Site menu:

 

November 2015 Policy Study, Number 15-9

   

Impact of Federal Transfers On State and Local Own-Source Spending

   

The relationship between federal intergovernmental transfers and state and local spending

   

 

Recent research finds that each dollar of additional federal grants to states is associated with tax increases in the range 54 cents to 86 cents in new state and local taxes.[5] Hines & Thaler (1995) and Bailey & Connolly (1998) provide a review of and summary of earlier research, including empirical findings and the theoretical expectations.

 

This study tests the effects of federal intergovernmental transfers on state and local own-source general revenue using a balanced panel of the 50 U.S. states and annual data for 1972 through 2012. Information is not available for the years 1973–1976, 2001, and 2003. Table 1 list the revenue sources comprising state and local own-source general revenue for 2012.

 

Table 1 :      Components of state and local own-source general revenue, all states combined


Revenue source

2012 Amount

Share of
Total

Property taxes

$445 billion

22%

Sales taxes, general

315 billion

16%

Sales taxes, selective

160 billion

8%

Income tax, individual

305 billion

15%

Income tax, corporate

50 billion

2%

License taxes

70 billion

3%

Other taxes

40 billion

2%

Charges

425 billion

21%

Miscellaneous revenue

200 billion

10%

Total

$2,010 billion

100%

 

The analysis begins with a graphical analysis of the relationships between federal transfers to the states and state and local own-source general revenues. In this way, one can visualize the extent to which federal transfers may result in higher state and local taxes and charges.[6]

 

Figure 2 :      State and local own-source general revenue, all states combined, 1972–2012
Graphic 2

 

The figures show the relationship between federal money going to states and the own-source general revenues at the state and local level. “Own-source” means that the money is generated from state and local taxes and charges. To control for differences in the size of states and inflation over time, the data are displayed as a share of total state personal income.

 

Figure 2 shows that state and local own-source general revenue varies from year to year, but shows an upward trend over time. In the 1980s, spending from state and local sources represented 13.9 percent of personal income, or $468 billion a year. In the 2000s, the amount grew to $1,217 billion, or 15.1 percent of personal income. In other words, not only has state and local own-source revenues grown, but they have grown as a share of personal income.

 

Figure 3 :      Federal intergovernmental revenue, all states combined, 1972–2012
graphic 4

 

Figure 3 shows that state and local revenue from federal intergovernmental transfers varies from year to year, but—as with own state and local own-source general revenue—shows an upward trend over time. In the 1980s, state and local revenues from federal transfers represented 2.9 percent of personal income, or $96 billion a year. In the 2000s, the amount grew to $372 billion, or 4.2 percent of personal income. In other words, not only have federal transfers to states grown, but they have grown as a share of personal income.

 

Figure 4 :      Relationship between federal intergovernmental revenue and state/local own-source general revenue, all states combined, 1972–2012
graphic 6

 

Figure 4 combines the trends shown in Figure 2 and Figure 3 into a scatterplot showing the relationship between federal revenue and spending from state and local sources for all 50 states combined. Each dot represents a single year. The figure shows an obvious positive relationship: As federal revenues grow relative to income, so do state and local revenues. The trendline indicates that, on average across the U.S. as a whole, for every percentage point increase in federal money to states, revenues from taxes and charges at the state and local level increase by roughly 0.75 percentage points.

 

The figure shows the strong correlation of spending from federal and state/local sources, but it does not split it into cross-sectional (states) and time-series components (years) that research encourages to consider separately.[7]

 

Figure 5 :      Relationship between federal intergovernmental revenue and state/local own-source general revenue, each state (Alaska in red), 1972–2012
graphic 8

 

Figure 5 is similar to Figure 4, but displays a separate dot for each year for each of the 50 states, for a total of 1,750 dots. The scatterplot has some outliers at the upper end of state and local own-source general revenue. Each of these outliers are associated with the State of Alaska and are shown as red dots. These outliers distort the averages and trends in the rest of the data, which is especially distortionary considering Alaska represents less than one percent of U.S. population, output, and incomes.

 

Figure 6 :      Relationship between federal intergovernmental revenue and state/local own-source general revenue, each state (Alaska excluded), 1972–2012
graphic 10

 

Figure 6 is the same as Figure 5, but excludes the State of Alaska. Hereafter, all figures will exclude data from Alaska.

 

As with Figure 4, this figure shows an obvious positive relationship: As federal revenues grow relative to income, so do state and local revenues from taxes and other charges. The trendline indicates that for every percentage point increase in federal money to states, taxes and charges at the state and local level increase by roughly 0.88 percentage points.

 

The figure shows the strong correlation of spending from federal and state/local sources, but still does not split it into cross-sectional (states) and time-series components (years) suggested by research.

 

Figure 7 :      Relationship between federal intergovernmental revenue and state/local own-source general revenue, each state, 2012
graphic 12

 

Figure 7 shows one simple way to get at the cross-sectional—state-by-state—variation. It plots federal revenue and spending from state and local sources for each state in a single year, 2012. The figure shows the strong correlation of spending from federal and state/local sources: States receiving more federal intergovernmental transfers also have greater spending from their own state and local sources. The trendline indicates that for every percentage point increase in federal money to states, state and local taxes and charges increase by roughly 0.74 percentage points.

 

Figure 8 :      Relationship between percentage point change in federal intergovernmental revenue and percentage point change in state/local own-source general revenue, each state, from 1972 to 2012
graphic 14

 

Figure 8 shows one simple way to get at the variation over time. It plots the change in federal revenue and the change in spending from state and local sources for each state over the years 1972 and 2012.

 

The figure shows the strong correlation of the change in spending from federal and the change in spending state/local sources: States with increasing intergovernmental transfers also increase collections from their own-sources such as taxes, fees, and charges.

 

   

 

Click here for pdf copy of this Policy Study

 

All of our publications are available for sponsorship.  Sponsoring a publication is an excellent way for you to show your support of our efforts to defend liberty and define the proper role of government.  For more information, please contact Public Interest Institute at 319-385-3462 or e-mail us at Public.Interest.Institute@LimitedGovernment.org