The most famous example I can think of is when the Federal government threatened to withhold money for state highways if they didn’t change the drinking age. I think they did the same with speed limits at one point.
Is there anything a state can do with this? Can it redirect federal taxes to make up for the shortfall?
A state can refuse to take the federal money, and fund the shortfall with state revenue. They can’t take federal money that’s been given to them for other purposes and use it in place of the money they turned down.
They didn’t really “threaten” it. They passed the National Minimum Drinking Age Act which required 10% of highway dollars be withheld from states who failed to legislate and enforce a drinking age of 21.
I think a much more common ‘problem’ is “unfunded mandates”, which are impositions without any accompanying funding, like the Clean Air/Water Act, ADA, or FLSA. Whether it’s really a problem or a bad thing is debatable but it’s much more common to outright require something and not provide funding for it than to insist on something and threaten withholding money that would otherwise be owed.
Unfunded mandates have crippled state and local governments. I’m not sure to what extent they’ve contributed to the meltdown in California, but they’re a big part of the growing crisis in New York. The state passes the expense of programs like Medicaid on to the counties, plus a whole level of their own unfunded mandates. In my county (Monroe), nearly 75% of the budget goes into these unfunded mandates, and with both sales and property taxes already at ridiculous levels, there’s little they can do but cut services, layoff workers, and raise taxes even more.