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State and local government fiscal position in 1984.

State and Local Government Fiscal Position in 1984

THE State and local government fiscal position improved again in 1984. The total surplus on a national income and product accounting (NIPA) basis increased $8 billion, to $51 billion, after an $11 billion increase in 1983. However, in contrast to the 1983 increase, the bulk of the 1984 increase--$5 billion--was in the social insurance fund surplus. The increase in the other funds surplus was $3 billion, compared with a $7 1/2 billion increase in 1983, when this measure shifted from a deficit to a $6 1/2 billion surplus.

Receipts increased $45 billion, or 9 1/2 percent in 1984, slightly more than the 1983 increase. The acceleration was due to Federal grants-in-aid, which increased 7 1/2 percent, following an increase less than 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 reduce Federal expenditures and an increasing deficit.

Expenditures increased $37 billion, or 8 1/2 percent, moderately more than the 1983 increase; this acceleration was the first, and the percentage increase was the largest, since 1980. Expenditure increases began to decelerate in 1981, partly due to the reduction and elimination of grants: Compensation decelerated in 1981 with the continued phase-out of public service jobs, which were funded by grants under the Comprehensive Employment and Training Act, and structures declined with cutbacks in highway and in sewer and waterworks grants. In 1982 and 1983, deceleration was the result of strict, recession-induced expenditure controls by States and localities and of continued declines in grants. The acceleration in 1984 occurred in purchases of goods and services--most notably in purchases of structures, which increased 11 1/2 percent, following declines in the preceding 3 years.


State and local government receipts increased 9 1/2 percent in 1984, which, as already noted, was the largest increase since 1980 (table 1). All major categories of receipts, except personal tax and nontax receipts, recorded stronger gains than in 1983. This pattern reflected the faster pace of economic activity in 1984 in combination with the effects of larger-than-usual tax law changes. (See the note to table 1 for a description of how the effects of tax law changes are calculated.)

Corporate profits tax accruals increased 17 1/2 percent, the largest 1984 percentage increase; the increase in 1983 was 13 1/2 percent. Although profits declined in the second half of the year, for the year as a whole they were substantially above the 1983 level. Tax law changes accounted for very little of the 1984 increase in corporate taxes.

Personal taxes increased 10 1/2 percent, compared with 11 1/2 percent in 1983. Income taxes more than accounted for this deceleration. Although tax law changes had added almost 50 percent to the 1983 increase in income taxes, they added only a small amount in 1984. Thus, the major factor in the increase in income taxes in 1984 was taxable income; income taxes excluding tax law changes increased more rapidly than in 1983.

Personal nontaxes, such as user fees for medical services and tuition at public universities and colleges, increased 12 1/2 percent, slightly more than in 1983. These nontaxes have increased more rapidly than total general own-source receipts (GOSR) since 1972 because State and local governments have continued to broaden the range and increase the 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 to reflect--at least in part--a shift, evident even before the "tax revolt' of the late 1970's, toward the view that public goods and 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 in medical costs in general and only secondarily an attempt to fund an increasing 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 category of 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 level of sales taxes, the 1984 increase would have been 9 percent, or 1 percentage point more than in 1983. Property taxes increased about the same as in the preceding year, and other indirect business taxes recorded a 5-percent increase, up from only 2 percent in 1983. Two major contributors to the acceleration in the other category were severance taxes, which were flat in 1984 after a sharp decline, and stock transfer and documentary taxes, which--in part because of a New York tax on capital gains from real estate transactions-- added about $1/2 billion to the 1984 increase.

Federal grants, as mentioned earlier, registered a strong acceleration. Although the 1984 increase--7 1/2 percent --was large when compared to changes in grants in the preceding 3 years, it was considerably below the 12 1/2-percent increase averaged in the 1970's. Grant receipts recorded a 10-percent increase in 1980, but declined in the following 2 years before rebounding in 1983. The 1981 decline was more than accounted for by the elimination of revenue sharing for States and the phased elimination of public service jobs. The 1982 decline, although more widespread, was concentrated in grants for public service jobs, education, highways, and aid to families with dependent children. As mentioned earlier, these declines reflected efforts to reduce the Federal Government deficit. Grants increased in 1983; although certain grant programs --education, and sewer and waterworks --continued to decline, others--such as highways and medicaid --increased more than enough to offset the declines. In 1984, nearly all of the major grant programs--public assistance, highways, education, food and nutrition, community development, and mass transit--recorded large increases.


State and local government expenditures increased 8 1/2 percent in 1984 (table 2). In the preceding 3 years, expenditures increases had decelerated from 10 1/2 percent in 1980 to 6 percent in 1983 (the smallest percentage increase since 1959). However, the 1984 increase was considerably below the 10-percent increase averaged in the 1970's. The 1984 acceleration was in purchases of goods and services; they increased 9 percent, half again as fast as in 1983. All other expenditures increased less than 1 percent, compared with 4 1/2 percent in 1983. the 1984 increase was held down by interest and dividends 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 for sewers and waterworks. Purchases of structures had declined $5 billion from 1980 to 1983 and then increased by that amount in 1984. Of the $5 billion increase, highways accounted for $3 billion. Most other types of nonbuilding construction--mainly sewers and waterworks, and transit--were up sharply also, while electric utility construction declined. Construction of schools, public office buildings, and correctional facilities increased modestly. Some of the increased construction was financed from public borrowing, which moved up after mid-1982. Construction activity did not reflect the availability of new funds until the beginning of 1984, however, because lags between borrowing and construction outlays lengthened.

Purchases of medical services on behalf of indigents (chiefly medicaid) also accelerated in 1984--up 8 1/2 percent, compared with 4 1/2 percent in 1983. Controls, such as limitations on price increases and diagnostic testing, imposed by the Federal Government and individual States have been a factor in slowing the increase in these purchases since 1981. Other purchases of goods and services from business increased 9 1/2 percent, up from 6 percent in 1983. Compensation of employees, the largest component of purchases, increased at the same rate as in 1983-8 percent.

In constant dollars, purchases of goods and services recorded the first increase--2 1/2 percent--since 1980 (table 3). All types of purchases recorded real increases, which ranged from less than 1 percent for compensation to 8 percent for structures. The increase in real purchases occurred as current-dollar purchases increased and inflation (as measured by the implicit price deflator for the various types of purchases) moderated. Inflation was up about 6 1/2 percent for total purchases, almost the same as in 1983. The deflator for compensation of employees was up 7 1/2 percent, almost a percentage point slower than in 1983. The deflator for structures recorded a 3-percent increase. From 1980 to 1984, increases in the structures deflator averaged only 2 percent, down from 11 percent from 1976 to 1980. A number of factors can be cited to explain the slower rate: Changes in regulations applicable to projects funded partly from Federal grants, Federal actions taken against corrupt practices affecting construction, and increased competition between firms in the form of lower profit margins and cost-reducing changes in work rules during the 1980-83 slump in construction.

Transfer payments to persons increased 8 percent, compared with 8 1/2 percent in 1983. Direct relief transfers were up 5 percent, slightly lower than in 1983. Other transfers were unchanged following a 4-percent increase. Transfers to nonprofit organizations for job training and payments to Alaska's residents under the "dividends' program, which is from royalties received by the State from exploitation of the North Slope oil fields, recorded declines. These declines offset increases in transfers for education and foster care.

Interest paid increased 18 percent, compared with 16 percent in 1983. Although interest rates for 1984 varied only slightly from the 1983 average, new borrowing increased sharply and accounted for the acceleration.

Fiscal position

The State and local government sector, excluding the operations of social insurance funds, recorded a surplus of $9 1/2 billion in 1984, $3 billion more than in 1983.1 Although the annual fiscal position shows an improvement for these governments in the aggregate, the quarterly pattern reveals a different picture. The other funds surplus for the first half of 1984 averaged $13 billion; for the last half, it averaged about $6 billion. From the fourth quarter of 1983 to the fourth quarter of 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 of the 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 in the second half. The removal in mid-1984 of surtaxes and other measures that had temporarily increased taxes contributed to the smaller increases, as did a slowdown in economic activity; these changes were the major cause of the decelerating surplus.

1. From 1976 through 1984, there were surpluses in all years except 1982; prior to 1976, there were usually deficits. A discussion of the limitations of the measure as an indientor of fiscal "health' appears in "State and Local Government Fiscal Position: An Alternative Measure' in the March 1984 SURVEY OF CURRENT BUSINESS.

The State and local government fiscal position improved considerably since 1982. The surpluses recorded in 1983 and the first half of 1984 were large enough to permit rebuilding of balances that have been severely eroded by the 1981-82 recession. It is not possible at this time to present separate 1984 accounts for States and for localities, 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 1/2 billion surplus. The National Governors' Association, which surveys State general fund positions, recently reported that reserves were about $6 billion for fiscal year 1984, up $3 1/2 billion from fiscal year 1983 (for most States, fiscal years end June 30). As discussed in the "State and Local Government Fiscal Position: An Alternative Measure' in the March 1984 SURVEY, the NIPA other funds surplus and general funds balances are not closely related; nonetheless, it appears that the two barometers of State fiscal position are pointing in the same direction.

The local government surplus probably grew little, if at all, in 1984. Local revenues probably showed a strong gain; property taxes, the largest category of local receipts, were up 7 1/2 percent. However, expenditures probably increased more rapidly than receipts. A substantial part of the strong increases in structures spending took place at the local level, and employment at the local level appears to have turned around following 3 years of declines.

Overall, the State and local government sector achieved an improved fiscal position in 1984 after recovering in 1983 from 2 years of recession-caused difficulties. Strict controls on expenditures throughout the period and willingness--at least on a temporary basis--to increase taxes contributed markedly to this recovery.


A major factor in the outlook for the State and local government fiscal position in 1985 will be the pace of economic activity. The pace of economic activity is particularly significant for State governments, because their revenue bases have become quite responsive to changes in the economy. If economic growth is in the 3-3 1/2 percent range suggested by many forecasters, State GOSR is likely to be up around 8 percent. Federal grants are unlikely to increase substantially because a 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 of structures, is likely to be 9-10 percent, the other funds measure for States should register near zero.

One issue, if unresolved, could sharply curtail both grants and highway construction, which makes up the bulk of State spending on structures. Grants for the interstate highway program do not require annual appropriations. However, legislation governing the trust fund from which it is financed requires Congressional approval of a biennial interstate cost estimate (ICE). For a number of years, approval of the ICE has provided a vehicle for the funding of specific projects. In late 1983, when Congress found it impossible to agree on a list of projects for fiscal years 1984 and 1985, a form of continuing resolution allowed for continued trust fund outlays through the summer of 1984. So far, efforts to reach a compromise have failed, and the ICE issue remains unresolved. Various temporary measures have allowed construction activities to continue, at least in most States. However, if the issue is not resolved before the spring construction season, the result will be an extremely sharp decline in grants and construction, on the order of $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 of structures and equipment acquired in 1984. Sharp increases in borrowing for public capital in 1984 indicate continued growth in construction spending in 1985, and modest growth in education and public safety employment is likely. Local expenditures are likely to record an increase in excess of 10 percent overall, and the other funds measure will 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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Author:Levin, David J.
Publication:Survey of Current Business
Date:Jan 1, 1985
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