Post on 30-Dec-2015
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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Two Issues Related to State and Local Fiscal Policies
A Balanced Tax System
State and Local Fiscal Policies and Economic Growth and Development
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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
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Balance in State-Local Tax Systems, 2002
Strongly Balanced 4
Fairly Balanced 14
Poorly Balanced 22
Imbalanced 11
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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..
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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
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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.
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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
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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
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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
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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
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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