4.4: State and Local Government Expenditures

State & Local Government Expenditures

Although federal government spending often gets most of the media attention, state and local government spending is also substantial—at about $3.2 trillion in 2013. Figure 1 shows that state and local government spending has increased during the last four decades from around 10% of GDP to above 16%. The single biggest item is education, which accounts for about one-third of the total. The rest covers programs like highways, libraries, hospitals and healthcare, parks, and police and fire protection. Unlike the federal government, all states (except Vermont) have balanced budget laws, which means any gaps between revenues and spending must be closed by higher taxes, lower spending, drawing down their previous savings, or some combination of all of these.

Learning Objectives:

• Explain how state and local government approve spending
• Identify the major categories of state spending
• Identify the major categories of local spending

Universal Generalizations

1. State and local governments must approve spending before revenues can be released.
2. State and local government budgets supply money for many services and programs.
3. The taxes collected by the state and local government are used to pay for various services and programs.
4. State and local governments benefit from federal expenditures.

Guiding Questions

1. How would the local economy be impacted if the state government did not pay for various services and programs?
2. Could the local governments get along without revenues from the state government?
3. What does the state government have to do to if does not collect enough revenues to cover its expenditures?
4. What is the purpose of a balanced budget amendment?
5. Name three aspects of local and state spending that you benefit from.

State and Local Government Spending

State and Local Spending, 1960–2015

Tables B-86 and B-1, https://www.govinfo.gov/app/details/ERP-2013)Economic Report of the President.

Spending by state and local government increased from about 10% of GDP in the early 1960s to 14–16% by the mid-1970s. It has remained at roughly that level since. The single biggest spending item is education, including both K–12 spending and support for public colleges and universities, which has been about 5–6% of GDP in recent decades. Source:

U.S. presidential candidates often run for office pledging to improve the public schools or to get tough on crime. However, in the U.S. system of government, these tasks are primarily the responsibilities of state and local governments. Indeed, in fiscal year 2013 state and local governments spent about $904 billion per year on education (including K–12 and college and university education), compared to only $83 billion by the federal government, according to usgovernmentspending.com. In other words, more than 90 cents of every dollar spent on education happens at the state and local level. A politician who really wants hands-on responsibility for reforming education or reducing crime might do better to run for mayor of a large city or for state governor rather than for president of the United States.

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Fiscal Policy

Fiscal policy is the set of policies that relate to federal government spending, taxation, and borrowing. In recent decades, the level of federal government spending and taxes, expressed as a share of GDP, has not changed much, typically fluctuating between about 18% to 22% of GDP. However, the level of state spending and taxes, as a share of GDP, has risen from about 12–13% to about 20% of GDP over the last four decades. The four main areas of federal spending are national defense, Social Security, healthcare, and interest payments, which together account for about 70% of all federal spending. When a government spends more than it collects in taxes, it is said to have a budget deficit. When a government collects more in taxes than it spends, it is said to have a budget surplus. If government spending and taxes are equal, it is said to have a balanced budget. The sum of all past deficits and surpluses make up the government debt.

Additional information is available in the 2012 Census report which shows expenditures at 2012 Census of Governments.

(Source: http://www.usgovernmentspending.com/US_statelocal_spending_pie_chart)

According to the pie chart the largest areas of the combined state and local spending are found in education and health care.

(Source: http://www.usgovernmentspending.com/piechart_2015_US_state)

The state spending pie chart shows that the average state spends 36% in health care, 19% in education, and 15% in pensions. The remaining areas run less than 10% in welfare, transportation, protection, interest on the state debt and other spending. State revenues are used to pay for state programs for state citizens, which are distributed to pay for public welfare, medical care, retirement funds, higher education, highway construction and state police just to name a few areas of state spending.

(Source: http://www.usgovernmentspending.com/piechart_2015_US_local)

Local spending averages report that the largest spending category is education at 35%, followed by 20% listed as "other spending". At the local level (counties, municipalities, townships, school districts, special districts) the largest category is for public education at the elementary and secondary levels. Additional categories are utilities, hospitals, roads, public welfare, police and fire protection, and interest on the debt. Other spending at the local level is spread over additional areas such as housing, community development, parks, and economic development.

(Based on the chart above the largest category of Texas state spending is in health care and education.)

(Source: http://www.usgovernmentspending.com/piechart_2015_TX_local)

The largest section of local spending is for education.

To read an article by the U.S. Census Bureau related to state and local government expenditures and their revenues visit State and Local Government Spending Grows Faster Than Revenue.

Answer the self check questions below to monitor your understanding of the concepts in this section.

Self Check Questions

1. What is a balanced budget amendment?
2. What are intergovernmental expenditures?
3. What are the 2 largest categories of state government spending?
4. Give examples of the types of things that the state government spends money on.
5. What is the largest category of local government spending?
6. Give examples of the types of things that local governments spend money on.