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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
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