Budget & Tax

Is Oklahoma Addicted to Federal Spending?

August 3, 2009

J. Scott Moody, Wendy Warcholik, Ph.D.

Oklahoma's share of President Obama's federal "stimulus" package will come to approximately $2.6 billion over two years-or an average of $1.3 billion per year. This certainly sounds like a lot of money, but it pales in comparison to what the federal government already sends to Oklahoma.

Unfortunately, Oklahoma is already highly dependent on federal largesse to keep a large part of its economy moving. If policymakers aren't careful, the stimulus package will only worsen this dependency.

Chart 1 shows the total amount of federal spending in Oklahoma from federal fiscal year (FFY) 1981 (the first year of available data) to 2008. In FFY 2008, Uncle Sam spent a whopping $31.758 billion in Oklahoma, or the equivalent of 24 percent of all income earned in the state (see Chart 2). Between FFY 2006 and 2007, the increase alone in federal spending in Oklahoma was $1.609 billion-even before the Bush or Obama stimulus packages!

Federal spending grew 352 percent to $31.758 billion in FFY 2008 from $7.027 billion in FFY 1981. Even after adjusting for the growth in the economy, federal spending grew as a percent of personal income by 11.6 percent-to 24 percent from 21.5 percent.

Chart 3 breaks down federal spending by type as a percent of personal income. (Unfortunately, federal spending by type by state was not available until after FFY 1988 when these statistics were merged into a single report.) The single largest type of federal spending in Oklahoma is for "retirement and disability," which consists mostly of Social Security spending. Between FFY 1989 and FFY 2008, spending on retirement and disability has declined as a percent of personal income by 7.1 percent-to 8.6 percent from 9.2 percent (percentage change may appear slightly off due to rounding).

The second-largest type of federal spending is for "other direct payments," which consists mostly of Medicare payments but also includes unemployment compensation, food stamps, and other expenditures. Between FFY 1989 and FFY 2008, spending on other direct payments has increased as a percent of personal income by 28.2 percent-to 5.7 percent from 4.4 percent.

The third-largest type of federal spending is for "grants to state and local governments," which consists mostly of Medicaid spending and, to a much smaller degree, the Department of Transportation. Between FFY 1989 and FFY 2008, spending on grants to state and local governments has increased as a percent of personal income by 32 percent-to 4.7 percent from 3.6 percent. Continued growth at this pace may soon see this category rival other direct payments.

The fourth-largest type of federal spending is for "salaries and wages." Nationally, this consists mostly of non-defense personnel. In Oklahoma, however, federal salaries and wages are dominated by the Department of Defense at $2.2 billion, versus $1.7 billion for federal civilian employees. Between FFY 1989 and FFY 2008, spending on salaries and wages has decreased as a percent of personal income by 40.5 percent-to 2.9 percent from 4.6 percent.

Finally, the fifth-largest type of federal spending is for "procurement," which consists mostly of the Department of Defense. As with salaries and wages, Oklahoma has an even higher proportion of defense procurement than the rest of the nation. Between FFY 1989 and FFY 2008, procurement has increased as a percent of personal income by 24.6 percent-to 2.2 percent from 1.7 percent. Though this is a large percentage gain, it stems from the fact that procurement spending was starting at such a low level.

Overall, Oklahoma's dependency on federal spending is alarming. Many of these programs are ones that Oklahomans likely would not have created or expanded if they had to pay for them directly. In fact, the federal government is actually subsidizing these programs with taxes paid by residents of other states. According to the Tax Foundation, Oklahoma receives $1.48 for every $1 sent to Washington, D.C.

More disturbingly, a closer examination of the composition of spending points to a co-dependency between federal and state spending. The category of spending with the fastest growth was for grants to state and local spending, which contains Medicaid spending. Between FFY 1998 and FFY 2008, the federal portion of Medicaid spending in Oklahoma grew 112 percent-to $3.519 billion from $1.657 billion. This growth is problematic because for every $1 spent on Medicaid, Oklahoma's state government must pick up approximately 27 cents of the tab.

Yet, as part of the recent stimulus package, the federal government will lower the state's portion of the Medicaid match over the next two years, with encouragement from Uncle Sam to expand Medicaid services as opposed to shifting the state dollars to other uses. Oklahoma's policymakers should not listen to Washington, D.C., as it will only serve to make Oklahoma more dependent on federal largesse. Instead, policymakers should use this one-time stimulus money to enact reforms, especially in Medicaid, that will help wean Oklahoma from federal dependency.

Economists J. Scott Moody (M.A., George Mason University) and Wendy P. Warcholik (Ph.D., George Mason University) are OCPA research fellows.