Urban Change and Poverty (1988) / Chapter Skim
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State Fiscal Conditions
State Fiscal Conditions
Pages 284-307
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From page 284... ...
a discussion of various measures of state fiscal conditions; (2) descriptions of state fiscal conditions in recent years and the fluctuations that have occurred in state tax levels; (3)
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From page 285... ...
In 1985, for example, the total NIPA surplus for state and local governments was $59 billion, of which the social insurance funds surplus accounted for $52.9 billion (Levin and Peters, 1986~. The general fund is the account into which most state tax revenue is deposited and from which most current spending is financed.
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From page 286... ...
Despite the complications arising from the diversity of state fund structures, the general fund is the best indicator of state fiscal activity that is, if balances in budget stabilization funds are added to a state's general fund and if the spending, tax, and accounting practices that influence it are taken into account (National Governors' Association/National Association of State Budget Officers, 1978~. There are three important differences between state general fund balances and NIPA surplus/deficit estimates: 1.
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Some outside accounts were tapped during the period of state fiscal stress in 1982-1983, but such transfers are usually not significant from a national perspective. Overall, general fund balances fluctuate much more than balances in most other accounts.
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STATE FISCAL CONDITIONS IN RECENT YEARS State fiscal conditions have been volatile over the last 10 yearsvery good in the late 1970s, very poor in the early 1980s, then improved in the mid-1980s but not as good as they were in the 1970s. Economic trends and changing tax policies are of primary importance in explaining these trends.
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From page 289... ...
National figures on budget stabilization~funds are available only for 1984 and 1985 when the funds stood at $0.8 billion and $1.7 billion, respectively (National Governors' Association/National Association of State Budget Officers, 19863.: Adding the stabilization funds makes the total balances in 1984 and 1985 $6.4 billion and $9.7 billion, respectively, or 3.8 percent and 5.3 percent of general fund expenditures. The improvement in state fiscal conditions that had been occurring since their Tow point in 1983 ended in fiscal year 1986.
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It has not been as unstable as the state surplus, nor was it as low in the 1981-1983 period. A major value of general fund data is that they are available for all states, thus permitting comparisons of state fiscal conditions.
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The tax revolt not only resulted in tax reductions; it also inhibited the enactment of tax rate increases for a number of years. Only two states raised income or sales taxes in the 1978-1980 period, and there were no personal income tax increases and only five sales tax
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The great majority of sales tax increases remained in effect, but three-quarters of the states that increased their personal income taxes in 1982 and 1983 either eliminated or partially rolled back those increases by the end of 1985. These reductions contributed to the decrease in the NIPA surplus in 1985 and the drop in general fund balances in fiscal year 1986.
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Table 5 traces the path of state and local tax revenue as a proportion of personal income annually from 1970-1985. State tax revenue rose faster than personal income in the early 1970s, fell sharply in reaction to the tax revolt, and then shot up again in 1984.
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The net result is that combined state and local taxes claim about the same proportion of personal income as they did in 1970. The relative increase in state tax revenue, compared with that raised by local governments, reflects a policy of fiscal centralization aimed at relieving the property tax and boosting the state share of the costs of elementary and secondary education.
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The increase in nontax revenue has been much greater for miscelIaneous revenue (e.g., interest received) than for charges, and it has been considerably larger at the local than at the state level.2 An 2 Between 1978-1984, local general revenues rose 65.9 percent, with major components rising as follows: federal aid, 7.8 percent; state aid, 64 percent; taxes, 53.5 percent; charges, 104.7 percent; and miscellaneous revenue, 224.1
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Federal Aid The third outside influence on state fiscal conditions, in addition to the economy and the tax revolt, has been federal aid policy. Federal aid is commonly divided into two parts: grants for payments to individuals (e.g., as Aid to Families with Dependent Children tAFDC]
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Much spending was deferred during those years, and a significant amount of "catch up" spending occurred as state fiscal conditions improved. General fund spending jumped sharply in fiscal years 1985 and 1986 for this reason.
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The increase in state aid was relatively larger than the increases in local funding and federal aid, and state aid accounted for 50.1 percent of the costs of elementary and secondary schools in 1986, compared with 47.9 percent in 1983 (National Education Association, 1986~. Public welfare spending (including Medicaid)
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States gave local governments $1.5 billion of aid for transit in 1984, an increase of 143 percent since 1979 and 28 percent since 1982. In view of the functional distribution of aid just described, it is not surprising that school districts and counties receive much more state aid than municipalities.
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OUTLOOK FOR STATE FISCAL CONDITIONS The outlook for state finances over the next decade depends on the course of the economy, exogenous influences on tax policy (tax revolt sentiment and interstate tax competition) , and trends in
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That study argued that if state and local governments maintained their current tax systems and service levels and if the Reagan administration's federal aid projections and economic forecasts were accurate, large surpluses would develop in aggregate state and local budgets. State and local governments would not allow this to occur, however, and would therefore reduce tax levels, increase services, or enact some combination of these options (U.S.
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These developments dampen the growth of state tax revenue. Federal tax reform is likely to exacerbate interstate tax competition because lower federal marginal tax rates imply that differentials in state and local tax rates will be more significant.
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Reductions in such areas as transit and wastewater treatment will generally be too significant for states to ignore. As a result of these forces economic trends, constraints on tax policy, and federal aid cuts many states will probably experience some degree of fiscal stress in the next decade.
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1984 State tax increases of 1983: Prelude to another tax revolt? National Tan Journal 37:9-22.
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Washington, D.C.: National Education Association. National Governors' Association/National Association of State Budget Officers 1978 Under~tar~ g the Fiscal Condition of the States.
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