The high cost of 'matching funds'

Anthony Davies:

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Much of the hand-wringing has to do with the loss of federal matching funds - a promise by the federal government to provide Texas with money for a program if the state first spends money of its own. If the state cuts its share of this money, the matching funds from Washington are cut along with it.

But this isn't nearly the tragedy that advocates' hyperbole would suggest. An analysis of more than 40 years of data that I completed with a colleague at Duquesne University demonstrates that matching funds have hindered Texas' economic growth and decreased tax revenue, suggesting that the current spending cuts could be a net positive for the state.

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And, of course, they are called "matching funds" for a reason - Texans have to come up with a chunk of cash for Washington to match. This means diverting tax revenue from other uses, imposing new taxes or increasing existing taxes. What kind of impact does this have? Looking at data for Texas from 1970 through 2006, we find that a $10 billion increase in federal matching funds is associated with a $20 billion decline in the state's GDP. On average, Texas is worse off after receiving matching funds than it would have been had it refused the money.

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There is more.

Medicaid is one example where the state has to match funds and loses control over how the money will be spent. Control freaks in Washington are telling the state how to run the program and spend their money. The state would be much better off with block grants that let the state decide the best way to implement a health care program for the poor.
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