley have examined the evidence, and they find the answer is yes.
Their research paper is titled Do Intergovernmental Grants Create Ratchets in State and Local Taxes? Testing the Friedman-Sanford Hypothesis.
The difference between this research and most is that Sobel and Crowley look at the impact of federal grants on state and local tax policy in future periods, not just the present period.
This is important because, in their words, “Federal grants often result in states creating new programs and hiring new employees, and when the federal funding for that specific purpose is discontinued, these new state programs must either be discontinued or financed through increases in state own source taxes.”
The same remarks apply to local governments like counties and cities.
The authors caution: “Far from always being an unintended consequence, some federal grants are made with the intention that states will pick up funding the program in the future.”
I realize that much of what is planned for the grant funds is one-time purchases of equipment. But one planned use is to hire a toxicologist to support what is described in the application as “timely investigation of criminal activity.” What will happen after the grant funds expire? Will we be unwilling to go back to the untimely investigation of criminal activity, if in fact that describes the present situation?
And if that does not describe the present situation, why do we need the grant?
From the conclusion to the research findings:
Our results clearly demonstrate that grant funding to state and local governments results in higher own source revenue and taxes in the future to support the programs initiated with the federal grant monies. Our results are consistent with Friedman’s quote regarding the permanence of temporary government programs started through grant funding.
…
Our results suggest that the recent large increase in federal grants to state and local governments that has occurred as part of the American Recovery and Reinvestment Act (ARRA) will have significant future tax implications at the state and local level as these governments raise revenue to continue these newly funded programs into the future.
…
Based on our estimates, future state taxes will rise by between 33 and 42 cents for every dollar in federal grants states received today, while local revenues will rise by between 23 and 46 cents for every dollar in federal (or state) grants received today.
I realize that some have criticized arguments that I and others have made as being only theoretical, and that as commissioners you must deal with the real world.
But what I have presented today is not just a quaint theory. It is empirical research. It’s what has actually happened. It describes the real world.
Not only are we taxed to pay for the cost of funding federal and state grants, the units of government that receive grants are very likely to raise their own levels of taxation in response to the receipt of the grants. This is a cycle of ever-expanding government that needs to end, and right now.
Gentlemen, we can do better. While most people think the problem of government over-spending requires a top-down solution starting in Washington, we have to do better than waiting for Washington to act.
Right here, right now, in Sedgwick County, home to what the Weather Channel calls the fourth-hottest city in the country, we can show the rest of the country the way. We can show the country that there is a bottom-up solution to the problem of federal spending.
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