Association for Public Policy Analysis & Management

In recent years, there have been renewed calls to reform the funding structure of the welfare state in America. Holding up Temporary Assistance to Needy Families (TANF) as a model, a coalition of the Republican leadership has proposed to block grant Medicaid, the Supplemental Nutrition Assistance Program (SNAP, aka food stamps), and Supplemental Security Income (SSI), with additional programs potentially added at a later date. Currently the programs are financed either wholly by federal funds (SNAP, SSI (though states have the option to supplement SSI)) or by a federal-state matching grant (Medicaid).

There is a long theoretical and empirical literature on the economics of the federal role in addressing poverty and on the relative effects and merits of block grants and matching rate grants. That literature outlined the basic theory of matching versus block grants, with matching grants generating more spending at levels above a given level of a block grant but less spending below it, since under a block grant state spending is 100 percent subsidized up to the block grant level. This gives the relatively obvious prediction that block grants are likely to reduce spending if they are set at low levels. The literature also concentrated on statistical and econometric issues in estimating those effects. However, most of this work is quite old, and focused primarily on AFDC in the period prior to the fundamental 1996 welfare reform.

This project offers a fresh, comprehensive examination of the fiscal federalism issues surrounding the U.S. social safety net. We provide a structural analysis of state spending decisions on TANF, Medicaid, SSI, SNAP, EITC, and other welfare programs (SSBG, CCDF) over the last two decades, breaking down spending into state and federal contributions. The estimating equations entail a cross-state, over-time econometric analysis examining how state economic and social characteristics, political organization, and financing method (matching, block, etc.) affect state spending choices. With the parameter estimates, we conduct a simulation analysis of the implications of the empirical results for some of the block grant mechanisms currently being discussed. For example, block grants can be fixed in nominal terms (like TANF) or allowed to change with inflation. They can also be made sensitive to state need, e.g., the poverty rate in the state. Some Congressional proposals have suggested that block grants be based on a per beneficiary basis. And, of course, the size of the initial block grant should have a major effect on state spending, especially if it is held constant in nominal terms thereafter, but even if it is adjusted for inflation afterwards, or perhaps the business cycle as some have proposed. We simulate the effects of all of these variations with our estimated model.