How Valuable Is a Federal Grant?

Sometimes, a federal grant is worthless.  The federal government has the ability to attach enough costly provisions to its grants that the net value is less than zero.

A recent case in my home town of Tallahassee illustrates this.  The Tallahassee Democrat, May 21, page A1 (sorry, no link because a subscription is required) reports that project organizers who plan to build a $1.5 million homeless shelter have turned down $500,000 in funding because the money was to come from a federal grant.  The article said, “…stringent reporting requirements, mandates to exceed prevailing wages and required environmental assessments would have increased the cost and delayed the completion time of the project significantly.”

The bottom line: the project’s developers believed that the costs associated with accepting the federal grant would have exceeded the $500,000 the grant would have given them.

The good news in this case is that the grant wasn’t accepted, so the money wasn’t wasted.  But what if the project’s organizers had decided that accepting the grant would have imposed costs of only $400,000 on them?  They would take the $500,000, which would have only been worth a net of $100,000 when accounting for all the costs and benefits.  In this hypothetical case, the federal government would have taken $500,000 in tax revenues and produced a net value of $100,000 with it.

In this particular case in Tallahassee, the conditions lowered the value of the grant to below zero and it was refused, but in other cases grants are accepted even if they on net provide only a minimal value to recipients.  Federal grants forcibly take money from taxpayers to give to grant recipients who value them considerably less than the value of the revenues that finance the grants.  Federal grants destroy value.  Sometimes they destroy so much value that recipients who are offered grants refuse to take them.

Randall G. Holcombe is Research Fellow at the Independent Institute and DeVoe Moore Professor of Economics at Florida State University. His Independent books include Housing America: Building Out of a Crisis (edited with Benjamin Powell); and Writing Off Ideas: Taxation, Foundations, and Philanthropy in America .
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