When Washington picks up the states’ tab, waste and fraud follow

Many states are now scrambling to improve. Virginia has banned self-attestation of eligibility and is mimicking policies in low-error Wisconsin. Louisiana is offering bonuses to staff who spot errors. And Mississippi is turning to improved technology and training. Each change suggests that new financial accountability rules are making a difference. Meanwhile, whether due to One Big Beautiful Bill Act reforms or other causes, food stamp caseloads nationwide fell by 4.3 million (10%) nationwide in the 12 months through January 2026. Agriculture Secretary Brooke Rollins has attributed “a lot” of that decline to cutting fraud.

Last month, the House oversight committee held a hearing on this principle, titled “Understanding Fraud in Federally Funded Programs Run by the States.” Anyone with even a passing familiarity with human nature can understand one key element. Whether it’s teenagers with their parents’ credit card or state bureaucrats spending federal funds, when someone else picks up the tab, there are simply fewer incentives to control spending. Robert Westbrooks, a former federal inspector general, pointedly asked in his testimony, “Why are Federally Funded, State-Run Programs Susceptible to Fraud?” His answer: because of “the moral hazard created when Washington provides the funding and the states control disbursement.” Stating the obvious, that “may diminish accountability and incentivization.”

Recent evidence supports that. The nation’s unemployment insurance system is normally run and mostly funded by states. But during recessions, the federal government provides significant funding for additional benefits. The pandemic saw a massive infusion of $700 billion in federal funds, all spent by state agencies alongside about $200 billion in state unemployment checks.

Overpayment rates involving state UI benefits grew from around 10% to 12% before the pandemic to 19% and 21% in the 12 months ending in June 2021 and June 2022, respectively. Elevated pandemic misspending cost state taxpayers about $25 billion, according to the Department of Labor. But losses involving federal benefits administered by states dwarfed that. Worst of all was the federal Pandemic Unemployment Assistance program, which had a staggering 36% improper payment rate. Total federal losses stretched beyond $200 billion, possibly far higher.

To be fair, PUA was seriously flawed from the start, allowing claimants to “self-certify” eligibility and paying out benefits without confirming individual identities or work history. But that didn’t trouble many states, since their money wasn’t being wasted. In Illinois, half of the federal PUA benefits paid in 2021 were stolen. In Colorado, 75% of early PUA claims were fraudulent. And California reported 95% of confirmed unemployment fraud involved PUA benefits. Few of those overpayments are recovered, in part because states have no financial incentive to do so.

States also eagerly pay benefits when fully federally funded, but close their wallets when they must cover part of the cost. During the pandemic, even high-unemployment blue states refused to use their own funds to continue paying extended unemployment benefits when full federal funding stopped. The only surprise was that federal officials thought they might.

What to do about it? States will always have a greater appetite to spend — and sometimes waste — federal tax dollars than their own funds. But it’s all the same taxpayers paying in the end. If federal lawmakers want to waste less, they should replicate the One Big Beautiful Bill Act’s reforms and expect states to have more skin in the game.

In sum, stop letting Uncle Sam be Uncle Sucker. The alternative is more spending, more fraud, and, ultimately, debt for our children and grandchildren to pay off.