Federal Grants Boost State Budgets to Record High

In fiscal year 2022, the share of states’ revenue from federal funds remained high, driven by pandemic aid and infrastructure investments. Federal grants to states exceeded $1 trillion for the first time, though their share of state budgets slightly decreased from 2021’s record high. This elevated share is expected to persist through fiscal 2024 as state tax revenue growth stabilizes.

Trends in federal funding

In 2022, 36.4% of states’ revenue came from federal dollars, down from a record 36.7% in 2021. Compared to 2019, the share grew in 48 states.

A spike in state tax revenue in 2022 reduced the impact of increased pandemic aid on the federal share. Tax collections rose by 16.7% compared to the previous year, boosted by stimulus checks and a shift in personal spending.

Historically, the federal share of state revenue has ranged from about a quarter to a third. The fiscal 2022 share was 4.4 percentage points higher than the 20-year average of 32% (2003-22). Following the 2007-09 recession, federal funds peaked at 35.5% in 2010. Between the Great Recession and the pandemic, Medicaid expansion was a major driver of the federal share increase. As of May 2024, 40 states and Washington, D.C., had adopted the expansion.

The federal share of state revenue indicates funding states receive for public services like healthcare and infrastructure. This percentage reflects swings in state and federal funds, without necessarily indicating budget problems.

States received 60.8% more in federal grants in 2022 than pre-pandemic, with increases ranging from 130.5% in South Dakota to 32.8% in California. More than $800 billion in COVID-19 relief will continue to flow to states. Additionally, 2022 was the first year states were eligible for over $760 billion from the Infrastructure Investment and Jobs Act and the Inflation Reduction Act.

State highlights

Federal shares varied across the country in 2022:

• Louisiana had the highest percentage of revenue from federal funds (50.5%).
• North Dakota had the lowest (22.2%).
• Louisiana, Alaska (50.2%), and Arizona (49.7%) had roughly double the federal shares of North Dakota, Hawaii (25.9%), and Virginia (27.6%).
• Federal funds were the largest revenue source in 16 states, compared to five in 2019 and 15 in 2021.
• California and Montana saw their federal share decrease from 2019 levels.
• 20 states reported their largest share of revenue from federal funds in 50 years.
• South Dakota saw the largest annual increase, up 11 percentage points from 2021.
• North Dakota saw the largest decline, with the federal share falling 17.5 percentage points from 2021.

Federal funds compared with other revenue sources

Federal funds remained the second-largest revenue source in 2022, accounting for $1.1 trillion, or 36.4%, of the $3.1 trillion collected by state governments. Taxes remained the leading revenue source, reaching $1.5 trillion and comprising nearly half of state revenue.

Why Pew assesses the federal share of state revenue

State revenue comes from various sources, including taxes, federal funds, and fees. Federal funds historically account for a large portion, ranging from a quarter to a third. State and federal budgets are interconnected, so any policy changes or federal funding disruptions can significantly impact state finances.

Recent federal aid influx underscores the importance of careful planning to mitigate future fiscal risks. A 2023 report from The Pew Charitable Trusts offers recommendations to reduce fiscal risks when using one-time federal aid.