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Wednesday, September 12, 2018

State and Local Government Finances, Part 2

In yesterday's article I reviewed state and local government spending and revenue, concluding:
  • The core functions of government, infrastructure and public safety, account for only 13 percent of state and local government spending;
  • The top two spending categories, Education and Social Services-Income Maintenance, claim more than half of all state and local government spending;
  • Taxes are responsible for less than half of total revenue.
In fairness, it is a bit difficult to compare states based on a simple aggregation of state and local governments. Some states place the responsibility for certain functions at the local level, while others prefer to centralize functions in the hands of the state government. Furthermore, local governments are fiscally dependent on state governments to a larger or lesser degree, affecting the distribution of responsibilities between the two levels of government.

More on local governments in a coming article; for now, let us take a closer look at the state level. 

State spending

To begin with spending, the 13-percent allotment of combined state and local government spending tp core functions worsens when we isolate the state level. On average, state governments spend only 8.2 percent of their budgets on public safety and transportation. 

It could be countered that public safety is, and should be, primarily a local government responsibility. This is a good point, but let us keep in mind that this is a percentage: if the states do not have to spend a lot of money on public safety because counties, cities and towns do it better, there is nothing that says they should spend more money on other functions instead. 

Which, as it happens, is what they do. If we add together Education, spending on Social Services and Income Maintenance, and Housing - the three welfare-state spending categories in state budgets - these three categories gobble up an average of 46 percent of state budgets. The welfare-state spending share varies quite a bit, and the ranking of individual states might come as a surprise:

Figure 1
Source of raw data: Census Bureau

Let us keep in mind, again, that states distribute spending responsibilities differently between the state and local governments. Overall, though, the fact that states use almost half their budgets, on average, for the purposes of economic redistribution is a sign of how entrenched the welfare state has become.  

While we are talking about spending priorities, it might be worth noting that states are relatively frugal when it comes to general government administration, but that there are some weird priorities being made. Administration claims the most in Montana (6.0 percent of total spending), Alaska (5.6), Delaware (5.5), Wyoming (5.0) and Connecticut (4.8). Its share is lowest in Michigan (1.3), Texas (1.4) and Illinois (1.5).

That said, a low share of the budget going to administration is not necessarily a reflection of overall sound budget priorities. Some states spend quite a bit more on administration than they do on public safety: the state of Hawaii doles out $1.80 on administration for every $1.00 on public safety. They are followed by Montana ($1.53), Connecticut ($1.49), Wyoming ($1.47) and Alaska ($1.46). It is not a sign of good fiscal stewardship when a state government spends more on its administration than it does on public safety; even if public safety is primarily a local-government responsibility, it should not be the case that administration costs more than public safety. 

Fortunately, there are states that strike a more reasonable balance between the two. Michigan only spends 34 cents on general government administration for every dollar on public safety. Texas is a close second ($0.39) followed by Nebraska (0.46).

In addition to administration, states spend a growing amount of taxpayers' money on debt: the cost of interest on state debt varies a great deal, much like administration costs, but in doing so it is beginning to compete with other expenditures. For example,
  • In Connecticut the state spends more on debt interest than on transportation and public safety (counted separately);
  • In Illinois, debt interest is twice as costly as public safety;
  • In Massachusetts and New Hampshire, state debt also costs more than public safety;
  • In Rhode Island, interest on state debt is costlier than public safety, transportation and administration.

The highest costs of debt interest, as share of total state spending, are in:

Debt interest
Rhode Island 5.1%
Connecticut 4.7%
Massachusetts 4.5%
New Hampshire 4.3%
Illinois 4.2%

The lowest:

Debt interest
Wyoming 0.5%
Nebraska 0.5%
Arkansas 0.6%

State revenue

On the revenue side, the biggest problem is state dependency on the federal government. Over time, federal funds have become of increasing importance to states. This dependency is directly traceable back to the expansion of spending programs, created by Congress, that give states the responsibility for running the programs while Congress maintains a funding responsibility. I recently pointed to this problem in an article for the Center for Freedom and Prosperity, but it deserves a lot more attention than it gets.

According to the 2016 state finance data from the Census Bureau, states collect on average 29.1 percent of their revenue from the federal government. Taxes are responsible for 43.1 percent. However, there are states where these two revenue sources actually compete for the top spot. Five state governments actually collect more money from Uncle Sam than from their own taxpayers:

Alaska gets $2.73 from the federal government for every $1.00 they collect in taxes; New Mexico is a distant second ($1.25) followed by Louisiana ($1.11), Mississippi ($1.07) and Wyoming ($1.01). 

In these states, it is at least questionable to what extent the state government is accountable to its own taxpayers, or to Congress. The trend, namely, is that the less important federal funds are to a state's revenue, the more it relies on what its own taxpayers can deliver. Figure 2 groups states in quintiles, showing the average share of charges and fees, taxes and federal funds, of total state revenue:

Figure 2
Source of raw data: Census Bureau

Overall, taxes pay for a widely different share of state spending depending on state: 

Table 1
Source of raw data: Census Bureau

Taxes as share of total revenue
Minnesota 56.9%
Connecticut 54.2%
Hawaii 51.6%
Illinois 51.5%
North Dakota 50.8%
Maryland 49.7%
California 48.2%
Wisconsin 47.8%
Nevada 47.7%
Vermont 47.6%
North Carolina 47.5%
New Jersey 47.2%
Nebraska 47.0%
Georgia 46.8%
Maine 46.0%
Kansas 45.8%
Indiana 45.5%
Massachusetts 45.2%
Idaho 44.7%
Florida 44.2%
Arkansas 44.1%
New York 43.8%
Washington 43.6%
Delaware 43.6%
Tennessee 42.6%
Pennsylvania 41.2%
Virginia 41.1%
Colorado 40.7%
Iowa 40.3%
Rhode Island 39.8%
Kentucky 39.4%
Utah 39.0%
Michigan 38.5%
South Dakota 38.5%
Arizona 38.4%
Montana 38.3%
West Virginia 37.6%
Oklahoma 37.1%
Missouri 37.1%
Mississippi 36.7%
Ohio 36.7%
Texas 36.2%
Louisiana 34.7%
Oregon 33.7%
South Carolina 33.0%
Alabama 32.9%
Wyoming 32.4%
New Hampshire 31.7%
New Mexico 29.4%
Alaska 12.9%

Next, we will take a look at local governments. After that, it is time for some longer-term trends. However, there will be other articles in between. Stay tuned, and don't forget to listen to Larson's Political Economy on blog talk radio! Next show is tomorrow Thursday at 8PM ET / 6PM MT! 

Click here for the first episode: 

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