How Federal Actions Drive Up Costs for States and Cities

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In October 2025, Los Angeles County declared a state of emergency in response to a wave of federal immigration raids. Officials said the raids were causing severe financial hardship for residents and the county itself.

This crisis casts a bright light on a fundamental tension in American governance: the immense, cascading costs that federal actions can impose on state and local governments. From police overtime and emergency housing aid in LA to the multi-billion dollar price tag for states to issue federally compliant driver’s licenses, these are hidden taxes on local resources, passed down from Washington, D.C.

This is how a single federal action can trigger a financial shockwave, how federal laws create local bills, and how the very money sent to help states can come with costly strings attached.

The Costs of Federal Immigration Enforcement in Los Angeles

The crisis in Los Angeles serves as a powerful case study, illustrating the multiple layers of cost—direct, economic, and social—that a single federal policy action can impose on a local jurisdiction.

The federal government’s decision to ramp up immigration enforcement did not occur in a vacuum. It landed with immediate and severe consequences on the budgets, economy, and social fabric of one of the nation’s largest metropolitan areas.

The Direct Price Tag

The most visible impact was the immediate drain on municipal finances. In the two weeks following the start of the federal raids, the City of Los Angeles spent over $32 million in direct response costs. This sudden, unbudgeted expenditure highlights the fiscal vulnerability of cities to federal actions they do not control.

The overwhelming majority of this sum—more than $29 million—was consumed by the Los Angeles Police Department (LAPD) for overtime pay and costs associated with declaring citywide tactical alerts to manage large-scale public protests against the raids. Another $1.4 million was required for cleanup and repairs to public property damaged during the demonstrations.

These figures demonstrate that the primary financial burden of managing the public reaction to a federal policy fell squarely on local law enforcement and public works departments.

This financial shock hit a city already in a precarious position. At the time of the raids, Los Angeles was facing a nearly $1 billion budget deficit. The unexpected $32 million expense forced the city controller to announce that $22 million would have to be drawn from the city’s already depleted reserve fund, further weakening its long-term fiscal health.

In parallel, the Los Angeles County Board of Supervisors took the extraordinary step of declaring a local state of emergency. This declaration was not merely symbolic. It was a legal maneuver designed to unlock new powers and funding streams to address the crisis.

The primary goal was to empower the county to provide direct financial assistance to residents, specifically by creating a program for rent relief for tenants who could prove their financial instability was a direct result of the raids or detentions. This action, while intended to mitigate human suffering, simultaneously created a new, open-ended financial commitment for the county, which would now also be positioned to request financial aid from the state of California to fund these new services.

The Economic Shockwave

Beyond the direct costs to government coffers, the federal enforcement actions sent a shockwave through the regional economy, disrupting labor markets, consumer spending, and the housing sector.

A report from the Bay Area Council Economic Institute and the University of California, Merced, estimated that the immigration crackdown could cost California’s economy nearly $275 billion in lost productivity alone.

This loss stemmed from severe labor shortages that materialized almost overnight. Fear of enforcement actions caused many immigrant workers, regardless of their legal status, to stay home. This created immediate staffing crises in critical local industries that rely heavily on immigrant labor, including agriculture, construction, hospitality, and elder care.

Reports emerged of abandoned construction sites, incomplete projects, and rising labor costs as businesses scrambled to find workers.

The economic chill extended to consumer behavior. Small businesses that form the backbone of many neighborhoods—grocery stores, taquerias, beauty salons, and street vendors—reported devastating losses in revenue, with many seeing declines of 30% to 60% compared to the previous year. As fearful residents avoided public spaces and curtailed their spending, the local tax base began to erode through a drop in sales and business income tax collections.

The housing market was not immune. In Houston, which experienced similar enforcement actions, the effects were clear: low-rent apartment complexes saw a spike in vacancies as residents left out of fear, and real estate platforms like Redfin reported a 24% year-over-year drop in home searches from users outside the U.S. and Canada.

The emergency declaration in Los Angeles, while aimed at protecting tenants, created new friction between local stakeholders. Landlords, who stated they were “still reeling” from the financial impact of COVID-era eviction freezes, expressed concern about a potential new eviction moratorium, highlighting how a federal action can force local governments to mediate difficult conflicts between competing local interests.

This sequence of events reveals a destructive cycle where federal action creates cascading costs that progressively weaken a local government’s ability to respond.

The initial, direct costs of policing and cleanup deplete immediate cash reserves. This happens at the very moment that the indirect economic damage—lost productivity and reduced consumer spending—begins to shrink the tax base needed to replenish those reserves.

This fiscal pincer movement forces the city to confront a rising demand for social services with a simultaneously falling revenue stream, creating a downward spiral of fiscal health. The federal action does not just send a bill; it damages the local entity’s ability to pay it.

The Strain on Public Services

The crisis also placed immense pressure on the public and non-profit services that constitute the local social safety net. The county’s emergency declaration was a clear signal that existing resources were insufficient, as it was explicitly intended to help funnel state money toward legal aid and other social services for affected residents.

This triggered a surge in demand for a wide network of non-profit legal organizations, such as the Legal Aid Foundation of Los Angeles (LAFLA), the Coalition for Humane Immigrant Rights (CHIRLA), and the Esperanza Immigrant Rights Project. These groups were inundated with requests for services ranging from emergency “Know Your Rights” trainings to complex legal representation in removal defense cases.

The impact was also felt in public schools. Districts with large immigrant populations reported declining enrollment as families kept children home or left the area, a trend that can trigger a loss of per-pupil state funding. Schools also had to divert resources to address the rising stress and trauma among students whose families were directly impacted by the raids.

The county’s Office of Immigrant Affairs (OIA) and other agencies were forced to activate emergency hotlines and disaster resource protocols, redirecting staff and funds away from their regular duties to manage the immediate crisis.

The federal government carried out an enforcement action to achieve a national policy goal, but the City and County of Los Angeles were left to bear the political and social fallout. Local officials, not federal agents, had to manage the protests, address the economic disruption, find resources for families in need, and mediate the resulting conflicts between local groups.

This dynamic effectively transfers the most difficult, expensive, and politically damaging aspects of a controversial federal policy onto the shoulders of local leaders, who must clean up the consequences long after the federal agents have left.

When Federal Law Creates Local Bills

While a crisis like the one in Los Angeles illustrates the sudden, acute costs of a federal action, a more common and persistent financial pressure comes from a mechanism deeply embedded in the American system of governance: the federal mandate.

These are directives, embedded in federal law, that require state and local governments to perform specific actions, often without the corresponding funding to pay for them.

Defining the “Unfunded Mandate”

In its simplest form, an unfunded mandate is any federal statute or regulation that imposes an enforceable duty on a state, local, or tribal government without providing the necessary federal funding to cover the costs. These mandates are most common in policy areas like civil rights, environmental protection, and public safety.

Concerns over the growing cost of these mandates led to the passage of the Unfunded Mandates Reform Act (UMRA) in 1995. The law was intended to curb the practice by creating a more transparent process.

It requires the Congressional Budget Office (CBO) to analyze most legislation to identify potential mandates and produce a formal cost estimate. If the CBO determines that a proposed intergovernmental mandate will cost state and local governments more than a specific threshold (as of 2023, $99 million for intergovernmental mandates and $198 million for private-sector mandates), it triggers a point of order, allowing members of Congress to challenge the legislation on procedural grounds.

UMRA’s power has proven to be limited. The law’s primary function is to generate information and create procedural hurdles. It does not, and was never intended to, actually prohibit Congress from imposing unfunded mandates.

As a result, cost-shifting remains a significant point of friction in the federal-state relationship, with organizations like the National Conference of State Legislatures (NCSL) continuing to publicly urge the federal government to avoid the practice.

Case Study: The REAL ID Act

The REAL ID Act of 2005 stands as a textbook example of a direct, underfunded federal mandate. Passed in the wake of the 9/11 Commission’s recommendations, the law requires states to meet a stringent set of minimum security standards for issuing driver’s licenses and identification cards.

If a state fails to comply, its IDs are not accepted for official federal purposes, most notably for boarding commercial aircraft.

For states, the cost of implementation has been staggering. A report by the National Governors Association (NGA) and other state groups projected the cost at over $11 billion over the first five years. A subsequent estimate from the Department of Homeland Security (DHS) placed the 10-year cost at more than $23 billion, with states bearing over 63% of that total.

These costs are comprehensive, covering everything from developing new fraud-resistant card designs and upgrading DMV computer systems to training staff on new verification procedures. The single largest cost, however, has been the massive logistical and operational burden of re-enrolling all 245 million existing license and ID holders in person to verify their original identity documents.

Federal funding has been grossly inadequate to meet this challenge. In 2005, Congress appropriated only $40 million for the program, a minuscule fraction of the billions required. While some grant funding was later made available through the Driver’s License Security Grant Program, it was not nearly enough to cover the full cost.

The state of Texas, for example, received a total of $8 million in federal funds for REAL ID implementation between fiscal years 2008 and 2011.

With the federal government not covering the costs, states have been forced to pass the bill directly to their residents. This is most commonly done through increased fees for new licenses, renewals, or special “correction fees” for converting an existing ID to be REAL ID compliant.

Case Study: Clean Water Standards

Federal environmental laws, particularly the Clean Water Act and the Safe Drinking Water Act, impose some of the most significant and ongoing costs on local governments.

Municipalities are on the front lines, responsible for operating the treatment plants and distribution systems that must comply with federal standards set by the Environmental Protection Agency (EPA).

The scale of these costs is immense. EPA surveys regularly estimate the national infrastructure needs for drinking water and wastewater in the hundreds of billions of dollars. A 2003 EPA survey, for example, identified $276.8 billion in drinking water infrastructure needs through 2022. Of that total, the agency calculated that $45.1 billion was directly attributable to the cost of complying with federal regulations.

For a single community, the financial impact can be severe. A new federal standard for a single contaminant can force a town to undertake a multi-million-dollar upgrade to its wastewater treatment plant, a “lumpy” capital cost that must be borne by local ratepayers.

A significant challenge, as highlighted by the U.S. Government Accountability Office (GAO), is that it is nearly impossible for local governments to precisely track these federally-induced costs.

Municipal accounting systems are typically organized by project (e.g., “Wastewater Plant Upgrade”) rather than by federal requirement. When a city undertakes a major project, it is often addressing multiple goals at once: complying with a new federal mandate, replacing aging infrastructure, and expanding capacity for a growing population. Disentangling the specific marginal cost of the federal requirement from the overall project cost is a formidable methodological challenge.

This accounting reality creates a structural problem that benefits the federal government in policy debates. Without reliable, comprehensive, and audited data on the true historical costs of mandates, state and local governments are at a permanent disadvantage when challenging new regulations.

They are forced to argue with anecdotes and projections, while the federal government can leverage the lack of hard data to downplay the fiscal impact of its actions. This information asymmetry weakens the political leverage of local governments and hinders a fully fact-based debate about the financial consequences of federal policy.

Why the Biggest Costs Aren’t “Mandates”

Perhaps the most critical flaw in the Unfunded Mandates Reform Act is its narrow and technical definition of what constitutes a “mandate.” The law contains several key exclusions, most notably for costs that arise as conditions of federal assistance or as duties from participation in a voluntary federal program.

This creates a massive legislative loophole. Many of the most expensive and consequential federal requirements are not structured as direct orders. Instead, they are attached as conditions to large federal grant programs—such as Medicaid, transportation funding, or education grants—that states and localities cannot realistically refuse.

Other costly federal actions that fall outside the UMRA definition include federal court orders that require institutional reforms, federal preemptions that prevent states from collecting certain taxes, and tax policies that make it more difficult for local governments to raise revenue.

Because these powerful tools of federal influence are not officially classified as “unfunded mandates,” their costs are not systematically estimated by the CBO under UMRA procedures. This means that the true scope of federally-induced costs on state and local governments is far larger than official reports on mandates would suggest.

By narrowly defining the problem, UMRA created a perverse incentive for legislative creativity. It made the old practice of issuing direct, unfunded orders more difficult, but in doing so, it inadvertently encouraged Congress to shift costs through these other, non-covered, and less transparent mechanisms.

The law treated a symptom (direct orders) rather than the underlying disease (the federal impulse to shift costs), leading to a more sophisticated system of imposing federal will.

How Federal Funding Shapes State and Local Budgets

The most powerful instrument of federal influence over state and local governments is not the direct order, but the federal grant. Through its “power of the purse,” Congress directs a massive flow of funds to states and cities, supporting essential services in every community.

This funding, however, is rarely a simple transfer of money. It is a potent vehicle for projecting federal priorities, shaping local policy, and imposing costs in ways that are more subtle but often more profound than a direct mandate.

The $1.1 Trillion Connection

In fiscal year 2024, the federal government provided approximately $1.1 trillion in grants and other financial assistance to state, local, and tribal governments. This funding represents a critical component of public finance across the country, accounting for, on average, between 20% and 27% of a state’s total general revenues.

In some states, the reliance is even higher, with federal funds making up over 30% of the budget.

The composition of this aid is heavily dominated by healthcare. Spending on Medicaid, the joint federal-state health insurance program for low-income Americans, accounts for more than half of all federal grant outlays to states. Other significant categories of funding support income security programs, transportation infrastructure, and education.

These grants are generally not blank checks. They fall into two main types: categorical grants, which are restricted to a very narrow purpose (like funding for a specific highway project), and block grants, which provide state and local governments with more flexibility in how the money is spent.

Regardless of the type, most federal funding comes with significant strings attached in the form of conditions, matching requirements, and reporting mandates.

Coercive Federalism

The legal foundation for attaching these strings is the U.S. Constitution’s “Spending Clause,” which grants Congress the power to tax and spend for the “general Welfare of the United States.”

Over time, the Supreme Court has interpreted this clause broadly, endorsing the Hamiltonian view that Congress can use its spending power to achieve policy goals that lie outside its other enumerated powers.

This interpretation has given rise to a dynamic often described as “coercive federalism.” In this model, the federal government uses the allure of essential funding to “induce” states to adopt policies that Washington desires but cannot impose directly under the Constitution.

The classic example, affirmed by the Supreme Court in South Dakota v. Dole, involved the national minimum drinking age of 21. Congress did not have the authority to pass a national drinking age law, so instead, it passed a law that would withhold a percentage of federal highway funds from any state that did not raise its own drinking age to 21.

Faced with the loss of millions of dollars for a critical infrastructure program, every state eventually complied.

This mechanism is a powerful tool for cost-shifting. In the drinking age example, states had to use their own resources—their own police forces, court systems, and administrative agencies—to implement and enforce the new, federally-desired policy in order to continue receiving money for a completely different purpose.

The structure of large, mandatory grant programs, especially Medicaid, creates a form of long-term fiscal dependency that is nearly impossible for states to escape. Once a state agrees to participate in this “voluntary” program—a choice it can hardly refuse, given the needs of its low-income population—it becomes locked in.

As the underlying costs of healthcare rise nationally and as the federal government periodically expands eligibility or the scope of required services, the state is forced to increase its own matching spending year after year just to remain in compliance.

The federal grant, initially viewed as a form of assistance, evolves into a primary driver of the state’s own budget growth, often “crowding out” state spending on other discretionary priorities like higher education or local infrastructure.

The Hidden Administrative Burden

A significant and often underestimated cost associated with federal funding is the administrative burden of simply getting and managing the money. Applying for grants, complying with complex federal regulations, and fulfilling extensive reporting requirements all consume significant staff time and resources at the state and local level.

Studies have attempted to quantify this overhead. One survey found that local governments spend, on average, about 7% of a grant’s total value on administration. For state governments acting as “pass-through” entities (receiving federal funds and distributing them to local actors), the administrative cost is nearly 9%.

This overhead is a direct reduction in the net value of the aid before a single dollar is spent on delivering a service to a resident.

This issue was cast into sharp relief by a recent, high-profile controversy in the world of federally funded scientific research. The National Institutes of Health (NIH), the largest single funder of biomedical research, announced a plan in early 2025 to cap the reimbursement rate for “indirect costs”—the administrative and facilities overhead associated with research—at a flat 15%.

This sparked an immediate and fierce backlash from the research community. Universities and research hospitals argued that their actual, federally-negotiated indirect cost rates are far higher, often ranging from 30% to over 70%, and are necessary to cover the real costs of maintaining laboratories, providing administrative support, and keeping the lights on.

They projected that such a cap would force them to divert billions of dollars from direct research activities to cover these essential operational costs, potentially leading to widespread layoffs of scientific and support staff.

This battle perfectly illustrates the hidden “cost of compliance” that is an inseparable part of accepting federal dollars.

While a 7-9% administrative cost on a single grant might seem manageable, the cumulative effect of this complexity across the entire system creates a significant diversion of public resources.

State and local governments must manage hundreds of different federal grants, each with its own unique application process, reporting schedule, and compliance rules. To navigate this maze, governments must hire specialized staff—grant writers, compliance officers, accountants—whose primary job is not to deliver services, but to manage the federal bureaucracy.

This “complexity tax” represents a deadweight loss to the public, siphoning away talent and money that could otherwise be used for front-line community services.

The Full Cost of Federalism

The preceding sections have examined the specific mechanisms—sudden crises, unfunded mandates, and grant conditions—through which federal actions impose costs on state and local governments. This section provides a national-level perspective on the total financial impact of this relationship.

It reveals a systemic pattern of downward fiscal pressure, where the financial burdens of national policy and federal budget constraints are consistently shifted down to the levels of government closest to the people.

The “Big Shift”

Organizations that represent state and local governments, such as the National Association of Counties (NACO), have documented what they term “The Big Shift.” This refers to a long-term trend in which federal budget cuts and policy changes effectively transfer financial responsibilities to local governments.

This dynamic is straightforward. When the federal government decides to reduce its deficit, it often does so by cutting discretionary spending or altering cost-sharing formulas for mandatory programs.

For example, a change in the federal contribution to the administrative costs of the Supplemental Nutrition Assistance Program (SNAP) could increase the annual obligation for counties by up to $850 million. Because counties are often legally required to administer these programs, they cannot simply stop providing the service.

Instead, they are forced into an impossible choice: raise local revenue, most often through politically unpopular property taxes, or cut other essential local services like public safety or infrastructure maintenance.

NACO has estimated that the cumulative downstream effect of these federal shifts could approach $1 trillion for state and local governments over a ten-year period.

This structure operates as a fiscal shock absorber, with local governments at the very bottom. The federal government can run massive deficits, which the CBO projects will total $20 trillion over the next decade. When Washington decides to address this debt, it often does so by cutting aid to states.

States, most of which are constitutionally required to balance their budgets, must then absorb this cut, often by reducing their own aid to counties and cities. Local governments, with the most limited and least flexible revenue tools, are the final recipients of this downward pressure.

They have the least capacity to absorb fiscal shocks but are responsible for delivering the most direct and essential services, making them the most vulnerable link in the intergovernmental chain.

The $3 Trillion Regulatory Bill

Beyond the direct shifts in program funding, the sheer scale of federal regulation imposes an enormous cost on the entire economy, including the public sector. A comprehensive 2023 study by the National Association of Manufacturers (NAM) calculated the total annual cost of federal regulations to the U.S. economy at a staggering $3.079 trillion in 2022, an amount equivalent to 12% of the nation’s GDP.

While this study focused on the private sector, its findings offer a powerful proxy for the challenges faced by public sector entities. The report found that the regulatory cost per employee is 20% higher for small firms than for large ones ($14,700 vs. $12,200).

This is because small entities, like small businesses, have fewer resources and a smaller revenue base over which to spread the high fixed costs of compliance—the legal fees, consulting, and administrative staff needed to understand and follow complex federal rules.

This reality is mirrored in the public sector, where small towns and rural counties must comply with the same complex federal environmental, labor, and safety regulations as large cities, but with much smaller tax bases and administrative staff.

A Necessary Cost?

A balanced analysis requires acknowledging the arguments in favor of a strong federal role and the national standards it creates. Proponents argue that federal mandates and regulations, despite their costs, are essential for achieving critical national goals that might be ignored or underfunded if left to the discretion of 50 different states.

This perspective is rooted in history. Federal intervention, often through mandates and court orders, was necessary to enforce civil rights in the face of state-sanctioned discrimination.

Similarly, in environmental protection, problems like air and water pollution do not respect state borders, necessitating a coordinated national response to prevent states from exporting their pollution to their neighbors.

Federal standards can also benefit the national economy by creating a uniform regulatory environment, which prevents a “race to the bottom” where states might compete for business by lowering environmental or labor protections.

From this viewpoint, the costs imposed on state and local governments are a necessary investment to achieve broader national benefits—such as cleaner air, safer drinking water, more accessible public spaces for people with disabilities, and a more equitable society—that are shared by all citizens.

This reveals that the tension over unfunded mandates and federal costs is not merely an accounting problem. It is a proxy for the fundamental and ongoing debate in American federalism about which level of government should be responsible for which services and how those services should be paid for.

Arguments against mandates, which emphasize the fiscal burden and the loss of local autonomy, are rooted in a value system that prioritizes local control and fiscal discipline. Arguments in favor of mandates, which emphasize uniformity and the protection of national priorities, are rooted in a value system that prioritizes national standards and equity.

The dollar figures are simply the language in which this deeper, philosophical conflict over the nature of American governance is expressed.

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