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State and local government fiscal position in 1990.

State and Local Government Fiscal Position in 1990

THE surplus of State and local governments as measured on a national income and product accounts (NIPA) basis was $36 billion in 1990, $10 billion less than in 1989 (table 1). This deterioration in the overall fiscal position was the net result of a $3 billion increase in the surplus of social insurance funds and a $13 billion increase in the "other funds" deficit. The fiscal position of State and local governments as measured by the "other funds" surplus or deficit has deteriorated steadily since 1984, while the social insurance funds surplus has continued to increase. The "other funds" surplus declined through 1986, and a deficit appeared in 1987. In 1989, the $3 1/2 billion increase in the "other funds" deficit was the result of an increase in expenditures that was larger than the increase in receipts. The sharper deterioration in 1990 was largely the result of an acceleration in expenditures; receipts increased about as much in 1990 as in 1989.

Receipts

State and local government receipts increased 7 percent in 1990, 1/2 percentage point less than in 1989 (table 2). General own-source receipts - that is, receipts excluding contributions for social insurance and Federal grants-in-aid - increased 6 percent, 1 1/2 percentage points less than in 1989. The deceleration was most marked in personal tax and nontax receipts, which increased 6 percent, following a 10 1/2-percent increase.

The deceleration in personal tax and nontax receipts was traceable to income taxes, which increased 4 1/2 percent in 1990, down from a 13-percent increase in 1989. The pattern of income tax growth has been irregular in recent years; in 1986-88, and to some extent in 1989, this pattern reflected both behavioral responses of taxpayers to the Tax Reform Act of 1986 and State and local government legislative actions.<1> In 1990, the deceleration largely reflected economic factors, mainly slower economic growth. Personal income increased 6 percent in 1990, down from a 7 1/2-percent increase in 1989 (see table 2.1 of the "Selected NIPA Tables" in this issue). In 1990, both taxpayer responses to the Tax Reform Act and State and local legislative actions were estimated to have had relatively little effect; in the absence of both (notably the $1 1/2 billion added by taxpayer responses in 1989), income taxes would have increased 5 1/2 percent in 1990. There were a number of legislative changes to income taxes in 1990, but the net effect of those that reduced taxes (mostly enacted before 1990) and of those that increased taxes (mostly enacted during 1990) was small.

Corporate profits tax accruals decreased 2 percent in 1990, compared with a 4-percent decrease in 1989. The effect of decreases in corporate profits more than offset tax increases imposed by several States in 1989 and 1990.

Indirect business tax and nontax accruals increased 6 1/2 percent in 1990, down from a 7-percent increase in 1989. Much of the deceleration was in property taxes, which increased 7 1/2 percent, following a 9 1/2-percent increase. Sales taxes increased 6 percent, following a 6 1/2-percent increase. Legislative actions added about $4 1/2 billion to sales taxes in 1990 and about $3 billion in 1989. In the absence of these actions, sales taxes would have increased 3 1/2 percent in 1990 and 4 1/2 percent in 1989. "Other" indirect business tax and nontax accruals increased 5 1/2 percent in 1990, up from a 4-percent increase in 1989. The acceleration is partly traceable to payments - about $1/2 billion - by oil companies to States to settle lawsuits. Without these payments, "other" indirect business tax and nontax accruals would have increased 4 1/2 percent in 1990.

Contributions for social insurance increased 6 1/2 percent in 1990, down from a 7 1/2-percent increase in 1989; the deceleration is in contributions to State and local government employee retirement systems and may be a response to the continued large surpluses of these systems. Federal grants-in-aid accelerated sharply in 1990; they increased 11 1/2 percent, up from a 6 1/2-percent increase in 1989. Increases in grants for medicaid, aid to families with dependent children, social services, and health care accounted for most of the acceleration. Grants for community development decreased in 1990.

Expenditures

State and local government expenditures increased 9 percent in 1990, up from an 8-percent increase in 1989 (table 3). Purchases of goods and services and transfer payments to persons, the two largest categories of expenditures, accelerated in 1990.

Purchases of goods and services increased 8 percent in 1990, up from a 7 1/2-percent increase in 1989. Purchases of structures accelerated sharply; compensation of employees and purchases of "other" goods and services decelerated. Much of the acceleration in purchases of structures was traceable to construction of highways and water supply facilities. Highway construction increased $2 1/2 billion in 1990, following a $1/2 billion decrease; construction of water supply facilities increased $1 billion, following little change. Other sizable increases in construction were in educational buildings, other buildings (such as offices and prisons), and sewers.

The deceleration in "other" purchases of goods and services was most pronounced in purchases of durable and nondurable goods; purchases of services other than compensation increased at about the same rate in 1990 as in 1989. Measured in constant (1982) dollars, "other" purchases increased 2 1/2 percent in 1990, following a 3-percent increase in 1989; the deceleration was apparent in all three categories of "other" purchases (table 4). The fixed-weighted price index for services purchased by State and local governments increased 5 percent in 1990, up from a 4-percent increase in 1989; the fixed-weighted price indexes for durables and nondurables increased less in 1990 than in 1989 (see table 7.16 in the "Selected NIPA Tables" in this issue).

Expenditures other than purchases increased 16 1/2 percent in 1990, up from a 13-percent increase in 1989. Transfer payments to persons increased 11 1/2 percent in 1990, up from an 11-percent increase in 1989; the acceleration was traceable to transfers for aid to families with dependent children. Interest received decelerated slightly more than did interest paid, so that the increase in net interest paid was less in 1990 than in 1989. The current surplus of government enterprises increased 8 percent in 1990, down from a 13 1/2-percent increase in 1989, primarily because of a deceleration in the net revenue of lotteries. Because net interest paid and the current surplus of government enterprises are offsets to State and local government expenditures, their deceleration contributed to the acceleration in total government expenditures.

Fiscal position

The fiscal position of State and local governments as indicated by the "other funds" measure deteriorated in 1990: The deficit increased from $29 billion in the fourth quarter of 1989 to $41 1/2 billion in the fourth quarter of 1990 (chart 8). <2> The deterioration in the fiscal position resulted from increases in expenditures that exceeded increases in receipts; the quarterly pattern of these increases was irregular during the year. In the first quarter, both receipts and expenditures excluding social insurance funds showed strong increases - $18 billion for receipts and $19 billion for expenditures - that resulted in an increase in the "other funds" deficit. In the second and third quarters, the "other funds" deficit changed little, but the growth of both receipts and expenditures slowed to an $8 billion increase in the second quarter and then accelerated to a $15 1/2 billion increase in the third. In the fourth quarter, the "other funds" deficit increased sharply as the growth of receipts slowed and the growth of expenditures accelerated.

The quarterly increases in receipts reflected irregular patterns of change among the components of receipts. The strong first-quarter increase in receipts primarily reflected a $7 billion increase in Federal grants-in-aid and a $4 1/2 billion increase in sales taxes; a small decrease in income taxes, which was more than accounted for by tax law changes, was a partial offset. The much smaller second-quarter increase in receipts reflected a decrease in sales taxes and a smaller increase in Federal grants-in-aid than in the first quarter; income taxes increased. The large third-quarter increase in receipts was attributable to strong increases in sales and income taxes and to a nontax payment to Alaska in settlement of a lawsuit; Federal grants-in-aid decreased. The $6 1/2 billion increase in sales taxes included $3 1/2 billion from tax law changes that went into effect in a number of States. The smaller fourth-quarter increase in receipts reflected the absence of the factors that had raised third-quarter receipts, as well as a slight decrease in personal income taxes; Federal grants-in-aid increased substantially.

The quarterly increases in expenditures primarily reflected the irregular pattern of purchases of goods and services from business - that is, purchases excluding employee compensation. Expenditures other than purchases of goods and services from business increased roughly $10 1/2 billion each quarter. In contrast, purchases of goods and services from business increased $9 billion in the first quarter, decreased $2 billion in the second, increased $5 1/2 billion in the third, and increased $12 billion in the fourth. This irregularity is traceable both to purchases of structures and to other purchases from business. Purchases of structures reflected the pattern of construction activity. The pattern of other purchases from business reflected the pattern of price changes; much of this pattern is traceable to the price index for petroleum products, which decreased at an annual rate of 34 percent in the second quarter and then surged 126 percent in the third quarter and 171 percent in the fourth.

Outlook

A major factor in the outlook for the State and local fiscal position in 1991 will be the pace of economic activity; the year began with the recognition that a recession was underway, as evidenced by a decrease in real GNP in the fourth quarter of 1990. This discussion assumes little or no year-to-year economic growth in 1991, compared with about 1-percent growth in 1990.

On the receipts side, personal income taxes are likely to accelerate slightly, and sales taxes are likely to decelerate; legislation already enacted should increase personal income taxes about $1 1/2 billion and reduce sales taxes about $1/2 billion in 1991. Although State and local governments may increase taxes later in the year in response to their deteriorating fiscal position, this discussion assumes no further tax law changes effective in 1991 because of the difficulty of predicting such changes. Further assuming a decrease in corporate profits tax accruals similar in size to that in 1990 and a continued slowing in property tax accruals, general own-source receipts are likely to increase about 6 percent. In contrast, Federal grants-in-aid are expected to increase about 17 percent; the Federal budget indicates large increases in grants for medicaid, education, mass transit, and health care. If contributions for social insurance decelerate again in 1991, total receipts are likely to increase about $60 - 65 billion, to about $860 - 865 billion.

On the expenditures side, the increase in purchases is likely to be smaller in 1991 than in 1990. Given the continued deterioration in their fiscal position, State and local governments are likely to curb the growth of expenditures, particularly compensation of employees and purchases from business other than structures. In recent months, a number of governors have proposed or announced cuts in spending from budgeted levels for fiscal year 1991, which ends in June 1991 for most States, in order to deal with projected general-fund deficits. <3>

The course of inflation, particularly in prices of energy, is a source of uncertainty. This discussion assumes price increases for goods and services other than compensation similar in size to those in 1990. (Larger increases in prices of goods and services would tend to increase current-dollar State and local government purchases of goods and services, at least in the short term, as governments attempt to maintain the level of government services.)

It is likely that purchases of structures will decelerate in 1991, even though new borrowing by State and local governments increased in 1990 and Federal grants for capital purposes are likely to increase in 1991. In particular, it is likely that highway construction will not match its 10-percent 1990 increase; new borrowing by State and local governments for highways decreased substantially in 1990, and Federal grants for highways are likely to change little in 1991. Assuming a 6-percent increase in structures, total purchases would increase about 7 percent. Transfer payments are likely to increase faster in 1991 than in 1990; medical care transfers, which are largely financed by Federal grants, are likely to accelerate again in 1991. If the other categories of expenditures increase at about the same rate as in 1990, total expenditures are likely to increase about $60 - 65 billion, to about $825 - 830 billion in 1991.

Accordingly, the NIPA surplus would change little, remaining at about $35 - 40 billion. The social insurance funds surplus is likely to increase about $2 - 3 billion, to about $72 billion, so that the "other funds" deficit is likely to increase, to about $35 - 40 billion. <1> The behavioral responses of taxpayers to the Tax Reform Act of 1986 included deferral of income to later years to take advantage of lower income tax rates provided by the act. The net effect on income taxes of these taxpayer responses was to add an estimated $1/2 billion in 1986, $3 billion in 1987, $1/2 billion in 1988, and $1 1/2 billion in 1989. State and local government legislation reduced income taxes an estimated $2 billion in 1987, $2 1/2 billion in 1988, and $1/2 billion in 1989. This legislation included actions, particularly in 1988, by a number of States to return all or part of the "windfall" associated with the Tax Reform Act. In the absence of both the taxpayer responses and the legislative actions, income taxes would have increased 10 1/2 percent in 1987, 10 percent in 1988, and 12 percent in 1989. <2> The quarterly estimates of State and local governments receipts and expenditures for 1990 are shown in table 3.3 of the "Selected NIPA Tables." <3> In most States, general-fund budgets are operating budgets in that they generally exclude capital spending, such as construction, which is often financed by borrowing. They may also exclude funds for special purposes that vary from State to State; typically, employee retirement funds and highway funds are among those excluded from general funds. The general-fund budget is legally required to be balanced in most States. In the NIPA "other funds" measure of surplus or deficit, funds other than social insurance funds (such as employee retirement funds) are included; capital spending financed by borrowing is included in expenditures, but proceeds from this borrowing are excluded from receipts. Consequently, when capital spending is financed by borrowing, the other funds measure tends to move toward a deficit.
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Author:Sullivan, David F.
Publication:Survey of Current Business
Date:Feb 1, 1991
Words:2502
Previous Article:Federal fiscal programs.
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