Federal grants make up almost 40% of state and local government revenue in Alaska, Kentucky, and Vermont, while North Dakota, Virginia, and Utah depend on Washington for less than a quarter of their budgets, according to a new analysis published by the Reason Foundation. The rankings examine which states face the greatest fiscal exposure if federal transfers are delayed, conditioned, or cut off entirely. Federal aid now accounts for roughly a quarter of all state and local government revenue nationwide, financing programs from disaster relief and food assistance to healthcare and transportation, but that dependence varies dramatically across the country.
In 2023, the typical state received 27.7% of its revenue from federal grants, with Alaska topping the list at 39%, followed by Kentucky and Vermont at 38% each. On the other end, North Dakota relied on federal transfers for just 19% of its budget, Virginia for 21%, and Utah for 22%. In absolute dollar terms, California pulled in $162 billion in federal aid in 2025, New York received $118 billion, and Texas got $89 billion, while North Dakota collected just $2.8 billion, South Dakota $3.8 billion, and Wyoming $3.9 billion. The typical state received $18.4 billion from Washington and $3,815 per resident, though per-capita figures ranged from $11,030 in the District of Columbia and $8,389 in Alaska down to $2,397 in Georgia and $2,699 in Virginia. Federal aid in inflation-adjusted terms has climbed from about $300 billion in 1980 to $1.1 trillion in 2023, yet its share of state and local revenue has held relatively steady at an average of 19% from 2000 through 2022 because overall state and local revenues grew alongside the broader economy.
The report highlights a fundamental shift in how federal dollars reach states: Medicaid now represents 57% of all federal transfers, and by 2023, 73% of grants flowed through mandatory programs rather than discretionary appropriations, up from 42% in 1980. The authors write that Washington "retains full discretion over federal transfers and has often used them as leverage to sway state policy," pointing to the nationwide adoption of the 21-year drinking age and mandatory seatbelt laws, which came only after Congress tied compliance to eligibility for highway funding. The Reason Foundation notes that while the Trump administration's use of federal funding to pressure states is unusual in scale and scope, the federal government has long dangled new grants and threatened to revoke existing ones to shape state policy.
The report explains that states carrying high debt burdens and unfunded pension or retiree health obligations often lack budgetary cushion to absorb disruptions in federal aid, making them vulnerable when transfers are threatened or conditioned. Even states with leaner budgets face fiscal pressure if federal grants account for an outsized share of revenue and reserves are weak. As national debt climbs and federal spending grows more contentious, these differences matter more: understanding which states depend most heavily on federal transfers and which programs those dollars support is increasingly relevant to gauging fiscal risk.
The report recommends that state and local governments document exactly how they rely on federal aid, identifying which programs, agencies, and budget functions depend on those funds, and develop contingency plans for delays or cuts in federal transfers, especially discretionary grants. The authors conclude that federal transfers will always undermine state autonomy and federalism, and that states, cities, counties, and school districts without excessive debt and with strong fiscal reserves may be able to weather disruptions in federal funding without surrendering policy autonomy—but those burdened by debt, unfunded liabilities, and weak reserves may not.