State and Local Fiscal Trends and Future Threats

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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

• Extent of centralization of revenue raising and
  spending responsibilities
• Size of the public sector
• Revenue mix
• 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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Size of Public SectorPer Capita Own-Source
Revenues
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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 percent
• own-source revenues increased 16.3 percent,
• tax revenues increased 13.5 percent,
• income taxes increased 24.2 percent,
• current charges increased 32.4 percent
• Intergovernmental revenues increased 38.6 percent

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Public Sector SizeRevenues as a Percent of
Personal Income
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Public Sector SizePer Capita S/L Direct General
Spending
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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 percent
• On social services increased 27.8 percent
• On transportation increased 22.9 percent

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Revenue Mix

• State governments rely more heavily on own-source
  revenues and tax revenues than local governments
• State governments rely more heavily on sales and
  income taxes while local governments depend on
  property taxes and current charges more
• State and local reliance on own-source and tax
  revenues declined from 1992 to 2002

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Expenditure Mix

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

• Primary engine for strong state and local
  economies is a strong private sector
• Agglomeration economies
• Human capital and labor costs
• Access to markets and raw materials
• Natural endowments/amenities
• Strong educational system
• State 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 activity
• In this view, cutting taxes can promote economic
  activity
• But the empirical results assume everything else
  remains the same no cut in services, no changes
  in fiscal behavior of other state or local
  governments
• Cutting 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
  services
• If cutting taxes reduces the level and quality of
  services available it will have a detrimental
  impact on economic activity

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