States Find Ways to Protect Taxpayers: Jonathan Williams on American Radio Journal

Recently, the national debt surpassed $40 trillion, highlighting a growing fiscal challenge for every level of government. At the same time, state governments have become increasingly dependent on federal funding. Back in 1993, roughly one quarter of all state spending was financed by federal dollars. Today, federal funds account for nearly 40% of the average state budget, and some states receive more than half of their funding now from Washington.

In an era of $40 trillion in national debt, states must chart a new path to ensure long-term fiscal sustainability. Programs from Medicaid to highway construction are paid for in part by money given to the states by the federal government. When Congress looks for ways to reduce spending, aid to the states is likely to come under close scrutiny.

During debate over the One Big Beautiful Bill Act, lawmakers considered reducing Medicaid funding for working-age, able-bodied adults without children. Although those restrictions were ultimately not adopted, the discussion served as a warning to states when federal spending cuts become necessary. Transfers to state governments may be among the first items on the chopping block.

As the saying goes, there is no such thing as a free lunch. Federal dollars often come with costly maintenance of effort requirements, mandates, and regulatory conditions that limit state flexibility and increase long-term obligations. As Washington gives, it also takes away.

One-way states can prepare for the fiscal uncertainty is by following the example of Financial Ready Utah. This initiative requires state agencies to identify and track federal funding streams and develop contingency plans for potential reductions. By forcing agencies to assess their dependence on federal dollars, Utah ensures that core government services can continue even if federal support declines.

Such forward-thinking policies are just one reason Utah is ranked number one for economic outlook in all 19 editions of our ALEC Rich States, Poor States report. Major bond rating agencies have also cited Utah’s long-term fiscal planning as a key factor supporting its continued AAA bond rating.

Another key element of building state resilience is avoiding the very problem that has driven the explosion of federal debt: government overspending. One of the strongest safeguards against excessive spending is Colorado’s Taxpayer’s Bill of Rights, commonly known as TABOR.

TABOR contains two core provisions: first, any new tax, a tax increase, or new debt must be approved by voters. Second, state spending cannot grow faster than the combined rate of population growth and inflation without voter approval. For example, if Colorado’s population grew by 2% and inflation rose by 3%, state spending can increase by no more than 5% unless voters authorize a higher level. Revenue collected above that limit must be returned to taxpayers, often through a refund check.

Since its adoption more than three decades ago, the TABOR limit has returned billions of dollars to Colorado taxpayers and helped impose meaningful fiscal discipline on state government. Even as Colorado has turned a deep blue politically, the Taxpayer’s Bill of Rights has been incredibly resilient and shows that state tax and spending limits can be popular on a bipartisan basis.

States can also strengthen their fiscal futures through robust balanced budget amendments. While 49 states have some sort of a balanced budget rule, that clearly alone does not guarantee sound finances. Some requirements lack meaningful enforcement and are easily bypassed. Others contain loopholes that allow spending to be shifted off the books or financed through borrowing. Many fail to prevent states from using debt to paper over budget shortfalls.

A handful of states, however, have adopted strong constitutional balanced budget protections. Indiana’s balanced budget amendment is widely regarded as the gold standard and serves as the basis for our ALEC model balanced budget amendment. Approved overwhelmingly by voters in 2018, Indiana’s amendment limits the purposes for which debt can be issued and closes loopholes that could conceal fiscal imbalances.

By following Indiana’s example, other states can strengthen budget discipline, model responsible fiscal governance, and prepare for a future in which the federal government may provide far less financial assistance.

America’s national debt has now exceeded $40 trillion and continues to grow.

States cannot wait for federal action. The states that have embraced contingency planning, spending restraints, and strong balanced budget protections demonstrate that tackling debt and overspending is indeed possible. Washington should look to the states as they continue to innovate and show there are policy solutions available to protect the American taxpayer.