The government shutdown reveals the risk of state reliance on Washington, D.C.

The federal government shutdown is now in its second week, with no deal in sight. For state budgets, the implications are likely insignificant, especially since the majority of federal grants to states are for Medicaid, a mandatory program that will continue operating as normal.

That said, the panic surrounding the lockdown, albeit exaggerated, is a sign of a bigger problem: the federal government has grown too big and entangled itself in areas that should be managed closer to home. Any sign of uncertainty at the federal level is, understandably, bound to cause alarm.

Federal spending and employment constitute a considerable share of the economy. Not to mention, state budgets have become dangerously dependent on the federal dollars.

Unless Congress pursues serious reform, decisions (or lack thereof) in Washington, D.C, will continue to exert an outsized impact on the economy and state budgets. That is a cause for concern, particularly as the federal government continues to rack up debt.

The growing dependence on Washington, D.C.

According to the National Association of State Budget Officers (NASBO), federal funds, on average, accounted for over a third of all state expenditures in 2024. While down from the pandemic years, this is among a historic high.

Before the Great Recession, federal funds were approximately a quarter of state expenditures. Spending hikes during the Great Recession and the coronavirus pandemic have pushed federal grants above 30 percent of state expenditures.

Figure 1: Federal Funds as Share of State Spending, FY 1991-2024 (State Average)

In North Dakota, federal grants grew to 45 percent of total spending in 2021. While that share declined to 39 percent in 2024, it is still higher than at any point between 2012 and 2020.

Figure 2: Federal Funds as a Share of Total State Spending, FY 2012-FY2024 (North Dakota)

States’ growing dependence on D.C. is problematic for several reasons.

First, shifts in federal policy generally introduce risk to state budgeting. That risk grows when federal funds account for a substantial share of state budgets. Second, many federal dollars are earmarked for specific purposes. This shifts state decision-making power to Washington, D.C., where reform is harder and the politics are less responsive to the people.

While the actual impact of the shutdown may be minimal, states have clearly ceded too much control to the federal government. Without reform, federal budget decisions will continue to unduly shape state budgets. The recently enacted Big Beautiful Bill is proof of that reality. States should worry, especially given the growing national debt.