On State- and Local-Government Revenues

by Don Boudreaux on March 29, 2011

in Budget Issues, Myths and Fallacies

Carpe Diem’s Mark Perry offers data showing that it’s a myth that state and local governments throughout the U.S. have seen their revenues fall over time.

The dollars in Mark’s data seem to be nominal rather than real.  So converting all dollars into 2010 dollars, we find that the $378,312,000,000 raked in by state and local governments in the final quarter of 2010 is 88.2 percent more real revenue than these governments raked in during the first quarter of 1988 (which was, in 2010 dollars, $200,980,000,000).

Some austerity.

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{ 57 comments }

Daniel Kuehn March 29, 2011 at 2:22 pm

So I don’t mean to be a bother, but who exactly expected otherwise over a period of 26% population growth, 74% real GDP growth, a major effort pushing responsibility for federal income maintenance programs onto states (a good shift to state discretion – don’t get me wrong)?

No per capita measure? No as a percent of GDP measure? What exactly do these numbers say about anything?

E.G. March 29, 2011 at 4:37 pm

These numbers apparently show that the growth in state and local spending is outstripping both population growth, and GDP growth. Thats an important point. What is more interesting here, is that doing a back of the envelope calculation, State/local expenditures from 2011, compared to 1991, as a % of total spending, experienced a 59/37% increase in pensions (ie, the share allocated to pensions increased by 59%), 51/12% increase in Healthcare spending, 531/59% increase in law enforcement. The so-called “services” they provide; education spending decreased -2% in state and incr. only 4% in local, welfare decreased 37/18% (thats a good sign), “general” expenditures decreased 42/28%, and “other” (ie garbage, waste water etc) decreased 33% in state and increased 18% in local.

So its not all bad news, but we can see that the biggest increases in the share of the pie happened in pensions, healthcare and police. Pension and healthcare expenditures make up the 2 biggest pieces of the pie (after education, which has hardly grown as a share), while law enforcement is still relatively small. So we can at least see that the growth which outstrips population and GDP growth, is coming from entitlement programs, not services delivered at the state and local level.

Daniel Kuehn March 29, 2011 at 5:07 pm

Ya – Don seems skeptical, but I think GDP is the right baseline rather than population. Still – as you say it’s outpacing GDP. Part of this is what you point out with pensions and health care. State expenditures are outpacing GDP, in part, because they largely concern some of the fastest growing components of GDP. There may be some reverse causality there – but I think it’s safe to say the health care sector would be growing faster than GDP even if we had an entirely free market. Since states take a non-trivial responsibility for a lot of health spending, you’re going to see an increase that outpaces general growth. Is this good or bad? I don’t know. My point is only that if you hold “the role of government” constant, the changes in the economy itself would lead you to expect an increase in state spending, as well as an increase in state spending that outpaces GDP.

Don Boudreaux March 29, 2011 at 6:48 pm

Why should government revenues or spending be necessarily tied as a more-or-less strict percentage to GDP? Would you expect, say, the revenues earned by the agricultural sector to remain a more-or-less constant share of GDP as the U.S. economy progressed from being chiefly agricultural in 1800 to chiefly service-oriented in 2011?

Daniel Kuehn March 29, 2011 at 6:59 pm

I don’t think government spending or revenues should be a certain percentage of GDP. What I said was I do expect them to grow with GDP. Of course that percentage will shift over time – as I noted, the trends in health prices and demographics suggest that given my (and most Americans’) view of the appropraite role of government, government spending should trend up as a percentage of GDP for at least as long as these health sector and demographic trends continue.

I expect the government share to change for the same reasons I expect the agricultural sector to change. If either get more efficient, their nominal share will probably go down (depending on demand elasticities, of course). If either do fundamentally new things (say, corn in our gas pumps or government in our health care), I expect the share to go up. But if neither of these things change I don’t expect a substantial change in their share.

Government isn’t getting all that much more efficient and the view of the American people on the role of the government hasn’t drastically changed, so I imagine the share will keep relatively constant.

E.G. March 29, 2011 at 7:27 pm

“government spending should trend up as a percentage of GDP for at least as long as these health sector and demographic trends continue.”

Yes, if government is the provider of healthcare and pensions. But I think thats the point…if government is a provider of healthcare and pensions, the costs will balloon at unproportional rates and be unsustainable.

“Most” people view the proper role of state and local government as providing some basic services and necessities; police, garbage pickup, paving roads…education (unfortunately) etc. All of these things for most part have shrunk considerably in terms of what state and local governments spend. Most people do NOT consider the proper role of government to spend their money on providing healthcare and pensions for state employees, and yet that is where most of the money goes, and more of it in the future.

If state and local kept to their mandate, and treated their employees like all the rest of the world, there is absolutely no reason their spending would increase anywhere near GDP.

Seth March 29, 2011 at 10:03 pm

What other categories would you expect to go up with GDP?

Sandre March 29, 2011 at 6:54 pm

I don’t understand why the Government spending needs to rise with GDP? So long as we live in the world where Government provides, courts, police, firefighters etc., a case could be made for increasing those services. Why couldn’t government do more with the same real dollars, just like its private sector counterparts?

Daniel Kuehn March 29, 2011 at 7:09 pm

Well certainly they could just be that sort of government in which case it would shrink as a percent of GDP. But given the actual role of government, would you expect to see it?

E.G. March 29, 2011 at 7:30 pm

” But given the actual role of government”

Well thats the issue isn’t it.

Daniel Kuehn March 29, 2011 at 8:58 pm

If you want to talk about that I suppose… I’m just wondering why people think it’s so unusual to expect government to grow with GDP.

Sam Grove March 29, 2011 at 9:43 pm

Maybe the problem is the Government spending grows even when GDP doesn’t

Growth in government spending appears to be very “sticky”.

E.G. March 29, 2011 at 10:32 pm

“I’m just wondering why people think it’s so unusual to expect government to grow with GDP.”

There’s nothing unusual about government growth.

brotio March 29, 2011 at 11:55 pm

You make a pretty damning admission of the Statist’s true motive, as far as I’m concerned. If the purpose of welfare is to give a person a helping hand, wouldn’t a GDP that’s rising faster than population growth indicate less need for entitlements?

E.G. March 30, 2011 at 12:18 am

“wouldn’t a GDP that’s rising faster than population growth indicate less need for entitlements?”

Not necessarily of course. But its not the “need” for entitlements that keeps growing, its the want and ability to get away with it.

brotio March 30, 2011 at 12:31 am

A rising GDP wouldn’t prove a need for less entitlement spending, but it would be pretty good evidence.

But its not the “need” for entitlements that keeps growing, its the want and ability to get away with it.

Exactly. The ability to get away with it is the Statist’s true motive.

Daniel Kuehn March 30, 2011 at 5:40 am

Brotio – pick what you want to talk about – welfare or entitlements.

Welfare I would expect to go down generally speaking – although of course assessments of need are always relative. Relative to colonial times nobody needs welfare today.

Entitlements are a different story – they’re going to grow depending on what the entitlement is to. Medicare is an entitlement. If health costs grow twice as fast as GDP, Medicare is going to grow faster than GDP even while maintaining the same role and mission it always has.

Daniel Kuehn March 30, 2011 at 5:41 am

I can’t speak for statists, btw. I’ll let them speak for themselves.

John V March 29, 2011 at 7:30 pm

DK,

Let’s just let it in:

88% is still higher than 26% and 74%. And while the we can look at this as the Fed pushing responsibility onto the states, that would hold more merit as an explanation if the if government spending of any kind hadn’t sky-rocketed to strato levels in nearly all areas domestic and defense even before the billions in stimulus.

Your contrarianism is blinding you.

Daniel Kuehn March 29, 2011 at 9:00 pm

Yes – I noted it exceeds those growth rates. So what – now I’m a contrarian that makes the exact same points you parrot back? That’s not much of a contrarian, if you ask me.

Don Boudreaux March 29, 2011 at 2:28 pm

Why would GDP growth be relevant? If my real income rose 88 percent over the past 22 years, I’m still better off if GDP rose not at all over that same time or if it rose 1,000,000,000 percent.

One can argue that state and local governments should do more and, hence, need even more revenues to do all that they should do. But the public narrative that I hear from many folks with big megaphones is not that state and local revenues aren’t rising even faster than they are rising, but that greedy, ideological, and/or stupid tax-cutters are taking money FROM state and local governments.

vikingvista March 29, 2011 at 9:12 pm

In the past 5 years, my income went up by a factor of 10. Does that mean I should be buying 10x as much milk?

GDP is a ridiculous as a baseline for reasonable government spending. It is useful as a baseline for *sustainable* government spending, only because government revenues are taxes on the GDP.

dave smith March 29, 2011 at 3:03 pm

I just did a quick calculation. Real percapita revenues were 9.5 % higher in 2010 than they were in 1999. They are not part of the data, but Federal transfers to state and local governments have exploded over the last generation.

Slappy McPhee March 29, 2011 at 3:57 pm

Where would I find data on these transfers from fed to state?

E.G. March 29, 2011 at 4:11 pm

From what I can find out, they have nearly doubled from 1996 to today, going from 234-563 billion, and went from 38% of State spending to 41%.

Daniel Kuehn March 29, 2011 at 4:26 pm

BEA

dan March 30, 2011 at 2:19 am

Detroit city imposes a city tax on income generated within the city. The feds deduct from the taxes of the individual the taxes paid to Detroit. This is a subsidy to Detroit.

W.E. Heasley March 29, 2011 at 3:27 pm

‘The rising tax revenues at the state and local levels to all-time record highs might suggest that the many states with budget deficits have a spending problem, not a revenue problem.’ – Dr. Mark Perry

Very close but no cigar.

In order that we have complete accuracy, try this edit:

‘The rising tax revenues at the state and local levels to all-time record highs might suggest that the many politicos through the mechanism of government create budget deficits as politicos have a spending problem, not a revenue problem.’

That is to say, “states” don’t think, act, nor make decisions. “Politicos” past, present and future, on the other hand, think, act, and make decisions.

Those politicos think, act, and make decisions based on political constituency building and rewarding rent seekers through the mechanism of government by use of tax payer dollars. Yes, other people (politicos using political constituency building and rent seeking) spending other peoples’ money (tax payer), on other people (recipient class).

Friedman was oh so right.

Greeneyeshade March 29, 2011 at 4:09 pm

Being a state government accountant, I can can confirm Dr. Perry’s conclusion. Its a spending problem.

maximus March 29, 2011 at 4:21 pm

I’d be curious how much of the problem is caused by unfunded mandates from the Feds? At least in California one the arguments has always been that the Feds keep removing dollars from mandated programs and then require the state to finance the shortfall without ending the program.

kyle8 March 29, 2011 at 9:33 pm

Cearly in the case of California, unfunded mandates are not the major problem. The main problem has been all over the news lately, in case you missed it, it is rising pension and health insurance payments that are totally unrealistic.

They make up the vast part of the rapidly rising expenditure in many of the worst hit states.

dan March 30, 2011 at 2:17 am

Imagine that!!!! Get hired at 20… retire at 40-45…collect the retirement…get rehired by a different classification and collect a pension and a paycheck. Then a new generation is hired while the second is collecting retirement. by the time the first generation is 65, there are two generations collecting pensions and one hired at the position making up for 3 payments in association for the same job position.

Methinks1776 March 29, 2011 at 4:24 pm

Oh, goodness! How can spending ever be a problem? It’s saving that’s evil.

Greeneyeshade March 29, 2011 at 4:46 pm

You ever see that TV show about hoarders?

They could come in my state capital and do “spenders”.

Seth March 29, 2011 at 9:54 pm

I think that is a great idea.

SaulOhio March 29, 2011 at 5:10 pm

But but but but…

But our deficits are caused by TAX CUTS! Everyone knows this!

W.E. Heasley March 29, 2011 at 8:57 pm

Perfect!
Oh no, way to go, Ohio!

vikingvista March 30, 2011 at 1:33 am

Well, deficit spending does increase public appetite for government spending. Cato has published an interesting plot showing such a demand curve. However, the flip side of that correlation is that the more governments spend, the more indebted they are and the more financial problems they have.

That is to say, if increased taxes do anything to reduce deficits, it is by decreasing the appetite for government spending.

JohnK March 30, 2011 at 9:00 am

“Citizens! In all times, two political systems have been in existence, and each may be maintained by good reasons. According to one of them, Government ought to do much, but then it ought to take much. According to the other, this two-fold activity ought to be little felt. We have to choose between these two systems. But as regards the third system, which partakes of both the others, and which consists in exacting everything from Government, without giving it anything, it is chimerical, absurd, childish, contradictory, and dangerous. Those who parade it, for the sake of the pleasure of accusing all governments of weakness, and thus exposing them to your attacks, are only flattering and deceiving you, while they are deceiving themselves. ”

–Bastiat

Seems the third system has won.

SweetLiberty March 29, 2011 at 5:36 pm

Savings IS evil – made so by Bernanke “printing” away the dollar’s value and keeping interest rates artificially low.

As for tax cuts, Leslie Stahl of 60 minutes can tell you that the real problem isn’t cutting taxes – it’s shackling those wicked CEO’s to their American desks instead of allowing them to operate from other nations. For some anti-American reason, corporate tax rates well under our 35% are appealing to some investors and businessmen. Go figure.

http://www.cbsnews.com/video/watch/?id=7360932n&tag=related;photovideo

vikingvista March 30, 2011 at 1:41 am

A common criticism made of those who advocate lowering the corporate tax, is to say that corporations don’t pay any corporate tax. It’s the same kind of argument as those fighting to prevent government subsidies to the CPB by arguing that the CPB doesn’t need them.

And these are college educated adults, not 4th graders.

vikingvista March 30, 2011 at 2:26 am

CORRECTION:

It’s the same kind of argument as those fighting to prevent *CUTTING* government subsidies to the CPB by arguing that the CPB doesn’t need them.

Dr. T March 29, 2011 at 6:38 pm

Dr. Perry implies that the record high state and local tax revenues are due, at least partly, to economic improvements. But, more than half of the upward slope results from inflation. Much of the remaining upward slope is due to our 26% population increase from 1988 to 2010. The remaining increase results from state and local governments adding new taxes and increasing the amounts or the rates of existing taxes.

An important point is that state and local government spending, especially in recent years, has exceeded revenues. State and local government debts and obligations (mostly pensions) are at record high levels (even after adjusting for inflation and increased population).

Our governments are getting bigger by taxing more, borrowing more, and creating massive future spending obligations. This growth does not arise from an improved economy but from the unchecked urges to expand that befall almost all governments.

E.G. March 29, 2011 at 7:34 pm

“Dr. Perry implies that the record high state and local tax revenues are due, at least partly, to economic improvements. ”

He is speaking specifically about the recent economy, not 1988 till now.

jorod March 29, 2011 at 8:37 pm

So revenue isn’t the problem.. It’s spending, plain and simple.

jorod March 29, 2011 at 8:38 pm

Quote of the day…”…every accretion of government power for whatever purpose increases the danger that government, instead of serving the great majority of its citizens, will become a means whereby some of its citizens can take advantage of others..” Milton Friedman…Free to Choose.

kyle8 March 29, 2011 at 9:37 pm

I have been under the belief for some time now that we are going to need an amendment setting an absolute spending cap on every level of government.

Balanced budget won’t do it, because the temptation there will be to just raise taxes. We have to come to percent of gdp or some other measurement and say, 16 or 17% and that’s it, and the same (but a lower amount) for each of the states.

I know that means that we would never see spending any lower than that amount, but I would take that deal right now.

Methinks1776 March 29, 2011 at 10:54 pm

Kyle, like the rest of the constitution, an amendment is simply a new challenge to overcome for politicians. Overcoming the obstacle we call “the constitution” is the only thing at which politicians are truly expert.

brotio March 30, 2011 at 12:03 am

That’s true, but at least it would give us a respite while they figure out how to circumvent the new amendment.

Methinks1776 March 30, 2011 at 12:16 am

Good point!

dan March 30, 2011 at 2:12 am

I find appeal to the capped spending but when in time of war……what then? And, should we make that exception….Methinks we are likely to be in a state of perpetual war.
The negative would have to worked out and all things considered….say a Federalist Papers of the 21st century.

vikingvista March 30, 2011 at 2:23 am

If that strategy were the solution, we never would’ve had this problem in the first place.

Don’t look to find ways to restrain misguided people. Look to find ways to keep people from being misguided.

dan March 30, 2011 at 2:40 am

I believe when the Founding Fathers discussed the Constitution and its govt restrictions that they went round and round about taxation. Hamilton, finally won out and restrictions were not put in place. I wonder if there should have been restrictions.
To keep people from being misguided? Education? I think that is only temporary, as several generations later, the education process will be changed to eliminate or change the ideas needed to guide people. Also, many generations later, the education process for guiding will be forgotten, altogether.

kyle8 March 30, 2011 at 6:45 am

I would make no exception for war, War will have to be financed by selling assets, using up surpluses, or stopping other funding. That would cause real pain on the populace, And guess what? that might just mean that we would have fewer wars!

vikingvista March 30, 2011 at 9:43 am

The CotUS itself was, supposedly, such a restriction. Remember the 16th amendment?

If the people are widely misguided, then as we have seen, constitutional restrictions don’t work. If the people are widely virtuous, then they are unnecessary.

It’s a mistake to attribute America’s greatness to a piece of paper. Rather, the ideas in that document reflect the kind of people Americans were.

JohnK March 30, 2011 at 8:37 am

Sometimes I wonder if the reason great civilizations of the past have failed was because the parasite known as government sucked society dry.
When people labor to create value only to have it stripped away from them so government parasites can have “free” pensions and health care, where’s the incentive to work?
Why not join the parasites?
What happens when everyone is a parasite?

“Government is the great fiction through which everybody endeavors to live at the expense of everybody else.”
–Bastiat

Kevin Dick March 30, 2011 at 2:34 pm

I went ahead and computed the real per capita series from 1990-2009:
http://emergentfool.com/2011/03/30/ratcheting-state-and-local-taxes/

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