Federal Funding for State Budgets Drops from Pandemic Peaks

Change in the Federal Share of States’ Revenue in Fiscal Year 2024

There has been a noticeable decrease in the proportion of states’ total revenue sourced from federal funds in fiscal year 2024. This reduction continues a downward trend from the heights seen during the pandemic. The decline is largely due to a rise in revenue generated by the states themselves, especially from taxes and other funds, coupled with the phasing out of federal COVID-19 aid. Going forward, although expectations are that the federal share will remain below the pandemic peak, unpredictability exists as alterations in federal policy and variations in state tax collections could tilt the balance in either direction.

Fiscal 2024 Federal Funding Overview

In fiscal year 2024, the total state revenue comprised 34.2% of federal funds, indicating the third yearly decrease in a row. This is down from 36% in fiscal 2023, 36.4% in fiscal 2022, and a record 36.7% in fiscal 2021. Despite these reductions, the federal share is still above pre-pandemic levels, a result of the sustained impact of significant federal support during the COVID-19 recession and other major legislative actions, such as the Infrastructure Investment and Jobs Act and the Inflation Reduction Act, which have directed funding to states.

Notable Trends in Federal Funding and State Revenue

Despite a decrease of $23 billion (around 2.1%) from the previous year, total federal grants to states still exceeded $1 trillion for the third successive year in fiscal 2024. Meanwhile, states’ general revenue saw an increase of $90.1 billion from fiscal 2023, largely attributed to record amounts from service charges, local sources—such as local government contributions to “financial support of programs administered by the state”—and higher tax collections, which form the major revenue source for most states.

Implications of Federal Funding on States

Historically, federal dollars have constituted about a quarter to a third of state revenue. Prior to the pandemic, the highest share came in the aftermath of the 2007-09 Great Recession when a temporary surge of federal dollars and falling state tax revenue pushed the federal share to 35.5% in fiscal 2010 and 34.7% in fiscal 2011. The fiscal 2024 share was 0.7 percentage points higher than the 15-year average of 33.5% starting in fiscal 2010 and 5.6 percentage points higher than the 50-year average of 28.6% since fiscal 1975.

Between the Great Recession and the COVID-19 pandemic, the major driver of the long-term growth of the federal share was Medicaid, as state participation in the program expanded under the Affordable Care Act (ACA) and overall enrollment increased. As of March, 40 states and Washington, D.C., had adopted the ACA expansion.

State-Specific Highlights from Fiscal 2024 Data

Federal shares have varied across the country. Fiscal 2024 data reveals that:

• Louisiana reported the highest percentage of revenue from federal funds for the third year in a row (50.7%).
• North Dakota reported the lowest percentage (23.9%).
• The percentages of revenue from federal funds in states with the highest shares—Louisiana (50.7%), Alaska (48.8%), and Arizona (46.4%)—were approximately double that of states with the lowest shares: North Dakota (23.9%), Hawaii (24%), and Kansas (24.9%), as was the case in fiscal 2023.
• In 13 states, federal funds—rather than state tax dollars—were the largest source of revenue in fiscal 2024, unchanged from fiscal 2023 but up from five states in fiscal 2019. The most recent peak was in fiscal 2020, when federal funds made up the largest share in 18 states.
• Only two states—Colorado and Indiana—reported their largest shares of revenue from federal funds of any year in the past 50 years, down from four states in fiscal 2023 and 20 in fiscal 2022.
• Alaska witnessed the largest annual percentage-point increase in the federal share of state revenue, 3.8 points above fiscal 2023. The amount of federal funds the state received actually fell by 3.8% from fiscal 2023, but state tax revenue declined by 39.3% over the same period due to a significant decrease in severance tax revenue, resulting in an increase in the federal share.
• South Carolina experienced the largest annual percentage-point decrease in its federal share, dropping by 6.7 percentage points from fiscal 2023. This was driven by the state having the nation’s second-highest growth in tax revenue (15.2%) and the second-highest decline in federal funding revenue (14.3%), both compared to fiscal 2023.

Pew’s Assessment of Federal Share of State Revenue

State revenue is derived from a broad set of sources including taxes, federal funds, service charges, local funds, and miscellaneous fees. Federal funds are a crucial funding source for states across an array of policy areas, most notably Medicaid, which accounted for 68.8% of federal grants in fiscal 2024. Income security, transportation, and education also contribute smaller shares. Because state and federal budgets are intrinsically intertwined, changes in policy, major legislation, or disruptions in funding at the federal level can impact state finances. Anticipating how alterations in federal policy will impact state finances remains a key concern for state officials. For instance, changes to Medicaid, SNAP, and other programs, are expected to decrease the revenue flowing from the federal government to states, while recent federal tax legislation will affect collections for items like tips, overtime, and car loan interest in states that conform.