State and local government fiscal position in 1984 Essay

State and Local Government Fiscal Position in 1984 THE State and local government fiscal position improved again in1984. The total surplus on a national income and product accounting(NIPA) basis increased $8 billion, to $51 billion, after an $11 billionincrease in 1983.

However, in contrast to the 1983 increase, the bulkof the 1984 increase–$5 billion–was in the social insurance fundsurplus. The increase in the other funds surplus was $3 billion,compared with a $7 1/2 billion increase in 1983, when this measureshifted from a deficit to a $6 1/2 billion surplus. Receipts increased $45 billion, or 9 1/2 percent in 1984, slightlymore than the 1983 increase. The acceleration was due to Federalgrants-in-aid, which increased 7 1/2 percent, following an increase lessthan one-half that large in 1983 and declines in the preceding 2 years.In 1981 and 1982, grants were a major target in efforts to reduceFederal expenditures and an increasing deficit.

Expenditures increased $37 billion, or 8 1/2 percent, moderatelymore than the 1983 increase; this acceleration was the first, and thepercentage increase was the largest, since 1980. Expenditure increasesbegan to decelerate in 1981, partly due to the reduction and eliminationof grants: Compensation decelerated in 1981 with the continuedphase-out of public service jobs, which were funded by grants under theComprehensive Employment and Training Act, and structures declined withcutbacks in highway and in sewer and waterworks grants. In 1982 and1983, deceleration was the result of strict, recession-inducedexpenditure controls by States and localities and of continued declinesin grants. The acceleration in 1984 occurred in purchases of goods andservices–most notably in purchases of structures, which increased 111/2 percent, following declines in the preceding 3 years. Receipts State and local government receipts increased 9 1/2 percent in1984, which, as already noted, was the largest increase since 1980(table 1).

All major categories of receipts, except personal tax andnontax receipts, recorded stronger gains than in 1983. This patternreflected the faster pace of economic activity in 1984 in combinationwith the effects of larger-than-usual tax law changes. (See the note totable 1 for a description of how the effects of tax law changes arecalculated.) Corporate profits tax accruals increased 17 1/2 percent, thelargest 1984 percentage increase; the increase in 1983 was 13 1/2percent. Although profits declined in the second half of the year, forthe year as a whole they were substantially above the 1983 level.

Taxlaw changes accounted for very little of the 1984 increase in corporatetaxes. Personal taxes increased 10 1/2 percent, compared with 11 1/2percent in 1983. Income taxes more than accounted for thisdeceleration. Although tax law changes had added almost 50 percent tothe 1983 increase in income taxes, they added only a small amount in1984. Thus, the major factor in the increase in income taxes in 1984was taxable income; income taxes excluding tax law changes increasedmore rapidly than in 1983.

Personal nontaxes, such as user fees for medical services andtuition at public universities and colleges, increased 12 1/2 percent,slightly more than in 1983. These nontaxes have increased more rapidlythan total general own-source receipts (GOSR) since 1972 because Stateand local governments have continued to broaden the range and increasethe level of user fees. In 1972, nontaxes were about 8 percent of GOSR;by 1984, they were about 12 percent. Their more rapid growth appears toreflect–at least in part–a shift, evident even before the “taxrevolt’ of the late 1970’s, toward the view that public goodsand services should be financed by those who benefit.

In addition,health and hospital fees increased more rapidly than other user fees;their more rapid increase was primarily a function of rapid increases inmedical costs in general and only secondarily an attempt to fund anincreasing share of health and hospital services from user fees. Indirect business tax and nontax accruals increased 9 percent,compared with 8 1/2 percent in 1983. Sales taxes, the largest categoryof indirect taxes, increased 11 1/2 percent, about the same as in 1983.In the absence of law changes, which added $2 1/2 billion to the levelof sales taxes, the 1984 increase would have been 9 percent, or 1percentage point more than in 1983. Property taxes increased about thesame as in the preceding year, and other indirect business taxesrecorded a 5-percent increase, up from only 2 percent in 1983.

Twomajor contributors to the acceleration in the other category wereseverance taxes, which were flat in 1984 after a sharp decline, andstock transfer and documentary taxes, which–in part because of a NewYork tax on capital gains from real estate transactions– added about$1/2 billion to the 1984 increase. Federal grants, as mentioned earlier, registered a strongacceleration. Although the 1984 increase–7 1/2 percent –was largewhen compared to changes in grants in the preceding 3 years, it wasconsiderably below the 12 1/2-percent increase averaged in the1970’s. Grant receipts recorded a 10-percent increase in 1980, butdeclined in the following 2 years before rebounding in 1983.

The 1981decline was more than accounted for by the elimination of revenuesharing for States and the phased elimination of public service jobs.The 1982 decline, although more widespread, was concentrated in grantsfor public service jobs, education, highways, and aid to families withdependent children. As mentioned earlier, these declines reflectedefforts to reduce the Federal Government deficit. Grants increased in1983; although certain grant programs –education, and sewer andwaterworks –continued to decline, others–such as highways and medicaid–increased more than enough to offset the declines. In 1984, nearlyall of the major grant programs–public assistance, highways, education,food and nutrition, community development, and mass transit–recordedlarge increases. Expenditures State and local government expenditures increased 8 1/2 percent in1984 (table 2). In the preceding 3 years, expenditures increases haddecelerated from 10 1/2 percent in 1980 to 6 percent in 1983 (thesmallest percentage increase since 1959). However, the 1984 increasewas considerably below the 10-percent increase averaged in the1970’s.

The 1984 acceleration was in purchases of goods andservices; they increased 9 percent, half again as fast as in 1983. Allother expenditures increased less than 1 percent, compared with 4 1/2percent in 1983. the 1984 increase was held down by interest anddividends received, which together increased more rapidly than in 1983. Purchases were paced by a rebound in the purchases of structures,which reflected the increases in grants, such as for highways and forsewers and waterworks. Purchases of structures had declined $5 billionfrom 1980 to 1983 and then increased by that amount in 1984. Of the $5billion increase, highways accounted for $3 billion. Most other typesof nonbuilding construction–mainly sewers and waterworks, andtransit–were up sharply also, while electric utility constructiondeclined. Construction of schools, public office buildings, andcorrectional facilities increased modestly.

Some of the increasedconstruction was financed from public borrowing, which moved up aftermid-1982. Construction activity did not reflect the availability of newfunds until the beginning of 1984, however, because lags betweenborrowing and construction outlays lengthened. Purchases of medical services on behalf of indigents (chieflymedicaid) also accelerated in 1984–up 8 1/2 percent, compared with 41/2 percent in 1983. Controls, such as limitations on price increasesand diagnostic testing, imposed by the Federal Government and individualStates have been a factor in slowing the increase in these purchasessince 1981. Other purchases of goods and services from businessincreased 9 1/2 percent, up from 6 percent in 1983. Compensation ofemployees, the largest component of purchases, increased at the samerate as in 1983-8 percent. In constant dollars, purchases of goods and services recorded thefirst increase–2 1/2 percent–since 1980 (table 3).

All types ofpurchases recorded real increases, which ranged from less than 1 percentfor compensation to 8 percent for structures. The increase in realpurchases occurred as current-dollar purchases increased and inflation(as measured by the implicit price deflator for the various types ofpurchases) moderated. Inflation was up about 6 1/2 percent for totalpurchases, almost the same as in 1983. The deflator for compensation ofemployees was up 7 1/2 percent, almost a percentage point slower than in1983. The deflator for structures recorded a 3-percent increase. From1980 to 1984, increases in the structures deflator averaged only 2percent, down from 11 percent from 1976 to 1980. A number of factorscan be cited to explain the slower rate: Changes in regulationsapplicable to projects funded partly from Federal grants, Federalactions taken against corrupt practices affecting construction, andincreased competition between firms in the form of lower profit marginsand cost-reducing changes in work rules during the 1980-83 slump inconstruction. Transfer payments to persons increased 8 percent, compared with 81/2 percent in 1983.

Direct relief transfers were up 5 percent,slightly lower than in 1983. Other transfers were unchanged following a4-percent increase. Transfers to nonprofit organizations for jobtraining and payments to Alaska’s residents under the”dividends’ program, which is from royalties received by theState from exploitation of the North Slope oil fields, recordeddeclines. These declines offset increases in transfers for education andfoster care. Interest paid increased 18 percent, compared with 16 percent in1983. Although interest rates for 1984 varied only slightly from the1983 average, new borrowing increased sharply and accounted for theacceleration.

Fiscal position The State and local government sector, excluding the operations ofsocial insurance funds, recorded a surplus of $9 1/2 billion in 1984, $3billion more than in 1983.1 Although the annual fiscal position showsan improvement for these governments in the aggregate, the quarterlypattern reveals a different picture. The other funds surplus for thefirst half of 1984 averaged $13 billion; for the last half, it averagedabout $6 billion. From the fourth quarter of 1983 to the fourth quarterof 1984, the other funds surplus declined about $4 billion. Expenditure(other than for social insurance funds) increases through 1984 averaged$11 billion for the first half and $10 billion for the second half ofthe year, and so were not the major cause of the decelerating surplus.Quarterly increases in receipts (other than for social insurance funds)averaged $12 billion in the first half of 1984, but only $8 billion inthe second half. The removal in mid-1984 of surtaxes and other measuresthat had temporarily increased taxes contributed to the smallerincreases, as did a slowdown in economic activity; these changes werethe major cause of the decelerating surplus. 1.

From 1976 through 1984, there were surpluses in all yearsexcept 1982; prior to 1976, there were usually deficits. A discussionof the limitations of the measure as an indientor of fiscal”health’ appears in “State and Local Government FiscalPosition: An Alternative Measure’ in the March 1984 SURVEY OFCURRENT BUSINESS. The State and local government fiscal position improvedconsiderably since 1982. The surpluses recorded in 1983 and the firsthalf of 1984 were large enough to permit rebuilding of balances thathave been severely eroded by the 1981-82 recession. It is not possibleat this time to present separate 1984 accounts for States and forlocalities, but a few broad points can be made.

Estimates in the September 1984 SURVEY indicated that, for 1982,States recorded a $7 billion other funds deficit and, for 1983, a $2 1/2billion surplus. The National Governors’ Association, whichsurveys State general fund positions, recently reported that reserveswere about $6 billion for fiscal year 1984, up $3 1/2 billion fromfiscal year 1983 (for most States, fiscal years end June 30). Asdiscussed in the “State and Local Government Fiscal Position: AnAlternative Measure’ in the March 1984 SURVEY, the NIPA other fundssurplus and general funds balances are not closely related; nonetheless,it appears that the two barometers of State fiscal position are pointingin the same direction.

The local government surplus probably grew little, if at all, in1984. Local revenues probably showed a strong gain; property taxes, thelargest category of local receipts, were up 7 1/2 percent. However,expenditures probably increased more rapidly than receipts. Asubstantial part of the strong increases in structures spending tookplace at the local level, and employment at the local level appears tohave turned around following 3 years of declines.

Overall, the State and local government sector achieved an improvedfiscal position in 1984 after recovering in 1983 from 2 years ofrecession-caused difficulties. Strict controls on expendituresthroughout the period and willingness–at least on a temporary basis–toincrease taxes contributed markedly to this recovery. Outlook A major factor in the outlook for the State and local governmentfiscal position in 1985 will be the pace of economic activity. The paceof economic activity is particularly significant for State governments,because their revenue bases have become quite responsive to changes inthe economy. If economic growth is in the 3-3 1/2 percent rangesuggested by many forecasters, State GOSR is likely to be up around 8percent. Federal grants are unlikely to increase substantially becausea new round of reductions in Federal spending seems imminent.Accordingly, the overall revenue growth is likely to be 6-7 percent.Because expenditures growth, led by continued expansion in purchases ofstructures, is likely to be 9-10 percent, the other funds measure forStates should register near zero.

One issue, if unresolved, could sharply curtail both grants andhighway construction, which makes up the bulk of State spending onstructures. Grants for the interstate highway program do not requireannual appropriations. However, legislation governing the trust fundfrom which it is financed requires Congressional approval of a biennial interstate cost estimate (ICE). For a number of years, approval of theICE has provided a vehicle for the funding of specific projects.

Inlate 1983, when Congress found it impossible to agree on a list ofprojects for fiscal years 1984 and 1985, a form of continuing resolution allowed for continued trust fund outlays through the summer of 1984. Sofar, efforts to reach a compromise have failed, and the ICE issueremains unresolved. Various temporary measures have allowed constructionactivities to continue, at least in most States. However, if the issueis not resolved before the spring construction season, the result willbe an extremely sharp decline in grants and construction, on the orderof $4-$5 billion in grants and $6 billion in construction activity. At the local level, receipts are likely to be up 8-10 percent;property tax increases should reflect entry into the tax base ofstructures and equipment acquired in 1984. Sharp increases in borrowingfor public capital in 1984 indicate continued growth in constructionspending in 1985, and modest growth in education and public safetyemployment is likely.

Local expenditures are likely to record anincrease in excess of 10 percent overall, and the other funds measurewill show a deficit for this level of government. Table: 1.–State and Local Government Receipts, NIPA Basis Table: 2.–State and Local Government Expenditures, NIPA Basis Table: 3.–State and Local Government Purchases, NIPA Basis

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