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f ({/(><«/re&ewe la n l' 0 / yc/ewe/and .■: ^ .V * • : . ■ ' ■ E CO N O M IC R EV IEW nomm lev- 1970 Additional copies of the ECONOMIC REVIEW may be obtained from the Research Department, Federal Reserve Bank of Cleveland, P. O. Box 6387, Cleveland, Ohio 44101. Permission is granted to reproduce any material in this publication providing credit is given. N O V E M B E R 1970 PATTERNS OF FEDERAL GOVERNMENT OUTLAYS AND REVENUES, 1960-1970 In recent years. Federal Government spending has grown more rapidly than revenues and, therefore, has contributed IN TH IS ISSUE to sizable deficits as well as to an accelerated rise in the Federal debt. Despite the more rapid growth in spending Patterns o f Federal Government Outlays and Revenues, 1960-1970 . . . 3 for defense purchases since 1965, the share of the nation's output (Gross National Product) accounted fo r by Federal purchases was essentially unchanged from the average fo r the previous five-year period. This article reviews the State and Local Revenues and Expenditures, 1960-1968 ...................... 15 changes in the composition of Federal spending and receipts that occurred during the 1960's and discusses some of the key developments that affected expenditures and revenues. 3 E C O N O M IC R E V IE W Federal Government spending, as indicated in rate of advance of any type of transfer payment the national income accounts budget, can be by the divided between expenditures fo r purchases of Interest payments on the Federal debt and govern goods and services (a component of GNP) and ment subsidies contributed to the balance of the transfer increase in Federal Government spending. payments (a component of personal Federal Government in recent years. income). Transfer payments are excluded from the Nearly 60 percent of the rise in Government GNP account "Federal Government purchases" spending during the decade occurred between because they represent a redistribution of income 1965 and 1969. Despite the rapid expansion in rather than a payment fo r a good or service Federal Government purchases between 1965 and produced. The Federal Government redistributes 1969, the share of GNP allocated to the Federal income to sector was unchanged from the average fo r the individuals (for social welfare pay ments), to business (for subsidies), and to other 1960-1964 period. On a year-to-year basis, how governments (such as grants-in-aid to states and ever, the proportion of total output accounted for local governments, and grants to foreign govern by ments). Nondefense spending fo r both social services and From 1960 to 1969, total Federal Federal purchases fluctuated (see Table I). spending rose at an average annual rate of 8.3 physical resources and defense spending rose faster percent (see Table I). Government purchases of than GNP and, thereby, absorbed a larger share of goods and services grew more slowly than total total output. On the other hand, spending fo r the spending, while grants to government units and space program declined both absolutely and rela transfer payments to individuals and business rose tively between 1965 and 1969, while the propor more rapidly than overall Federal spending. Conse tion of national output accounted for by the quently, purchases of goods and services declined operations of the Federal Government ("General as a share of total Federal spending during the government") was virtually unchanged from the 1960's, while grants to other government units average fo r 1960-1965. and transfers to individuals increased as a share of Federal spending. Of the $98.3 billion increase in Federal Govern GROWTH AND COMPOSITION OF FEDERAL OUTLAYS ment spending from 1960 to 1969, 49 percent The unified budget, which represents the finan consisted of purchases of goods and services. cial plan of the Federal Government, gives a more Outlays for defense goods and services accounted comprehensive view of the fiscal activities of the for nearly 71 percent of the increase in Federal Federal Government than the national income Government purchases in the period, w ith the balance in nondefense programs, especially for accounts budget. The unified budget incorporates social services, such as education, health, and total spending, lending, and financing activities of welfare. Transfer payments to persons made up the Federal Government.1 The two budgets differ about 29 percent of the increase in spending, while in several respects. For example, the N IA budget Federal Government grants-in-aid to state and 1 local governments accounted for 14 percent of the Federal rise. Federal Government grants showed the largest March 1968. Digitized for 4FRASER an integrated set of accounts that includes the See "The New Federal Budget," Economic Review, Reserve Bank of Cleveland, Cleveland, Ohio, N O V E M B E R 1970 TABLE I Distribution and Growth of Federal Government Expenditures National Income Accounts Budget Selected Calendar Years Total Federal Government expenditures Purchases of goods and services Defense Nondefense Transfer payments Grants-in-aid to state and local governments Net interest paid Subsidies less current surplus of government enterprises 1960 1965 1969 (Bil. of $) (Bil. of $) (Bil. of $) $ 93.0 53.5 44.9 8.6 23.4 6.5 7.1 $123.5 66.9 50.1 16.8 32.5 11.1 8.7 $191.3 101.3 78.8 22.6 52.1 20.2 13.1 2.5 4.3 4.6 Average Annual Percent Change, Compounded 1geo196519601965 1969 1969 5.8% 4.5 2.2 14.2 6.8 11.3 4.2 11.7 11.6% 11.0 12.0 7.8 12.6 15.9 10.9 8.3% 7.3 6.4 11.3 9.3 13.4 7.1 1.6 7.1 Federal Government Purchases (as a Percent of GNP) Distribution of Federal Government Purchases Gross National Product Federal Government purchases National security National defense International affairs and finance Veterans benefits and services Total Government outlays less national security Social services Education and manpower Health Income security and welfare Physical resources Agriculture and agricultural resources Natural resources Community and transportation Community development and housing Interest on public debt General government Space research and technology $503.7 53.5 46.4 44.9 0.3 1.2 7.1 1.1 0.4 0.4 0.4 3.9 0.9 1.4 1.3 0.2 - 0.2 1.5 0.6 $684.9 66.9 52.1 50.1 0.5 1.5 14.8 2.5 0.7 0.8 1.0 4.6 0.3 2.1 1.7 0.4 0.0 2.2 5.6 $931.4 101.3 81.1 78.8 0.6 1.8 20.2 4.9 1.3 1.5 2.2 8.5 2.4 2.5 2.6 1.0 0.2 2.9 3.9 1960 1965 1969 100.0% 10.6 9.2 8.9 0.6 2.4 14.1 2.2 0.8 0.8 0.8 7.7 1.8 2.8 2.6 0.4 n.a. 3.0 1.2 100.0% 9.8 7.6 7.3 0.7 2.1 21.6 3.7 1.0 1.2 1.4 6.7 0.4 3.1 2.5 0.6 n.a. 3.2 8.2 100.0% 10.9 8.7 8.5 0.6 1.9 21.7 5.3 1.4 1.6 2.3 9.1 2.6 2.7 2.8 1.0 n.a. 3.1 4.2 NOTE: Details may not add to totals because of rounding, n.a. — Not Applicable. Source: U. S. Department of Commerce 5 EC O N O M IC R E V IE W TABLE II Budget Receipts, Outlays and Surplus or Deficit Unified Budget Fiscal Years 1960-1970 (Bil. of $) 1960 Receipts, expenditures, and net lending: Expenditure Account: Receipts Expenditures (excludes net lending) 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 $92.5 $94.4 $ 99.7 $106.6 $112.7 $116.8 $130.9 $149.6 $153.7 $1 87.8 $193.8 90.3 96.6 104.5 111.5 118.0 117.2 130.8 153.2 172.8 183.1 195.0 + 2.2 -2 .2 -4 .8 -4 .9 - 5 .4 -0 .3 0.0 -3 .6 -19.1 + 4.7 -1.1 8.3 6.4 7.9 6.7 9.6 7.3 9.6 9.8 10.2 9.7 10.9 9.7 14.6 10.8 17.7 12.6 20.3 14.3 13.2 11.7 7.9 6.1 + 1.9 + 1.2 + 2.4 -0.1 + 0.5 + 1.2 + 3.8 + 5.1 + 6.0 + 1.5 + 1.8 92.5 94.4 99.7 106.6 112.7 116.8 130.9 149.6 153.7 187.8 193.8 92.2 97.8 106.8 111.3 118.6 118.4 134.7 158.3 178.8 184.6 196.8 Budget surplus or deficit + 0.3 -3 .4 -7.1 -4 .8 -5 .9 -1 .6 - 3 .8 - 8 .7 -2 5 .2 + 3.2 -2 .9 Expenditure account surplus or deficit Loan Account: Loan disbursements Loan repayments Net lending Total budget: Receipts Outlays (expenditure plus net lending) NOTE: Details may not add to totals because of rounding. Sources: The Office of Management and Budget and U. S. Department of Treasury excludes means of financing the budget and net loan account includes transactions, such as Federal lending activities of the Federal Government. In Government purchases o f mortgages (through the addition, receipts and expenditures are reported Government differently in the two budgets. This article reviews, financing of farm credit, and financing urban in broad terms, the fiscal activities of the Federal renewal programs. Expenditures and net lending Government as reported in the unified budget. are equal to total outlays of the Federal Govern National Mortgage Association), lending ment. Because the expenditure and loan accounts accounts" of the unified budget are shown in are separated, the amount of the total Federal Table II. Receipts include all types of tax receipts, surplus or deficit in the expenditure account can trust funds receipts (such as social security trust be compared w ith the surplus or deficit in the loan funds), as well as receipts from the earnings of the account. Federal activity The "receipts, expenditures, and Reserve System that are paid to the Loan of disbursements and net lending the Federal Government, which Treasury Department. Expenditures include out accounted lays, except fo r loans, and trust funds. The unified portion of total Federal outlays, rose sharply in fo r a relatively small but growing budget identifies the lending activity of the Fed 1966, 1967, and 1968 and, thus, contributed eral Government by recording disbursements for im portantly to the overall Federal budget deficit loans and repayments (the difference being net (see Table II). On the other hand, Government lending) separately from other expenditures. The disbursements fo r loans fell after 1968 because of 6 N O V E M B E R 1970 T A B L E III Distribution and Growth of Federal Government Outlays Unified Budget Selected Fiscal Years 1960 Bil. of $ rotal Outlays $92.2 National security 54.4 National defense 45.9 International affairs and finance 3.1 Veterans benefits and services 5.4 Total Government outlays less national security 37.8 Social services 20.0 Education and manpower 1.3 Health 0.8 Income security 18.0 Physical resources 10.1 Agriculture and rural development 3.3 Natural resources 1.0 Commerce and transportation 4.8 Community development and housing 1.0 1nterest 8.3 General government 1.3 Space research and technology 0.4 1970 Average Annual Percent Change, Compounded Percent Bil. of $ of Total 1960- 1965- 19601965 1970 1970 1965 Percent of Total Bil. of $ Percent of Total 100.0% 59.0 49.8 $118.4 59.6 49.6 100.0% 50.4 41.9 $196.8 92.4 80.3 100.0% 47.0 40.8 5.1% 10.7% 9.2 1.9 1.6 10.1 7.9% 5.5 5.7 3.3 4.3 3.7 3.5 1.8 7.3 - 4.4 1.4 5.9 5.7 4.8 8.7 4.3 1.1 8.7 4.8 41.0 21.7 1.4 0.8 19.5 10.9 58.8 29.7 2.5 1.7 25.5 14.5 49.6 25.1 2.1 1.5 21.5 12.3 104.4 63.9 7.4 15.8 40.7 21.4 53.0 32.5 3.8 8.1 20.7 10.9 9.2 8.2 14.5 18.0 7.2 7.5 12.1 16.6 24.0 56.2 9.8 8.0 10.7 12.3 19.2 35.6 8.5 7.8 3.6 1.1 5.2 4.8 2.1 7.4 4.1 1.7 6.2 6.5 2.5 9.3 3.3 1.3 4.7 7.7 15.2 9.1 6.2 4.1 4.7 6.9 9.5 6.8 1.1 9.0 1.4 0.4 0.3 10.4 2.2 5.1 0.2 8.7 1.9 4.3 3.1 18.3 3.4 3.7 1.6 9.3 1.7 1.9 -2 7 .5 4.5 10.7 66.3 61.0 12.0 8.7 -6 .3 13.0 8.2 9.7 25.0 NOTE: Details may not add to totals because of rounding. Federal Government contributions to employee retirement and interest received from trust funds are deducted from total outlays but not from individual functions listed above. Source: The Office of Management and Budget the transfer of major lending agencies (Federal Although National Mortgage Association and Farm Credit showed the largest growth rates fo r any Administration) to private ownership. Government function during 1960 to 1970, such Between fiscal years 1960 and expenditures fo r the space program single 1970, total spending started from a small base. Moreover, Federal outlays (including expenditures and net outlays fo r the space program have been declining lending activity) rose by $104.6 billion (see Table in recent years. III). Outlays fo r most major functions showed National Security. Outlays fo r national defense sizable dollar increases during the decade; how rose at an average annual rate of 5.7 percent from ever, the largest growth rates were recorded for 1960 to 1970 and constituted the largest single nondefense activities, especially for health, educa component of the Federal budget. Between 1960 tion and manpower, community development and and 1965, defense expenditures rose at an average housing, and fo r operations of the Government. rate of 1.6 percent annually, but were stepped up 7 E C O N O M IC R E V IE W sharply following the escalation of m ilitary activi the major demographic changes that occurred in ties in Vietnam by the United States in 1965. At the recent peak in fiscal year 1969, however, the past decade. Income security programs make up the bulk of defense spending still accounted fo r a smaller share Federal outlays fo r social services and are largely of total Federal outlays and of GNP than during financed through specific types of payroll taxes. It the Korean War. is estimated that these programs, which include National defense spending accounts for the bulk social security, unemployment insurance, and rail of Federal outlays for national security. Other road retirement, covered 20 m illion beneficiaries activities related to national security include pro in 1970. Outlays fo r income security programs in grams fo r fiscal year 1970 amounted to $40.7 billion, w ith affairs. In veterans services and international recent years, outlays fo r veterans nearly 80 percent financed from trust funds benefits have been stepped up, reflecting the obtained through contributions by employers' and enlarged size of the armed forces and the enact employees' payroll taxes. Between 1960 and 1970, ment of a "G . I. B ill” for Vietnam veterans. outlays fo r social security (Old-Age, Survivors, and affairs Disability Insurance), the largest of the income (mostly foreign aid programs) rose by only 1.4 security programs of the Federal Government, percent annually during the 1960's; outlays were more than doubled, as coverage was broadened at a reduced level in 1969 and 1970, after being and benefits improved. As a result of the rapid held relatively constant from 1962 to 1968. growth in outlays fo r income security programs, Finally, expenditures Social Services. broadened for The international Government's the relative importance of these programs rose include providing from 19.5 percent of Federal outlays in 1960 to Federal functions, which social services and achieving stabilization goals, 20.7 percent in 1970. added significantly to the acceleration in Federal Certain types of Federal social service outlays spending during the 1960's. As shown in Table III, are financed from the Federal budget (as distinct outlays fo r social services accounted for the largest from trust funds) and have as their ultimate goal dollar increase in the Federal budget between the improvement of the quality of the nation's 1960 and 1970 ($43.9 billion) and constituted the work force. Although frequently thought of as a second largest and the fastest growing section of Federal welfare measure, spending fo r education the budget. Social service programs, as defined and health is also presumed to result in upgrading here, include education and manpower programs, the quality of the labor force, which in turn health, and income security. For each of these represents a contribution to stabilization and to activities, the means o f financing, aims, and economic growth. o economic costs and benefits differed. The rapid The Federal Government's assumption of growth of these activities reflects changing a tti hospital and medical care fo r the aged and poor tudes toward poverty, geographic m obility, and during the 1960's also contributed im portantly to 2 Outlays for Space Research and Technology showed the fastest growth from 1960 to 1970 (25 percent average annual increase). However, outlays have been declining, in absolute and relative terms, since 1966. 8 the rapid growth of total Government expendi tures. As shown in Table III, Federal outlays fo r health rose from $0.8 billion in 1960 to $15.8 billion in 1970 (with another large increase N O V E M B E R 1970 scheduled fo r fiscal year 1971). New programs, the The latter programs are designed to reduce the sharp rise in the cost of medical services, growth in number of unemployed and underemployed by demand fo r newly available services, and a gener providing job training and job opportunities. ally short supply of facilities contributed to the increase in Federal spending for health and medical care. Physical Resources. Federal Government out lays fo r physical resources constituted the third largest type of spending in the Federal Budget during the 1960's. Physical resources, as defined The fastest growing areas in Federal outlays for here, include agricultural and rural development personal health care include aid fo r medical p ro gram s, research, Medicare, and commerce and transportation, and community and Medicaid. Except for n a tu ra l resource development, Medicare services, which are primarily financed by housing development. The bulk of Federal expen trust funds, the numerous health programs (includ ditures for physical resource development con ing medical research and Medicaid) undertaken by tribute to the nation's productive capacity through the Federal Government are financed from general programs such as soil conservation, irrigation, revenues. The bulk of the increase in Federal dams, and adequate transportation facilities. outlays fo r health has been due to Medicare and Higher outlays for physical resources accounted Medicaid programs enacted in 1967 that cover for $11.3 billion of the $104.6 billion increase in physical care, hospitalization, and extended care total outlays from 1960 to 1970. Since 1965, facilities fo r the aged. The dramatic rise in Federal Federal outlays fo r Medicare and Medicaid since 1967 represented a declining share of the total, although reflects the sharp increase in medical costs as well absolute spending doubled during the 1960's. as the rising number of persons covered under the Programs to modernize highways and airways and programs. to aid community development and housing have budget outlays fo r physical resources contributed to the large increases in spending in Spending for education and manpower training recent years. Vast problems of pollution, urban programs rose from $1.3 billion in 1960 to $7.4 renewal, substandard housing, and traffic con billion in 1970. Federal spending for education gestion on the nation's highways and airways seem includes a wide range of programs, including aid to to point toward an acceleration of spending for disadvantaged children at all levels of education, physical resources during the 1970's. aid to college students, vocational education, Miscellaneous. A t least two other aspects of science and research, and manpower training. The Federal outlays deserve brief comment because of bulk Federal spending for their contribution to the upward trend in expendi education has been directed toward elementary tures. Interest payments on the Federal debt, and secondary education (primarily for benefit of which accounted fo r about 9.3 percent of total children from low-income families), higher educa Federal outlays in 1970, rose from $8.3 billion in of the growth in tion (largely in the form of student grants and 1960 to $18.3 billion in 1970. The steady increase loans, again fo r low-income families), and man in interest payments reflects the accelerated rise in power the Federal debt and higher costs o f financing training programs (which cover skill training, job placement, and on-the-job training). Treasury borrowings. 9 E C O N O M IC R E V IE W Finally, outlays by the National Aeronautics amount of income subject to taxes and of legis and Space Adm inistration rose from $0.4 billion in lation, which affects the base and the tax rate. fiscal year 1960 to a peak of $5.9 billion in 1966. Changes in the level of economic activity affect Because the development phase of the lunar income, which in turn affects tax collections. landing program is complete, such outlays have Accordingly, year-to-year fluctuations in personal declined since 1966. Outlays for other aspects of income tax receipts and corporate tax receipts the space program, such as space science and space contribute to instability in Federal revenues. On technology, have remained relatively unchanged in the other hand, receipts from employment payroll recent years, since Federal budgetary constraints taxes have risen steadily, irrespective of changes in have forced suspension and deferments of several business programs. revenue occur when tax rates and the tax base are Per Capita Federal Outlays. The bulk of the conditions. Discretionary changes in adjusted by legislation. increase in Federal outlays from 1960 to 1970 Numerous changes in the tax base and in tax reflects an expanded number of activities under rates influenced the growth of Federal revenues taken by the Federal Government. However, some from fiscal 1960 to fiscal 1970. Emphasis in fiscal of the rise in Federal spending was associated w ith policy shifted from expenditures to tax policy as a the growth in population. In other words, the 13- means to achieve changing stabilization goals. In percent increase in the population of the United the 1962 Economic Report o f the President, States between 1960 to 1970 would in itself add formal proposals were made to reduce individual to total Federal spending, even if no additional tax rates in order to stimulate aggregate demand. services were provided. Because services have In a message on tax reform sent to Congress in expanded and prices have risen, there has been a January 1963, the President stated that Federal rapid increase in Federal expenditures per person. income taxes constituted the "largest single barrier From fiscal 1960 to fiscal 1968 (latest year for to full employment...and to a higher rate of which data are available) per capita outlays rose economic grow th..." Based from stration's estimates, Federal $426 to $760, w ith slightly more than on tax the Adm ini rates were one-half of the increase associated w ith national generating a level of revenue that would balance defense. The balance is made up largely of the budget before the economy reached full grants-in-aid, health, education and welfare, space employment. Thus, Federal Government expendi research and technology, and interest on the tures could be increased or revenues held down Federal national through tax cuts. The budgetary restraint that priorities, per capita outlays for health, education, contributed to the shortfall in aggregate demand and welfare in 1968 amounted to $34.41, com was apparent in the high employment surplus, pared w ith $23.24 fo r space programs and $58.08 which is an estimate of the Federal budget surplus debt. Despite the shift in for interest on the Federal debt. on GROWTH AND COMPOSITION economy were at a high employment level. Against a national income accounts basis if the OF FEDERAL REVENUES the background of substantial surpluses in the high Federal Government revenues are a function of employment budget, the Adm inistration chose to the level of economic activity that determines the lessen the restraining effects of the budget by 10 N O V E M B E R 1970 T A B L E IV Distribution and Growth of Federal Government Receipts Unified Budget Selected Fiscal Years 1960 1965 Bil. of $ Percent of Total $92.5 40.7 21.5 100.0% 44.0 23.2 Total budget receipts Individual income taxes Corporation income taxes Social insurance taxes and contributions Excise taxes Other receipts 14.7 11.7 3.9 15.9 12.6 4.2 Average Annual Percent Change, Compounded 1970 Bil. of $ Percent of Total Bil. of $ Percent of Total $116.8 48.8 25.5 100.0% 41.8 21.8 $193.8 90.4 32.8 100.0% 46.6 16.9 22.3 14.6 5.8 19.1 12.5 4.9 45.3 15.7 9.6 19601965 23.4 8.1 5.0 19651970 4.8% 10.7% 3.7 13.1 5.2 3.5 8.7 4.5 8.1 15.3 1.5 10.9 19601970 7.7% 8.3 4.3 11.9 3.0 9.5 NOTE: Details may not add to totals because of rounding. Source: The Office of Management and Budget reducing tax rates rather than by increasing Federal spending. Revenue and Expenditure Control Act of 1968 as a means to temper consumer spending and reduce Trends in Federal Revenues. From 1960 to inflationary pressures that were widespread in the 1970, total Federal Government receipts grew at economy at that time. The income tax surcharge an average annual rate of 7.7 percent, which was was extended into 1969, reduced to 5 percent on slightly less than the growth in total Federal January 1, 1970, and finally eliminated on June outlays 30, 1970. (see Table IV). However, substantial reductions in rates fo r personal and corporate The most rapid growth in Federal revenues income taxes, as well as reduction in certain excise during 1960 to 1970 took place in social insurance taxes, tended to hold down the growth in revenues taxes and contributions (including employment during the 1960's. The largest source of Federal taxes, such as social security, unemployment revenue is still the individual income tax. From insurance, and retirement contributions of Federal 1960 to 1970, revenues from personal taxes grew Government employees), which rose at an average by 8.3 percent annually, with the bulk of the annual rate of 11.9 percent from 1960 to 1970. growth occurring since 1965. Major tax legislation Receipts from that affected growth in revenues from individual accounted for most of the increase ($9.7 billion in income taxes included the Revenue Act of 1964 1960 to $29.2 billion in 1970), reflecting the old-age and survivors insurance and the Revenue and Expenditure Control Act of larger number of persons enrolled and contributing 1968. In the Revenue Act of 1964, tax rates on to social security and several increases in the individual incomes were adjusted downward to taxable earnings base and in payroll tax rates. The stimulate consumer spending and thus to boost inception of Medicare in 1967 boosted Federal aggregate demand. An income tax surcharge of 10 receipts from hospital insurance from $0.9 billion percent was imposed on personal incomes in the in 1966 to $4.7 billion in 1970. 11 E C O N O M IC R E V IE W Numerous changes in tax policy also affected Legislation in 1965 repealed excise taxes on many Federal revenues from corporate taxes between manufactured items (such as household appliances, 1960 and 1970. For many years, receipts from luggage, jewelry, furs) and services (such as tele corporate income taxes were the second largest graph services) and reduced excise taxes on auto source of Federal revenues. However, growth in mobiles. On January 1, 1966, the excise tax on revenues from corporate income taxes averaged autos was cut again and then restored in March 4.3 percent annually, and since 1968, that source 1966 as an anti-inflationary measure. The Tax of revenue has fallen and now ranks behind social Reform Act of 1969 postponed reductions in tax insurance taxes. The Revenue Act of 1964 adjusted the corporate tax rate downward from 52 rates on automobiles and telephones that were scheduled in tax legislation in 1966. percent to 48 percent o f taxable income. Prior to adjustment in tax rates, the Revenue Act of 1962 Shifts in Distribution of Revenues. Marked provided fo r a 7 percent tax credit fo r business shifts in the relative importance of major sources investment in plant and equipment (3 percent for of Federal revenue occurred during the 1960's, utilities), and other legislation provided for more partly reflecting changes in tax legislation. For accelerated depreciation of machinery and equip many years, the two major sources of Federal ment. Government revenue were individual income taxes These measures were adopted to shift investment spending and hence contribute to more and corporate income taxes. Both personal income rapid growth in aggregate demand. In response to taxes and corporate income taxes declined some excess demand and inflationary pressures, the tax what in relative importance, while the share of credit was temporarily suspended in 1966 and total revenues from employment taxes rose during then restored the following year as inflationary the 1960's (see Table IV). For example, until pressures abated. The Tax Reform Act of 1969 1963, personal and corporate taxes accounted for permanently repealed the investment tax credit. about 78 to 80 percent of total Federal Govern The second major change that affected revenues ment receipts; since 1963, these two sources have from corporate income taxes came in the Revenue accounted fo r 63 to 67 percent of Federal receipts and Expenditure Control Act of 1968, which The decline in the relative importance of those imposed a 10 percent surcharge on corporate taxes two revenue sources reflects the sharp rise in social from January 1968 through June 1969. However, insurance taxes during the 1960's. Since 1968, receipts from corporate income taxes did not slow Federal revenues from social insurance taxes have until 1970, reflecting the combined effects of the accounted fo r the second largest source of total business slowdown and the extension of the tax Federal surcharge at 5 percent until June 30, 1970. insurance taxes, which revenues. The rapid growth in social averaged 11.9 percent annually from 1960 to 1970, reflects numerous The rate of growth in Government revenues increases in social security tax rates in recent from excise taxes during 1960-1970 was less than years. The fourth major source of Federal receipts, half excise taxes (including taxes such as on tobacco, the rate of growth fo r overall Federal revenues. Prior to 1965, excise taxes were im motor vehicles, and gasoline) also accounted for a posed on a wide range of products and services. diminishing share of total Federal receipts. 12 N O V E M B E R 1970 FEDERAL DEFIC ITS AND FEDERAL DEBT particularly true during economic contractions or business slowdowns, when the N IA budget is in As shown in Table II, from fiscal years 1960 to deficit, whereas the high employment budget 1970, the Federal Government budget was in could remain in surplus. Such was the case during surplus only in 1960 ($0.3 billion) and 1969 ($3.2 the early 1960's, when the N IA budget showed a billion). The largest deficits during the decade sizable occurred in 1967 ($8.7 billion) and in 1968 ($25.2 budget was in surplus. Similarly, in the second and billion), because of rapid expansion of defense and third quarters of 1970, the shortfall in Federal nondefense outlays. revenues associated w ith the business slowdown The bulk of the deficits reflect the more rapid increase in expenditures than in receipts. In addition, net lending activity deficit, whereas the high employment contributed significantly to a deficit (N IA basis) of nearly $13 billion at an annual rate. In brief, sharp rise in the overall deficits (see Table II). In deficits in conventional budgets were associated w ith slow growth in economic activity and could 1966, net lending activity accounted for nearly all not be interpreted as stimulative. of the Federal Government contributed to the Therefore, a deficit in the Federal budget is not of the Federal deficit. A deficit in the Federal budget can be planned, necessarily an indication of the thrust of fiscal reflecting discretionary changes in fiscal policy policy. Deliberate deficits were incurred during the (such as a reduction in tax rates, an increase in early spending, or some combination). A deficit can also Budget policy during the early years of the past be unplanned, reflecting the effects of changes in decade focused on the high employment budget the level of economic activity on the budget rather than surpluses or deficits in the conven 1960's to stimulate aggregate demand. (which contributes to a shortfall in revenues). tional budgets. It also appears that the concept of Therefore, the effects of a deficit on economic the activity w ill be different. In the case of the former, economic policy planning in the current situation. high employment budget is being used in a deficit would tend to stimulate overall economic Federal Debt. Use of budget policy to promote activity, especially if financed by creation of new high employment in the economy may require money, whereas effects of an unplanned deficit frequent and sizable deficits in the Federal budget. (assuming a constant level of expenditures) would Consequently, the Federal Government is forced tend to cushion a slowdown in the economy. In to borrow funds (unless new money is created), particular, both the national income accounts which adds to the Federal debt. Deficits in the budget and the unified budget reflect the effects budget have required frequent increases in the of fluctuations in economic activity on the budget. statutory A more useful indicator of fiscal policy is the high employment budget, which represents an ceiling on the debt, which in turn generate concern over the size, the cost, and the burden of the debt. attempt to remove the effects of fluctuations in From 1960 to 1970, the Federal debt rose by the pace of economic activity on the Federal nearly $92 billion to $383 billion, w ith most of budget. Hence, the high employment budget w ill the growth having occurred since the mid-1960's frequently diverge sharply from the surplus or (see Table V). On a per capita basis, the Federal defict debt rose moderately during the early 1960's and indicated in the NIA budget. This is 13 E C O N O M IC R E V IE W TABLE V Nevertheless, the relationship of the debt to GNP, Federal Debt, Per Capita Debt and Gross National Product Fiscal Years 1960-1970 which is a measure of the nation's ability to carry Fiscal Year Gross Federal Debt Per Capita Debt the debt on the basis of current output, suggests no deterioration. In fact, throughout the 1960's, Gross Fede Debt (as Peri of GNP) $290.9 292.9 303.3 310.8 316.8 323.3 329.5 341.3 369.8 367.1 382.6 had since the peak years of World War II. In other words, during the 1960's because output rose at a (Bil. of $) 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 the debt-GNP relationship continued to slide as it $1,616 1,600 1,631 1,647 1,655 1,668 1,682 1,725 1,850 1,818 1,873 58.7% 57.8 55.9 54.2 51.7 49.4 45.7 44.4 44.7 40.8 40.0 Sources: U. S. Department of Commerce and The Office of Management and Budget faster rate than the buildup of the Federal debt, the nation's capacity to carry the steadily enlarging debt was improved. CONCLUDING COMMENTS Fiscal policy in the 1960's was marked by frequent changes in tax legislation fo r the purpose of influencing aggregate demand, employment, and prices. However, since 1965, accelerated growth in Federal defense and nondefense outlays, which were not offset by tax changes, has contrib spurted to about $1,873 in 1970. The cost of uted im portantly to enlarged deficits and inflation interest payments have also risen sharply because at a time when of the enlarged debt and higher interest rates. employment. The apparent acceptance of the the economy was at high- Interest on the Federal debt accounted fo r about 9 high employment budget concept in the present percent of Federal outlays in fiscal 1970 and situation seems to im ply willingness to consider represents one of the largest of the so-called incurring enlarged deficits in periods of economic "uncontrollable” outlays in the Federal budget. slack. 14 N O V E M B E R 1970 STATE AND LOCAL REVENUES AND EXPENDITURES, I 9 6 0 — 1968 During the 1960-1968 period, attention was focused on expenditures. Federal Government revenues and Between 1960 and 1968, total 1960-1968 (the last year fo r which complete data are available).2 Combined state and local revenues and expenditures are used throughout the article, Federal Government revenues increased from $92 because in those states where per capita expendi billion to $154 billion per year, fo r an average tures and revenues are relatively low, the lack of annual rate of growth of 6.6 percent. In the same financing at one level of government may be made period, total Federal expenditures increased from up for, at least in part, at the other level. $92 billion to $179 billion, for an average annual rate of 8.7 percent. However, total state and local REVENUES revenues for the "m ean" state increased from State and local governments increased per capita $990 m illion in 1960 to $1,966 m illion in 1968,1 revenue from their own sources at an average for an average annual rate o f growth o f 9 percent. annual rate o f 7.2 percent during fiscal years Expenditures at the state and local levels increased 1960-1968.3 In 1960, the average per capita from $968 m illion in 1960 for the mean state to revenue o f all state and local government units $2,008 m illion, or an average annual increase of from their own sources amounted to $234.95, 9.6 percent. compared w ith $408.86 in 1968 (see Table I). This This article examines the growth o f state and increase in revenues required new and expanded local revenues and expenditures during fiscal years forms of state and local taxation. In the past, state i and The primary data sources for this article are: U. S. Department of Commerce, Bureau of the Census, Govern mental Finances in 1960 to 1969, Series GF 60 to 69, No. 5, (Washington, D. C.: U. S. Government Printing Office), and Facts and Figures on Government Finance, 11-14th Editions, (New York: Prentice-Hall, Tax Foundation, Inc.,). Averages were calculated by summing the data for the individual state and dividing by 51 (including the District of Columbia). local governments relied heavily on the property tax as the primary source of revenue. Recently, however, these governmental units have 2 Preliminary expenditure data are available for fiscal 1969, however, revenue data are still incomplete. 3 Revenue from own sources does not include Federal funds allocated to state and local governments. 15 E C O N O M IC R E V IE W TABLE I Average Per Capita State and Local Revenues Total state and local revenue Total state revenue from own sources Percent of total state and local revenue Property tax revenue Percent from own sources State income tax revenue Percent from own sources State sales tax revenue Percent from own sources Other revenue Percent from own sources Intergovernmental transfers Percent of total state and local revenue 1960 1968 Average Annual Rate of Growth 1960-1968 $285.77 $516.32 7.7% $234.95 $408.86 7.2 82.21% $ 83.45 35.51% $ 12.67 5.39% $ 25.51 10.85% $113.32 48.23% $ 50.82 79.18% $127.84 31.26% $ 29.14 7.12% $ 49.13 12 .01 % $194.93 49.61% $107.46 17.78% 20.81% Sources: U. S. Department of Commerce, Bureau of the Census, Governmental Finances and Facts and Figures on Government Finance, Tax Foundation 16 5.5 9.7 8.5 7.0 9.8 N O V E M B E R 1970 been turning to additional methods of taxation, base. Although exceptions to any tax erode the such as income taxes and sales taxes. tax base and do not always improve the tax, they Tax Structure. The tax structure of an area is are often necessary fo r political reasons and set by law and is based on historical, political, and usually do not significantly complicate the sales economic considerations. In general, to meet the and income taxes to the same extent as the current rapid expansion o f expenditures, state and property tax. Exceptions to property taxes are local governments have placed less reliance on only possible through an adjustment in the valu property taxes and have moved toward broad- ation or classification of property that requires based taxes, such as income and sales taxes. subjective judgments. On the other hand, specific Although the "goodness" of a given tax structure categories of purchases, such as food or services, is a value judgment, many economists working in can be eliminated from the sales tax, while an the area of public finance have accepted the income tax can be adjusted by several means, criteria of sim plicity, fairness, and minimum effect including income exclusions, exemptions, and tax on economic stability as reasonable attributes of a credits. Another important characteristic of a "good" good tax.4 If these criteria are accepted, then the current trend is toward more effective taxation, tax is its fairness. One method of judging whether because sales and income taxes, which currently a tax is fair is on grounds of a bility to pay. are providing the bulk o f additional state and local According to this criteria, the more progressive a revenue, are superior to the property tax when all tax6 is the better it is, even though those paying three criteria are considered.5 In many instances, the highest taxes often receive the least benefit it would seem that some of the benefits o f sales from the services provided by the tax revenue. and income taxes are blunted because the older Because property taxes are based on a fixed sum forms o f taxation are frequently retained. per dollar o f assessed valuation, such taxes are, in For example, sales and income tax bases are theory, proportional to the value o f property. much simpler to calculate than the property tax Even if exact valuation is carried out, the property tax 4 John F. Bell, History o f Economic Thought, (New York: Ronald Press Co., 1967), pp. 168-169; James M. Buchanan, The Public Finances, (Homewood, Illinois: Richard D. Irwin, Inc., 1965); John F. Due, Government Finance: Economics o f the Public Sector, (Homewood, Illinois: Richard D. Irwin, Inc., 1968), pp. 79-83; Richard A. Musgrave, The Theory o f Public Finance, (New York: McGraw-Hill Book Co., 1959), pp. 42-115; Adam Smith, The Wealth o f Nations, London: G. Bell & Sons, Ltd., 1921), Vol. II, pp. 351-154; Carl Shoup, Public Finance, (Chicago: Aldin Publishing Co., 1969), pp. 21-43. 5 See Dick Netzer, Economics o f the Property Tax (Washington, D. C.: The Brookings Institution, 1966), pp. 32-66. is likely to be regressive w ith respect to income, since property tax payments w ill probably account for a smaller share of total income as income rises.7 Progressive is used here to describe a tax that levies progressively increasing rates as income increases. A regressive tax levies lower percentage rates as income increases and a proportional tax levies the same percent age rate regardless of income. 7Since only property owners pay the property tax directly, it is widely believed that this group is being unduly burdened with taxation and, therefore, the tax is unfair. Renters, however, also participate in sharing the property tax burden since it is shifted forward in the form of increased rent. 17 E C O N O M IC R E V IE W The state and local sales tax has a fixed rate of A tax that automatically decreases tax revenue as taxation imposed on either all or selected retail the economy slows and increases tax revenue as sales. The degree of regressiveness of the sales tax the economy becomes more active w ill have the depends upon the items excluded from taxation; most stabilizing effect. that is, the more necessities, such as groceries, that tax is the best example o f a tax that has a are exempt from sales taxation, the less regressive stabilizing effect. Not only does the absolute yield the tax. If all individuals spent the same portion of of the income tax respond to economic activity, their incomes on taxable items, the sales tax would but the income tax rates respond countercyclically be proportional w ith respect to income. Usually a as well (i.e., as an individual's income falls, the fam ily w ith a higher income generally spends a applicable tax smaller share o f its income on taxable items; as a general sales tax, the rate is constant, but the result, the sales tax tends to be regressive. absolute yield of the tax w ill be higher or lower O The progressive income rate also decreases). With the The income tax is the most progressive of the depending on the level of economic activity. As an three primary sources o f state and local revenues— automatic stabilizer, the property tax is the least property, sales, and income taxes. In its simplest efficient of the three types of taxes considered. form, only income from wages is taxed and at a Property taxes are levied on a fixed base and rate, fixed o f taxation and the absolute tax yield is stable regardless of benefits individuals who have nonwage sources of economic conditions. Moreover, legal action is income—usually required to change the rate, and revaluation is rate. Obviously, this form those in the higher income brackets. A t the state level, income taxes are necessary to adjust the base, neither of which usually progressive and include income from all occurs automatically. sources as part of the tax base, thereby insuring Property Tax. Table I shows average per capita that the tax w ill at least be proportional. In revenue derived from property taxes and other addition, 31 o f the 39 states having an income tax selected sources fo r 1960 and 1968.9 In 1960, in 1968 had graduated rate scales, theoretically average per capita state and local receipts from making the income tax progressive w ith respect to property taxes amounted to $83.45. By 1968, income. In those states having fla t rate income average per capita property tax revenues yielded taxes, the tax is proportional w ith respect to $127.84. The property tax provided 35.5 percent income since the absolute tax payment varies of all state and local tax receipts in 1960, in directly w ith income. Although it is d iffic u lt to contrast to 31.3 percent in 1968. Although prop- determine exactly what is happening to the degree of progressiveness of some income taxes, in most cases, the taxes tend to become less progressive as exemptions, exclusions, and credits complicate the tax structure. A third criteria of a "good" tax is its effect on O For a more detailed discussion and qualification see Henry J. Cassidy, "Is Progressive Income Tax Stabi lizing?" National Tax Journal, Vol. X X III, No. 2, June 1970, pp. 194-205 and E. Corry Brown, "The Static Theory of Fiscal Stabilization," Journal o f Political Economy, October 1955, pp. 427-440. economic growth and stability. This criteria is, however, usually discussed more in connection Q w ith Federal taxes than w ith state and local taxes. 1968. 18 See Appendix A for a breakdown of revenue by state for N O V E M B E R 1970 erty tax receipts declined as a proportion of total Although 10 additional states imposed sales such taxes between 1960 and 1968, the relative impor receipts remained the single most im portant source tance o f the sales tax as a source of revenue, of state and local revenue. among revenue during the 1960-1968 period, those diminished Income Tax. As the states slightly imposing during the the sales period. tax, This property tax became apparent inconsistency is due to the fact that the somewhat less important, state income taxes began 10 additional states that imposed a sales tax to provide a larger share of state and local tax received less than recepits. State income taxes accounted fo r 5.4 revenues from the sales tax and not because the 16.8 percent of their total percent o f all state and local revenue derived from share of revenue derived by the original 33 states own sources in 1960, compared w ith 7.1 percent decreased. These figures, however, only include in 1968. During the period, revenues from state sales tax revenue going into state treasuries.11 income taxes rose at an average annual rate of 9.7 percent. Thirty-tw o states had income taxes in Other Revenue. For all state and local govern 1960. For these states, 8.5 percent o f total state ments the category "o th e r" accounted for nearly and local revenue was raised through this form of 50 percent of all state and local revenue from their taxation.10 By 1968, 37 states had an income tax, own sources in 1968. Most of the revenue in this and the proportion of state and local revenue category is derived from gasoline taxes, cigarette provided by income taxes fo r these states had taxes, motor vehicle and operator licenses, and increased to 9.3 percent. proceeds from state-operated enterprises. This category also includes corporate p ro fit taxes that Sales Tax. The sales tax is also an important are levied in some states. Although "o th e r" source of revenue for the states. The state sales tax revenue is the single largest category o f tax was in effect in 33 states in 1960 and in 43 states receipts, it consists o f many different sources of in 1968. In 1960, the state sales tax yielded 10.9 revenue, many o f which on an individual basis percent of state and local revenue fo r all 50 states, yield a relatively low level of receipts. and 16.8 percent if only those states using the A t the state level, "o th e r" revenues are equal to sales tax are included. In 1968, the state sales tax total state revenue from their own sources less provided 12.0 percent of state and local revenue of income tax, property tax, and sales tax receipts. In all 50 states, and 14.5 percent if only those states 1960, 60 percent of all state revenue was derived using the tax are considered. from "o th e r" sources; by 1968, this share had fallen to 55 percent. 10 These data should be interpreted with caution since the 1960 figures include New Jersey, which only imposes an income tax on commuters, and the total revenue on which the percentages are based is total state and local revenue, even though the income tax shown only includes state income tax receipts. Any local revenue collected as income or earnings tax is included in the category "other". 11 In many states, local governments are permitted to add, at their option, an additional sales tax which filters down to the local government; these funds are included in the category "other” in Table I. 19 E C O N O M IC R E V IE W A t the local level, "o th e r” revenue includes all local sources of revenue other than the property EXPENDITURES The increased need fo r state and local revenues tax. Sales and earnings taxes became more widely has come about from the rapid expansion in the used between 1960 and 1968; as a result, the share demand fo r public services and the sharp increases of local revenue derived from "o th e r" sources in the cost o f these services. Between 1960 and increased from 39 percent to 45 percent. 1968, per capita expenditures of state and local governments increased at an average annual rate of Intergovernm ental Transfers. The Federal 7.8 percent, from an average o f $290.60 to Government is another important source of state $530.40. (Revenues increased at a rate o f 7.2 and local revenue.12 The share of total state and percent per year.) The four major categories of local revenue derived through intergovernmental expenditures—education, highways, public welfare, transfers increased from 17.8 percent in 1960 to and health and hospitals—rose at a combined 20.8 percent in 1968. Although the widely dis average annual rate of 7.9 percent and accounted cussed for more than 70 percent of all state and local revenue enacted,13 the sharing plan has not been Federal Government has been expenditures in 1968. providing funds to state and local governments through other programs. If such a revenue sharing Education. Expenditures fo r education make up plan were adopted, all states would receive funds the largest expenditure category. These expendi from the Federal Government according to a tures accounted fo r 36.0 percent o f total state and formula based on the population of the state, with local spending in 1960 and 40.5 percent in 1968. an adjustment fo r the state's own tax effort. These As shown in Table II, per capita expenditures fo r funds would not be "tie d " to any specific use or education averaged $105.67 in 1960 and increased program. In addition, the plan provides fo r funds to $214.85 in 1968. During the period, the average to be transferred directly to local governments, annual growth rate o f per capita education expen also based on the local area's population and own ditures was 9.3 percent, the highest growth rate tax effort. for all categories of expenditures. On a year-toyear basis, the greatest increases in spending for education occurred in 1965, 1966, and 1967, 19 Intergovernmental transfers are not included in "total state and local revenue from own sources," since these when per capita expenditures increased by 11.75 percent, 13.67 percent, and 11.21 percent, funds are from outside of "own sources." respectively. 1^ tion by state and local governments occurred in all Increases in per capita expenditures on educa Federal Revenue Sharing With State and Local Govern ment, Allocations to Major Counties, Cities and Towns, The Department of Treasury, Office of Assistant Secretary for Economic Policy, July 1970; M. L. Weidenbaum, "Alternative Approaches to Revenue Sharing: A Description and Framework for Evaluation," National Tax Journal, Vol. X X III, No. 1, March 1970, pp. 2- 2 2 . 20 states during the 1960 to 1968 period (see Appendix B). In 1960, Wyoming had the highest per capita expenditures fo r education among the states ($172), followed by California ($150). In 1968, the state w ith the highest per capita expenditure on education was Wyoming ($348). N O V E M B E R 1970 TABLE II Average Per Capita State and Local Expenditures 1960-1968 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 Total Expenditures Education Expenditures Highway Expenditures Public Welfare Expenditures $290.60 310.04 318.92 348.58 371.00 399.85 436.92 469.39 530.40 584.65 $105.67 113.29 119.47 130.00 140.98 152.07 173.76 202.22 214.85 238.48 $60.18 61.69 65.29 71.49 77.40 83.55 84.92 92.61 92.53 91.92 $23.78 24.49 25.83 27.21 28.22 29.66 32.26 36.94 42.54 49.88 $19.58 20.96 22.23 23.21 23.75 25.81 28.50 31.39 34.70 39.11 7.8% 9.3% 5.5% 7.5% 7.4% 8.0% 9.5% 4.8% 8.6% 8.0% Average Annual Rate of Growth (1960-1968) Average Annual Rate of Growth (1960-1969)* Health and Hospitals Expenditun * Preliminary. Sources: U. S. Department of Commerce, Bureau of the Census, Governmental Finances and Facts and Figures on Government Finance, Tax Foundation 21 EC O N O M IC R E V IE W Because the data used in this article are averages TABLE III Total Expenditures fo r Highways 1960-1968 (mil. of $) of state and local per capita expenditures, some State and Local expenditure on highways was virtually unchanged Direct Federal 1960 1961 1962 1963 1964 1965 1966 1967 1968 $137 151 151 165 164 127 125 100 173 $ 9,402 9,785 10,341 11,136 11,664 12,221 12,770 13,956 14,481 clarification o f the highway expenditure data is needed. Although the average state per capita Total between 1967 and 1968, total spending fo r high $ 9,539 9,936 10,492 11,301 11,828 12,348 12,895 14,056 14,654 ways by all state and local governments, as well as the Federal Government, increased throughout the 1960 to 1968 period (see Table III). Some of the variation in state highway construction is due in part to the lack o f uniform construction programs for the interstate highway system, which is nearly complete in some states but at lesser stages of Source: U. S. Department of Commerce, Bureau of the Census, Governmental Finances completion in other states. Public Welfare. Average state and local public welfare expenditures made up only 8.2 percent of The next highest per capita expenditures for total expenditures in 1960 and decreased slightly education were $319 and $289 by Alaska and over the period. All of the decrease, however, took Utah, respectively. O f the more populous states, place between 1960 and 1965. In absolute terms, Michigan had the largest expenditures fo r educa per tion in 1968 ($253). increased throughout the 1960-1968 period (see Highways. One indication of a possible shift in capita expenditures on public welfare Table II). priorities at the state and local government level is Although the average annual rate of increase indicated by the relatively slow rate of growth of was 7.5 percent for the entire period, average average per capita expenditures for highways. public welfare expenditures per capita increased Although these expenditures increased in absolute by more than 30 percent between 1966 and 1968. terms during the 1960-1968 period, expenditures As would be expected of welfare expenditures, the for highways had the slowest average annual rate variation among the states is large, and toward the of growth (5.5 percent) among the four major end of the period, the most populous states tended categories of expenditures. In fact, between 1967 to have the largest per capita expenditures. In all and 1968, there was virtually no change in average states, however, welfare budgets rose. The states per capita expenditures fo r highways. As shown in having the highest per capita public welfare expen Table ditures II, average per capita expenditures for highways increased from $60.18 in in 1960 were Oklahoma ($55.17), 1960 to Louisiana ($49.94), and Colorado ($48.52). In $92.61 in 1967 and then decreased slightly to 1960, per capita expenditures were $35.05 in $92.53 in 1968. In 1960, on average, highway California and $26.71 in New York, placing these expenditures accounted fo r about 21 percent of states among the 15 states having the highest per total state and local expenditures, but by 1968, capita public welfare expenditures. By 1968, New the share had decreased to about 18 percent. York's per capita expenditures of $95.43 were the 22 N O V E M B E R 1970 largest of all states, followed by California expenditure fo r health and hospitals grew by 77 ($93.02). Oklahoma, however, ranked third in percent during the period, some states such as New spending in 1968, w ith $92.04 per capita expendi York, the District of Columbia, and Nevada, which tures fo r public welfare. Except for Oklahoma, already had been above the average o f all states, which earmarks its general retail sales tax for increased their per capita expenditures by nearly public welfare, those states w ith the largest per 100 percent. capita expenditures fo r public welfare have more than one-half of their total budget provided by local governments. For example, in New York and CONCLUDING COMMENTS State and local expenditures and revenues California, local governments provided 92 percent increased rapidly during the 1960-1968 period. and 68 percent, respectively, of the total state and The increases were not limited to a few areas, but local public welfare budget. occurred throughout the budgets of all state and Health and Hospitals. During the 1960-1968 local governments. In addition to the increased period, state and local expenditures fo r health and demand fo r publicly provided services, rapidly hospitals in all states increased at an average rising costs fo r services, in general, and a shifting annual rate o f 7.4 percent. However, such expendi of public priorities toward providing a higher level tures decreased from 6.7 percent of total expendi of service contributed to the rise in expenditures. tures in 1960 to 6.5 percent in 1968. Although Education is, perhaps, the best example of the there has been some increase in the quantity and latter, as evidenced by the growth of colleges and quality o f publicly provided health and hospital universities at the state level and com m unity and services, the absolute increases in expenditures junior colleges at the local level. Preliminary data were counteracted in large part by increases in the fo r 1969 indicate that the trend apparent between costs of providing these services. For example, the 1960 and 1968 continued and, in most cases, cost of medical care rose by more than 30 percent accelerated in 1969. during the period. As shown in Table II, the mean state per capita expenditure fo r health and To finance the expanded level o f state and local government, many states turned to new sources of hospitals increased from $19.58 in 1960 to $34.70 revenue, such as the sales and income taxes. In in 1968, w ith most of the increase coming after general, these changes not only provided the state 1965. A t the beginning of the period, the District and local governments w ith additional broad based of taxes, Columbia ($50.92), New York ($36.11), but improved the state and local tax Nevada ($30.56), and Hawaii ($30.53) were the structure in terms of sim plicity, stability, and only states w ith health and hospital expenditures fairness. The Federal Government is an important exceeding $30 per person. By 1968, however, source of revenue to state and local governments, average state and local expenditures had increased and if some of the proposals currently under to $34.70, and the disparity among the states consideration are adopted, more Federal funds w ill became greater. Although the mean per capita flow into state and local treasuries in the future. 23 A P P E N D IX A Per Capita Revenues by State and Local Governments, by Selected Categories State Percent of Percent of Property State and Local State State and Local State Tax Income Tax Total* Sales Tax Total* Alabama $ 33.90 Alaska 91.16 Arizona 150.88 Arkansas 52.44 California 226.18 Colorada 159.49 Connecticut 186.46 Delaware 73.00 District of Columbia 137.01 Florida 114.91 Georgia 75.58 Hawaii 82.33 Idaho 119.01 Illinois 151.01 Indiana 145.96 Iowa 172.17 Kansas 166.21 Kentucky 60.29 Louisiana 55.44 Maine 128.71 Maryland 137.00 Massachusetts 204.02 Michigan 151.10 Minnesota 173.13 Mississippi 54.64 Missouri 107.54 Montana 191.61 Nebraska 186.49 Nevada 179.62 New Hampshire 165.19 New Jersey 199.73 New Mexico 61.64 New York 192.25 North Carolina 63.32 North Dakota 151.68 Ohio 135.92 Oklahoma 84.73 Oregon 152.10 Pennsylvania 93.93 Rhode Island 146.49 South Carolina 45.00 South Dakota 181.78 Tennessee 63.79 Texas 110.80 Utah 123.59 Vermont 138.42 Virginia 79.61 Washington 121.40 West Virginia 63.45 Wisconsin 160.02 Wyoming 207.87 12.07% 14.62 35.60 20.78 38.50 35.14 44.28 15.10 Average 31.26 127.84 $ 17.47 81.58 19.69 15.67 49.51 44.45 31.60 29.96 22.78 16.00 29.76 38.48 37.80 38.29 40.92 19.92 14.56 39.40 31.44 44.70 32.79 34.95 20.01 32.04 43.93 44.76 31.53 49.62 48.22 14.76 31.93 21.18 31.24 38.24 22.71 35.46 26.17 37.69 17.09 43.42 22.03 34.32 31.16 32.92 23.81 24.48 20.04 34.26 37.23 --- 102.16 — — 6.22% 13.08 4.64 6.20 8.42 9.79 --- 21.13 ----- 25.27 90.38 49.10 7.61 17.57 12.28 31.86 30.77 27.28 27.69 10.59 8.25 6.86 6.71 9.15 2.78 77.23 56.82 17.72 12.44 74.77 4.62 23.25 42.68 9.37 15.01 1.69 6.92 9.78 2.24 --- --- --- — 3.83 1.83 14.88 98.71 42.17 21.05 --- 16.43 71.82 — --- — — --- --- 1.15 0.44 3.56 16.39 14.10 4.33 — 4.4 16.74 --— 26.48 10.06 2.56 0.88 --— 41.88 71.28 48.44 --- --- 10.56 16.95 14.48 $ 50.58 --- 64.16 46.11 72.37 52.48 53.68 ----- 18.01% --- 15.13 18.27 12.31 11.56 12.75 --- --- $178.85 450.65 189.08 138.13 238.41 197.40 180.87 308.24 45.42 § 76.22 10.90 13.38 33.671 70.59 38.83t 42.10 53.28 48.02 31.59 8.12 16.90 6.45 14.08 10.97 13.51 8.46 54.28 73.68 45.71 49.84 51.64 25.49$ 56.47 15.12 18.95 17.36 11.90 17.83 7.89 14.24 7.54 29.12 25.29 5.42 13.76 296.52 210.49 171.68 194.55 181.87 162.84 144.67 187.30 158.08 165.41 273.72 134.32 183.13 168.86 227.09 219.17 1 55.66 146.74 201.68 175.32 313.81 163.86 178.97 270.39 272.19 151.25 259.48 171.32 240.29 204.93 210.61 168.49 146.00 187.03 171.56 186.47 174.57 210.74 181.03 230.03 157.41 184.78 273.57 12.01 194.93 58.07 59.12 146.99 49.83t 78.52 63.61 58.18 54.52 49 .12| 40.79 63.64 38.82 26.69t 82.55 31.01 § 58.05 58.07 — --- --- --- — — 15.62 96.86 4.93 20.74 --- --- 25.22t 144.44 80.07 25.35$ 76.82 29.14 7.12 49.13 * Refers to state's total from its own sources, t Tax begun in 1965. %Tax begun in 1961. § Tax begun in 1967. Sources: U. S. Department of Commerce, Bureau of the Census, Governmental Finances and Facts and Figures on Government Finance, Tax Foundation Percent of Other Percent of State and Local State and Local State and Local Total* Total* Taxes* 15.14 17.82 28.58 12.46 20.01 16.47 12.97 13.42 16.23 10.71 19.48 8.91 5.84 17.91 6.22 21.26 17.30 --- --- --- --- 63.69% 72.29 44.61 54.73 40.58 43.49 42.96 63.76 68.39 54.89 51.76 37.83 45.48 41.50 37.46 41.76 38.92 54.67 71.92 41.11 42.03 36.99 49.28 44.00 57.02 43.72 46.23 42.08 55.08 49.22 43.20 64.76 45.21 50.59 53.44 48.21 64.41 47.78 58.69 43.35 55.47 44.67 59.25 57.77 44.02 50.12 54.15 46.38 49.72 39.56 49.00 49.61 A P P E N D IX B Per Capita Expenditures on Education by State and Local Governments 1960-1968 Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming Average 1960 1961 1962 1963 1964 1965 1966 1967 1968 $ 72.59 142.98 135.43 71.48 149.51 140.96 112.28 142.76 $ 82.77 175.21 138.10 76.13 170.60 149.41 102.10 133.19 $ 89.29 174.14 151.70 80.19 166.78 152.23 130.68 136.26 $ 86.37 209.83 161.82 87.49 178.29 176.66 127.26 160.22 $ 93.94 273.33 170.10 95.61 199.20 197.68 131.02 180.67 $107.52 247.04 185.26 98.98 202.85 220.90 140.26 199.36 $134.49 275.98 210.21 122.75 219.10 234.37 150.87 228.18 $158.13 322.39 239.55 136.50 241.95 249.43 177.75 236.25 $161.66 319.22 248.07 140.90 245.62 260.46 198.43 261.22 73.10 92.26 76.30 107.17 95.83 103.49 111.85 108.73 114.00 70.00 106.48 84.19 ' 98.72 78.09 122.32 121.95 84.95 82.15 116.67 102.12 136.46 86.04 94.33 139.14 110.80 82.45 130.60 94.77 105.14 136.10 95.17 73.51 70.07 106.60 76.38 93.39 146.87 114.83 88.24 132.97 84.11 100.86 171.99 75.16 94.62 81.46 124.66 103.51 105.68 120.19 124.69 126.89 82.22 109.67 84.48 110.51 90.31 134.07 137.55 84.56 86.30 135.48 106.22 145.15 89.53 101.17 146.90 118.10 86.97 132.66 103.42 109.41 144.86 98.54 93.43 77.69 113.77 76.35 97.94 161.57 119.49 90.17 148.00 92.65 117.16 167.16 74.07 91.90 87.71 132.42 108.12 112.83 135.92 132.80 129.31 95.77 107.59 106.21 119.13 103.84 138.64 144.54 87.76 94.57 132.06 106.42 150.44 100.21 111.89 151.22 123.30 98.85 140.22 107.94 107.74 156.05 100.53 96.91 83.23 118.60 78.44 106.78 166.25 125.40 93.59 155.72 96.36 125.01 175.55 83.29 107.33 97.08 146.25 128.09 122.25 141.66 141.23 147.64 101.89 113.11 109.97 127.32 103.00 151.06 149.04 87.18 110.27 154.56 123.70 157.93 106.91 110.05 172.97 138.38 101.21 148.97 109.66 121.20 170.89 112.92 100.95 88.36 144.06 84.79 110.58 181.49 128.01 107.24 177.62 95.83 146.43 179.76 88.22 118.07 103.11 147.37 130.75 132.77 156.90 159.82 161.23 103.54 121.26 112.44 131.45 108.79 171.11 169.01 96.60 114.55 165.95 136.41 171.83 108.30 119.43 189.03 152.11 109.12 163.88 118.75 140.40 198.00 114.55 107.28 91.49 144.91 92.91 123.17 201.25 132.54 119.59 182.12 104.57 1 55.69 178.41 103.14 128.18 113.82 158.37 147.11 138.24 175.99 174.61 166.58 109.83 123.08 108.10 146.05 121.80 178.19 178.93 104.91 121.49 181.95 143.55 199.97 119.09 135.82 197.46 165.34 116.89 173.80 126.25 143.19 203.59 126.39 128.17 103.43 161.43 97.53 146.42 219.37 156.95 126.04 188.53 113.36 174.86 205.43 120.03 145.97 132.35 187.61 162.22 162.24 195.53 198.62 171.57 129.85 148.75 120.99 172.78 133.32 206.40 197.77 117.82 145.88 190.50 165.43 212.98 136.18 147.35 237.41 189.85 137.12 190.98 156.59 168.09 223.27 151.15 152.98 118.01 188.21 121.59 150.43 255.67 166.47 146.50 207.43 138.83 209.11 275.26 147.16 162.06 154.87 242.93 184.07 170.92 219.26 211.19 196.50 160.11 185.49 166.67 197.57 153.97 241.80 242.32 132.74 169.02 200.30 181.05 220.00 174.04 160.26 278.53 223.59 160.15 237.08 168.41 187.94 246.74 175.49 172.94 142.94 219.94 149.14 172.24 278.15 191.03 165.25 234.42 161.25 221.38 319.85 154.47 182.94 182.93 233.53 188.11 192.12 220.84 256.83 215.37 167.18 195.15 206.44 219.72 163.19 253.42 254.88 143.16 177.56 236.16 200.05 247.92 177.99 172.49 281.11 238.01 165.48 248.08 176.40 192.20 272.35 178.61 187.19 160.57 259.28 160.53 181.19 289.36 259.52 187.93 262.54 193.77 237.61 347.62 105.67 113.29 119.47 130.00 140.98 152.07 169.95 193.19 214.85 Source: U. S. Department of Commerce, Bureau of the Census, Governmental Finances N O V E M B E R 1970 R E CE N TL Y PUBLISHED E CO N OMI C C OM M E N T A R I ES OF T HE F E D E R A L RESERVE BANK OF C L E V E L A N D "National Housing Goals" October 26, 1970 "Behavior of Interest Rates During Economic Slowdowns" November 2, 1970 "Interpreting Recent Price Behavior" November 9, 1970 "Observing Bank Credit Developments" November 16, 1970 "Unemployment in Major Labor Market Areas" November 23, 1970 Economic Commentary is published weekly and is available w itho ut charge. Requests to be added to the mailing list or fo r additional copies o f any issue should be sent to the Research Department, Federal Reserve Bank of Cleveland, P. 0 . Box 6387, Cleveland, Ohio 44101. 27