1

State and Local Fiscal Trends and Future Threats

A Report Prepared for

National Association of Realtors

By

State and Local Fiscal Policy Research Program

Institute for Policy Studies

George Washington University

Presentation to the Connecticut Legislative Program Review and Investigations Committee

October 26, 2005

2

Objectives

1. Review state and local revenue raising and spending patterns and changes from 1992 to 2002

2. Identify trends impacting state and local revenue raising efforts and spending needs

3

Revenue Raising and Spending Patterns and Trends, 1992-2002

1. Extent of centralization of revenue raising and spending responsibilities

2. Size of the public sector

3. Revenue mix

4. Spending mix

4

Revenue and Expenditure Centralization Patterns and Trends

1. In 2002 states raised 55% of state/local own revenues. Same as 1992.

2. In 2002 states accounted for 50% of direct expenditures, up from 49% in 1992.

3. No change in patterns or trends, but variation across states.

5

STATE Share of Own Revs

STATE Share of Own Revs

Delaware 80.0 Colorado 46.0

Hawaii 79.5 New York 46.2

Vermont 77.3 Florida 47.2

Arkansas 73.9 Texas 47.3New Mexico 72.6 Nevada 49.4

W. Virginia 72.5 Georgia 50.0

Alaska 71.3 Illinois 51.3

Kentucky 67.6 Tennessee 51.8

EXHIBIT

U.S. AVE. 54.9 Connecticut 61.9

6

STATE % Direct Gen. Exp.

STATE % Direct Gen. Exp.

Hawaii 79.1 Nevada 32.4

Alaska 66.9 California 35.5

Delaware 63.7 New York 35.7

Vermont 62.3 Arizona 36.7

W. Virginia 62.0 Florida 38.2

Rhode Is. 60.5 Colorado 38.3

Kentucky 59.4 Wisconsin 40.0

Maine 58.6 Illinois 40.1

EXHIBIT

U.S. AVE. 43.0 Connecticut 57.0

7

Size of Public Sector:Per Capita Own-Source

Revenues

2002 1992

New York $6290 New York $4640

Wyoming $6173 Wyoming $4116

Delaware $5920 New Jersey $4083

Connecticut $5510 Hawaii $4075

Minnesota $5510 Connecticut $3916

U.S. Average $4705 U.S. Average $3136

8

Size of the Public Sector: Trends in State and Local Revenues

From 1992 to 2002 real per capita state total general revenues increased 22.5 percentown-source revenues increased 16.3 percent,tax revenues increased 13.5 percent,income taxes increased 24.2 percent,current charges increased 32.4 percentIntergovernmental revenues increased 38.6

percent

9

Percent of Federal Grants in Aid to State and Local Governments by Function

  1972 1982 1992 2002 2006 est.

Nat. Res. And Environment

2.2 5.5 2.2 1.4 1.4

Transportation 14.7 13.7 11.5 11.7 10.7

Education 27.6 18.4 14.8 12.8 13.2

Health 17.5 21.4 40.1 45.1 48.0

Medicaid 13.4 19.7 38.1 42.0 44.2

Income Support 26.3 25.3 25.8 23.2 21.0

All Other 11.7 15.7 5.6 5.8 5.8

10

Public Sector Size:Revenues as a Percent of

Personal Income2002 1992

U.S. CT U.S. CT

S/L Own Revenue

14.9 12.8 16.6 15.0

State Own Revenue

8.2 7.9 9.1 9.2

Local Own Revenue

6.7 4.9 7.5 5.8

11

Public Sector Size:Per Capita S/L Direct General

Spending2002 1992

New York $8491 New York $5642

Wyoming $7801 Wyoming $5282

Connecticut $7105 Hawaii $5203

Minnesota $7102 New Jersey $4693

California $6952 Connecticut $4591

U.S. Average $6150 U.S. Average $3811

12

Public Sector Size (Continued)

From 1992 to 2002, real per capita state direct general expenditures

declined in one state – New Hampshire increased by less than 10 percent in six

other states – Alaska, Arizona, Hawaii, Nevada, New Jersey and Rhode Island

Increased by more than 40 percent in ten states.

Increased by 31.2 percent in Connecticut while the U.S. average was 27.6 percent

13

Public Sector Size: Real Per Capita Spending

From 1992 to 2002, real per capita state spending

On public safety increased 38.0 percent

On education increased 31.6 percentOn social services increased 27.8 percentOn transportation increased 22.9 percent

14

Revenue Mix1. State governments rely more heavily on

own-source revenues and tax revenues than local governments

2. State governments rely more heavily on sales and income taxes while local governments depend on property taxes and current charges more

3. State and local reliance on own-source and tax revenues declined from 1992 to 2002

15

Percentage Distributions of State and Local General Revenues by Source,

2001-2002

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

Ow n-Source Taxes Property Tax GeneralSales Tax

IndividualIncome Tax

CurrentCharges

All OtherOw n-Source

Revenue Source

Perc

ent o

f Gen

eral

Rev

enue

State

Local

16

STATE Prop Tax % Local Own Revs

STATE Prop Tax % Local Own Revs

Connecticut 83.8 Alabama 16.5

Rhode Is. 83.2 Arkansas 20.6New Hampshire 79.1 Louisiana 24.0

Maine 77.5 Oklahoma 29.6

New Jersey 76.1 Kentucky 30.0

Mass. 74.0 Nevada 32.1

Vermont 68.9 New Mexico 33.2

Wisconsin 62.2 Washington 33.7

EXHIBIT

U.S. Average 45.1

17

Percentage Distribution of State and Local General Revenues by Source,

1992 and 2002

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

Ow n-Source

Taxes Property Tax GeneralSales Tax

IndividualIncome Tax

CurrentCharges

All OtherOw n-Source

Revenue Source

Pe

rce

nt

of

Ge

ne

ral R

ev

en

ue

1992 2002

18

Expenditure Mix

1. State governments spend more heavily on intergovernmental transfers (28.5%), social services and income support (24.4%), and contributions to insurance trusts (11.5%).

2. Local governments spend more heavily on education (38.7%). They also allocate a greater share of their budget for public safety and housing.

19

Percentage Distribution of State and Local Direct Expenditures

by Function, 1992 and 2002

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

EducationServices

SocialServices and

IncomeMaintenance

Transportation Public Safety Environmentand Housing

Utility InsuranceTrust

All Other

Function

Per

cen

t o

f D

irec

t E

xpen

dit

ure

1992 2002

20

Two Issues Related to State and Local Fiscal Policies

A Balanced Tax System

State and Local Fiscal Policies and Economic Growth and Development

21

A Balanced Tax System

What does it mean to have a balanced tax system?

Advisory Commission on Intergovernmental Relations

Balance among characteristics of a sound tax system

22

Balance in State-Local Tax Systems, 2002

Strongly Balanced 4

Fairly Balanced 14

Poorly Balanced 22

Imbalanced 11

23

Defining Local Economic Growth and Development

Economic growth implies growth in various measures of economic output – income, jobs, etc.Economic development implies more than just increases in measures of economic outputs. It implies that the welfare of citizens is improving – poverty rate, infant mortality rate, etc..

24

Factors Influencing Local Economic Growth and

DevelopmentPrimary engine for strong state and local economies is a strong private sectorAgglomeration economiesHuman capital and labor costsAccess to markets and raw materialsNatural endowments/amenitiesStrong educational systemState and local fiscal policies

25

State and Local Fiscal Policy and Local Economic Growth and

Development

Traditional fiscal policies targeted at attracting new firms and expanding existing businesses – targeted tax credits, job training, and other targeted assistance programs.Policies promoting internal growth by supporting entrepreneurship and creating an environment conducive to private economic activity.

26

Taxes and Economic Activity

Several studies find that taxes, at the margin, may have an incremental negative impact on economic activityIn this view, cutting taxes can promote economic activityBut the empirical results assume everything else remains the same – no cut in services, no changes in fiscal behavior of other state or local governmentsCutting taxes and cutting services will be detrimental to economic activity

27

Spending and Economic Activity

Several studies conclude that the level and quality of public services available is a major influence on promoting economic activity – especially infrastructure and educational servicesIf cutting taxes reduces the level and quality of services available it will have a detrimental impact on economic activity

28

Summary of Trends ImpactingState and Local Fiscal Policies

Trend State/Local Revenues State/Local Expenditures

Erosion of trust in government

Undermines ability of government to raise

funds through general taxes

 

Federal Mandates   Unfunded mandates put pressure on state and local spending, especially in the

area of health care and homeland security

Federal Tax Policies Undermines state (and to lesser extent local) efforts to raise taxes, especially income and sales taxes, and is forcing states to decouple from federal

government 

 

29

Federal Intergovernmental Grants

  Shifting emphasis toward Medicaid while all other aid categories decline in

relative importance

Demographic Changes Undermines ability of state and local

governments to raise tax revenues – especially

income, sales and property taxes

Puts added pressure on state and local spending – particularly health related

categories, but other categories as well

Technological Change Undermines state and local efforts to raise

revenue from sales and income taxes, as well as

the local property tax

 

E-commerce Undermines state and local governments ability

to raise revenues from sales taxes

 

30

Interjurisdictional Competition

Puts pressure on state and local governments

to keep taxes low

Puts pressure on state and local governments to keep

spending low, except maybe for infrastructure

services vital to economic growth like education and

transportation

Targeted Tax Incentives Undermines ability to raise local taxes,

especially the property tax

 

Globalization Undermines ability of state and local

governments to raise taxes

Puts pressure on expenditures, especially

in infrastructure services needed to compete with other

jurisdictionsSchool Finance Reform Undermines legitimacy

and acceptance of local property taxes

Can lead to declining quality of education

services