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“Kansas Governor Rejects $13 Million in Future Taxes”

by Matt Mitchell on August 11, 2011

in Federalism, Tax and Budget

Okay, so that isn’t the real headline. The real headline reads: “Kansas governor rejects $32 million federal health care grant.”  But the two headlines may actually be the same.

First, some background: For years, economists have known that states that receive federal grants tend not to use the money to reduce their own spending (despite what theory would predict).  Since money seems to stick where it lands, public finance scholars have dubbed this phenomenon the “flypaper effect.”

Newer research by West Virginia University’s Russell Sobel and Charles Crowley takes this idea one step further. They find that even after the federal money goes away, state and local governments tend to increase their own taxes in order to maintain the same level of services. They found that for every $1.00 a state receives from the federal government, it tends to raise its own future taxes between $0.33 and $0.42. It seems that special interests come to depend on the money and lobby for its maintenance even after the “free” federal subsidy goes away.

So now to Kansas. There, Governor Brownback recently rejected a $32 million grant that was to help the state set up a health insurance exchange portal (i.e., a fancy website). In his statement, the governor wrote: “There is much uncertainty surrounding the ability of the federal government to meet its already budgeted future spending obligations.” So “Every state should be preparing for fewer federal resources, not more.”

Given the research of Sobel and Crowley, this would seem to be a valid concern. If the federal money goes away, the state can expect its own future taxes to rise by some $10 to $13 million.

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