State and local government fiscal position in 1983.
THE State and local government surplus on a national income and product accounting (NIPA) basis was $52 billion in 1983, up $20 billion from 1982. The social insurance fund surplus accounted for only $3 billion of the change; the other funds measure shifted from a $2 billion deficit to a $15 billion surplus. This swing to a record surplus reflected strongerthan-anticipated economic growth and legislative actions, both of which increased receipts, and limitations on expenditures growth. Futher, it is likely that the major shift in the fiscal position came at the State level.
Receipts increased 10 percent in 1983, double the rate of increase in 1982. The sharp acceleration in receipts was primarily in general ownsource receipts, but Federal grants-in-aid, which increased following 2 years of declines, also contributed. Expenditures increased 6 percent, following slightly larger increases in 1981 and 1982. The continued deceleration reflected general fiscal restraint on purchases. However, in 1983, expenditures other than purchases contributed significantly to the deceleration, primarily because the rate of increase in interest paid was only one-half as much as in 1982. In turn, lower interest rates and especially a sharply lower volume of short-term borrowings contributed to the slower growth in interest paid. Purchases of goods and services, which make up the bulk of expenditures, registered slower growth in all major categories except structures. Structures registered a decline for the third consecutive year, but it was only 2 percent, compared with about 5 percent in 1981 and 1982.
State and local government receipts increased 10 percent in 1983, reversing the deceleration in 1981 and 1982 (table 1). All five major categories of receipts contributed to the acceleration. Corporate profits tax accruals registered the largest percentage increase, reflecting the effect of the economic recovery in 1983 on corporate profits. They increased 29 1/2 percent, following a large decline in 1982.
Personal tax and nontax receipts increased 13 1/2 percent, up from a 10-percent increase in 1982. Income taxes more than accounted for this acceleration. Legislative actions affecting income taxes contributed heavily to the increase, which would have been 9 1/2 percent, rather than 15 percent, in the absence of those actions. (The 1982 increase in the absence of legislative actions would have been about 6 percent, rather than 8 percent.) Of the 40 States that currently impose a broad-based personal income tax, 18 took some action to increase 1983 revenues from that tax. The increases were concentrated in the parts of the country where the 1981-82 recession was most severe. In the 16 States of the industrial Northeast and Midwest that have a broad-based income tax, only Massachusetts, Missouri, Rhode Island, and New York did not impose an increase (and New York City had imposed one in late 1982). Four of the Midwestern farm states also acted to increase income taxes in 1983. Personal nontaxes-- chiefly user fees for public universities, colleges and medical facilities-- increased about 13 percent for the second consecutive year; growth in other types of personal taxes decelerated slightly.
As has already been mentioned, most of the sharp increase in corporate profits tax accruals was the result of the recovery in profits in 1983. As well, numerous legislative actions affected these taxes, but, for the most part, they had to do with "correcting' the Federal legislative actions of 1981 that modified the tax base for many of the States with a corporate tax. The need for the corrections stemmed from the changes in Federal tax practices regarding depreciation which, in the absence of State action, reduced the tax base for States as well. Some States that followed the Federal practice in 1982 "decoupled' in 1983. The decoupling was accomplished in various ways; one was to require firms to calculate depreciation under the pre-1981 rules as well as with the new rules, and include in ordinary income part of the difference between old and "accelerated' depreciation.
Indirect business tax and nontax accruals increased 10 1/2 percent, up from 8 1/2 percent in 1982. Sales taxes contributed significantly to this acceleration; they increased 11 percent, nearly double the 1983 increase. Almost one-third of the 1983 increase was from legislative actions; those involving State-level general sales taxes alone accounted for one-quarter of the 1983 increase. Forty-five States impose general sales taxes, and 21 took actions to increase them. However, not all of these were major revenue-raising efforts; some involved relatively minor coverage changes and others involved "swaps'. Florida, for example, brought motor fuel into the general sales tax base in a swap for a reduction in the motor fuel excise tax. Nebraska increased the general sales tax rate but excluded grocery-store food sales from the base. Ten of the 21 States in this group were also among the 18 States that increased personal income taxes.
Property tax growth slowed somewhat from the record 1982 increase, but, at 11 percent, was still very strong. The rapid increase in real estate market values that occurred in the 1978-81 period probably was reflected for the most part in the tax base by 1983. As in 1982, a portion of the increase in 1983 can be attributed to increases in effective property tax rates; a National League of Cities survey of large cities found rate increases in about 30 percent of the respondents.
Contributions to social insurance funds accelerated slightly in 1983, as declines in State and local employment slowed. (See the discussion of compensation of employees in the following section.) Federal grants, as noted previously, registered the first increase in 3 years. Of the $2 1/2 billion increase, $1 billion was for highway grants, partly reflecting increased grants from the Federal motor fuel excise tax increase effective April 1, 1983. Welfare-related grants increased almost $1 billion. All other grants taken together registered a small increase, although there were shifts within them. For instance, food and nutrition grants were up by $0.6 billion, but sewage treatment plant construction grants declined by almost the same amount.
State and local government expenditures increased 6 percent in 1983, continuing the deceleration in 1981 and 1982 (table 2). Had the increase in interest paid not slowed sharply, total expenditures would have increased 7 percent.
Purchases of goods and services increased 6 1/2 percent in current dollars; as measured in constant dollars, purchases registered a very small increase after 2 years of declines. Compensation of employees, the largest component of purchases, increased at almost the same rate as in 1982-8 percent. Employment declined by about 60,000 after a decline of 100,000 in 1982 (chart 11). The 1982 decline was largely due to the end of the Comprehensive Employment and Training Act (CETA) jobs program in late 1981. The 1983 decline was concentrated in education, where a decline of 70,000 employees in 1983 followed a 60,000 decline. Most of the 1983 decline took place over the course of the 1982-83 school year; since mid-1983, education employment has been essentially stable. Noneducation employment, up almost 90,000 and 1982 after allowance is made for reductions in CETA employment, was up only about 10,000 in 1983.
Purchases of structures declined in 1983 for the third consecutive year, but the rate of decline slowed to about 2 percent. Highway purchases were the dominant element in an upturn that appeared in the second half of the year, apparently the consequence of funds available from the increased Federal motor fuel excise tax. Other types of construction showed some strength in the third quarter, but leveled off again in the fourth. In constant dollars, purchases of structures declined again in 1983, but the decline was only 3 1/2 percent in 1983, following declines of 9 percent in 1981 and 5 percent in 1982.
Purchases of medical services on behalf of indigents (chiefly Medicaid) decelerated again in 1983; in constant dollars, these purchases declined for the second consecutive year. Other purchases of goods and services from business decelerated to an increase of 6 1/2 percent. Price increases were under 6 percent in 1983, about the same as 1982.
Transfer payments to persons increased 8 percent, up from 5 percent in 1982. Benefits paid by social insurance funds were up about 10 1/2 percent in both 1982 and 1983, but other types of transfers accelerated sharply in 1983. Benefits paid under the aid to families with dependent children (AFDC) program, which constitutes the bulk of the direct relief programs, registered a 7 1/2 percent increase in 1983 after a small decline in 1982. The 1983 increase, which was concentrated in the first half of the year, was due in part to an increase in caseloads--a delayed response to increases in unemployment during 1982. AFDC growth slowed after mid-1983, reflecting improved employment after the end of 1982. General assistance and supplemental security income--State or local government-funded relief programs--decelerated slightly in 1983.
Other types of transfers include payments to nonprofit institutions operating employment training programs and--until late 1981--employing persons funded under CETA. The absence of any employment funding in 1982 offset growth in other types of transfers, so that this category of transfer payments registered almost no change in 1982. The large negative influence of employment funding was not present in 1983 (although CETA-type training programs still in existence did decline), so the category accelerated somewhat.
The rapid deceleration in interest paid, which reduced overall expenditures growth by 1 percentage point, reflected lower interest rates and especially a sharply lower volume of short-term borrowing in 1983. Most short-term municipal borrowing undertaken is one of two types. The first type is used to smooth out revenues flows. Tax anticipation notes, to be repaid with property tax revenues, most of which are paid either in annual or semi-annual settlements, are an example. The second type is used to finance a capital project, initiated when long-term rates are high but expected to decline shortly. The second kind of borrowing occurred in large volume during the first half of 1982. When rates declined after July of 1982, these borrowers issued longer term debt and retired the short-term debt as it came due in late 1982 and through 1983. (The sequence at least partly explains the large volume of refunding issues made during 1983.) Thus, a part of long-term borrowing (about 15 percent) replaced existing short-term debt. Also, there was a decline in new long-term borrowing other than for refunding. The resulting slower addition to total debt brought about a deceleration in interest paid.
The State and local government sector, excluding the operations of social insurance funds, registered a record surplus of $15 billion in 1983, a major shift from the $2 billion deficit in 1982.(1) Three major factors contributed to this shift: First, a strong economy brought about stronger-than-anticipated revenue growth; second, the wave of legislative actions increased taxes for the year as a whole by $6 1/2-$7 billion; and third, these governments continued to succeed in limiting expenditures growth.
1. Although from 1976 to 1981 there were surpluses, earlier there were usually deficits. Because capital spending by government is combined with current spending in the summary NIPA presentations and because much of the capital spending by States and localities is funded by long-term borrowing, the "normal' fiscal position of the other funds measure has been a deficit. This and other characteristics of the surplus and deficit in the NIPA framework are discussed more fully in "State and Local Government Fiscal Position in 1978,' in the December 1978 issue of the SURVEY OF CURRENT BUSINESS.
It is quite probable--although sufficient data are not yet available to quantify it--that the major shift in the fiscal position came at the State level. An article in the May 1983 SURVEY OF CURRENT BUSINESS presented separate estimates for States and localities. Although these estimates have not yet been reworked to be consistent with the July 1983 NIPA revisions, the overall fiscal position presented then probably remains reasonably accurate. The estimates showed a divergence in fiscal behavior between States and localities. Local governments moved into surplus in 1981, because property taxes--the primary local revenue source--accelerated sharply, and expenditures increases were modest. It is likely that expenditures growth continued to be slow in 1982 and 1983, as education employment--primarily a local responsibility--declined in both years. Property taxes accelerated again in 1982, and slowed only slightly in 1983. It is likely, then, that local governments retained surpluses throughout 1981-83.
State governments, on the other hand, probably registered a small deficit in 1981 and a deeper one in 1982. Expenditures at the State level probably did not grow any more rapidly than did local expenditures, but the primary State own-source revenues --chiefly personal income and general sales taxes--increased only modestly in 1981 and even more slowly in 1982. A weak economy--and indexing of personal income taxes in such States as California, Minnesota, and Wisconsin--contributed to the deceleration. A decline in Federal grants-in-aid, the bulk of which--at least initially--flows to States, exacerbated the situation. Relatively optimistic revenue forecasts for the 1982 and 1983 fiscal years (which for most States end in June) caused further problems as it became clear that the economy was performing less well than many forecasts anticipated.
As a result, in many States, revenues fell not only below projected levels, but below planned outlays. Program cuts (especially between July 1982 and June 1983) helped some States to avoid deficits. In others it was necessary to use up reserves accumulated in prior years or borrow from special funds; a few States made determinations that it was not, after all, a violation of their constitutions to run general-fund deficits. A major part of the problem occurred when revenue forecasts for fiscal year 1983, based on widely used econometric forecasts of an economic recovery beginning in mid-1982, turned out to be overly optimistic. Many States had already begun to reduce reserves in 1981 and early 1982 (registering deficits in NIPA terms), so the drain on reserves that continued through most of fiscal year 1983 was unusually stressful. The first response, in most States, was further reduction of reserves and a retiming of collections in an effort to bring revenues forward. These responses were followed by employment and pay freezes, reductions and delays in construction programs, and other program reductions.
By mid-1982, budget plans for fiscal year 1983 were completed in most States, but revenue forecasters were less sanguine about prospects for an improving economy. Forecasts prepared in the fall of 1982 projected yet further revenue shortfalls, and legislators, having exhausted other deficitreducing techniques in the 2 prior years, moved to increase various broad-based taxes. Some of these appeared in mid-1982, but more were the result of special legislative sessions convened in the fall of 1982, with effective dates in early 1983. Legislative sessions in 1983 imposed further increases, some of them coming into play as late as December 1983. The cumulative sum of the legislative actions affecting broad-based taxes added more than $6 billion to 1983 revenues; legislative actions in other tax areas brought the total to $7 billion. The effect of these changes, if carried forward intact into 1984, would add almost $9 billion to revenues for that year.
The timing of this wave of legislated increases coincided with the long-predicted economic recovery that began in early calendar 1983. The staff of the National Conference of State Legislatures has estimated that State revenues for calendar 1983, excluding the effects of legislative actions, exceeded by about $9 billion the revenue estimates for that period made in early 1983. When this amount is added to about $7 billion in legislative actions for 1983, virtually the entire $17 billion swing in the other funds measure is explained.
The deficits at the State level and the surpluses at the local level were reflected in changes in reserves. In 1980 and 1981, the small other funds surpluses represented modest reserve accumulations at the local level, and slowly depleting reserves at the State level. In 1982, depletion of reserves at the State level occurred much more rapidly, while localities continued to accumulate them. In 1983, while localities probably continued this accumulation, States underwent a sharp change. The depletion ended, and the process of rebuilding reserves began. If the rebuilding of reserves was more rapid than might seem necessary, it is because the economy expanded more rapidly than expected.
Surpluses of the magnitude achieved in the last half of 1983-- roughly $18 billion--will not be used up immediately. There are, however, forces at work that will operate to reduce the surpluses. The first is legislative actions cutting taxes. Some of the increases imposed in 1983 were temporary increases and surtaxes that will (in the absence of further action) be removed in January 1984. More than $1 billion will be eliminated in July 1984, and others are scheduled to terminate in late 1984 or in early 1985. Thus, in the absence of any further positive legislative actions, receipts growth between the end of 1983 and the beginning of 1985 will be slowed $1 to $2 billion by existing legislation.
Other tax cuts--or "give-backs' of recent increases--may be imposed outside of the normal legislative process. The "Tax Revolt,' first seen in 1978, is reappearing in various parts of the country. Efforts are underway to place tax reductions on the November 1984 ballot in California, Florida, Massachusetts, Michigan, and Oregon. It is difficult to measure the strength of public sentiment in support of these measures; two recent tests provided contradictory results. Ohio voters in November 1983 soundly defeated a measure that would have done away with the series of tax increases imposed over the past 18 months and made it very difficult for the legislature to ever increase taxes again. On the other side, two Michigan legislators who supported tax increases during 1983 were recalled by their constituents in special elections held in November and December of 1983. If nothing else, reactions such as the second will encourage legislators to find ways to prevent the build-up of large and visible surpluses at the State level. It is widely believed that accumulations of surpluses large enough to draw the attention of voters increase the chances of success for measures such as California's Proposition 13. Some reserve-building is obviously necessary, but if sizable surpluses are not to be accumulated, then tax reductions in addition to the $1-$2 billion mentioned above are likely.
It is also likely that there will be some relaxation of the tight reins placed on expenditures growth. The employment cutbacks appear to have ended, and modest growth is likely in 1984. Employees who have accepted wage freezes for up to 3 years will be trying to recover some lost ground, so average compensation increases should accelerate. For example, for the year beginning July 1984, the Maryland budget includes a general pay increase of 6 percent, after only one general increase in the 3 prior years.
The volatile construction purchases component, already showing some strength in the second half of 1983, is likely to register the first annual increase in 4 years in 1984. The moderate surpluses accumulating at the local government level will help to fund a construction upswing. In addition, long-term tax-exempt borrowing, which (after removing components not used to finance public capital) increased from about $26 billion in 1981 to about $37 billion in 1982, dropped back in 1983, but still approached $30 billion. It is likely that those borrowings will begin to be used to finance construction in 1984.
In summary, it is unlikely that general own-source receipts will continue to increase in 1984 at the rate achieved in 1983; an increase of about 9 1/2 percent seems more likely. The Federal grants-in-aid increase is likely to be somewhat larger than in 1983 because the additional highway funds will be present for a full year. Total receipts growth is likely to slow to about 8 1/2 percent. Expenditures growth will accelerate for the first time since 1980; if construction purchases are strong--near $50 billion-- then the overall expenditures increase will be about 10 percent. If these estimates prove accurate, then the NIPA surplus will shrink slightly to about $48 billion, made up of $40 billion in social insurance funds and $8 billion in the all other funds meassure.
Table: State and Local Government Receipts, NIPA Basis
Table: State and Local Government Expenditures, NIPA Basis
Table: CHART 11; State and Local Government Employment: Change From Preceding Year
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|Publication:||Survey of Current Business|
|Date:||Jan 1, 1984|
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