The fact that states spend differing amounts per capita on social welfare is well known; the extent to which these differences relate to differences in state fiscal capacity is less understood. The federal government has long played an important role in offsetting state fiscal disparities. However, significant changes have occurred in federal grant programs and eligibility requirements that impact differentially poor and rich states. Other factors in the state environment in addition to fiscal capacity and federal grants influence state spending, including various determinants of state need for social welfare spending such as poverty and unemployment. Finally, political and institutional factors, including the state budget process, affect state spending.
The federal government can offset state fiscal disparities through federal reimbursement for Medicaid and foster care under a formula more generous to low-income states than to high-income states. In addition, the federally funded Supplemental Security Income (SSI), Food Stamps, and Earned Income Tax Credit (EITC) programs provide assistance to all eligible individuals and require no state funds.2 Thus, a state with a relatively high share of low-income individuals presumably has a high share of residents receiving federal benefits, regardless of the states low-fiscal capacity.
Significant changes in federal cash assistance have also occurred. In 1996, the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) transferred some of the responsibility for social programs, and the fiscal risk, from the federal government to states. Under the earlier AFDC program, states and the federal government shared the risk of increased entitlement welfare spending. Under the TANF program, which replaced AFDC, states bear the full cost of spending increases above the value of their federal block grant and reap the full savings of spending reductions as long as maintenance-of-effort (MOE) and certain other requirements are satisfied. In some ways, these reforms reduced the incentives for poorer states to increase spending on social welfare programs, even if their needs increased, because their increased spending is not matched with increases in federal support.
Around this time, the Medicaid program3 was experiencing explosive growth, placing more stress on state budgets. In fact, the Medicaid program increased nearly 150 percent, from $91.5 billion in 1991 to $228 billion in 2001 (Snell, Eckl, & Williams, 2003). Several factors contributed to the increase in expenditures, including the early 1990s recession, which increased the number of families eligible for Medicaid; extensions in the Medicaid program to cover more of the uninsured, working poor; demographic trends that increased the share of enrollees who were disabled and required more medical services; and increases in the overall costs for medical services.
Some have expressed concern that spending on Medicaid will crowd out state spending on other social welfare programs, such as cash assistance (e.g., see Steuerle & Mermin, 1997; Ladenheim, 2002). Given states increased flexibility in funding cash assistance, changed incentives, and increasing Medicaid costs, understanding how fiscal capacity, especially in poorer states, might affect state policy choices about social welfare programs is important.
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