Economic Snapshot | Budget, Taxes, and Public Investment

State and local tax growth matched 1990s overall economic growth

Snapshot for October 30, 2002.

State and local tax growth matched 1990s overall economic growth

The fiscal difficulties currently faced by state and local governments are sometimes attributed to an alleged, abnormal growth in taxes and spending over the past decade. For example, a report from the Cato Institute attributes state governments’ budget difficulties to “an overspending binge in the 1990s.”1

State and Local Fiscal Trends

However, this chart shows that trends in state and local revenues and expenditures in the 1990s closely matched the overall rate of growth of the country’s gross domestic product. The chart shows the evolution of both revenues and expenditures as shares of GDP over the previous business cycle. The revenues shown are “own-source,” which means that Federal aid is excluded for the sake of isolating the magnitude of state and local taxes and charges. The omission of Federal aid explains most of the gap between total spending and total revenue. The rest is due to deficits (not shown) for some years in the period.

It can be seen that the trend in revenues has been slightly downward since 1993. The trend in expenditures has been more variable but has stayed almost entirely within a range of one percentage point. The slowdown in spending in the latter part of the decade made possible some build-up of reserves to defray the costs of the spending upturn at the very end of the period. That tail-end upturn coincided with the onset of the recession, which necessitated additional spending on Medicaid, among other programs.

The lesson is that there was no inordinate growth in taxes or spending throughout the period. In fact, by foregoing the tax cuts that eroded revenue after 1993, the states could have established sufficient reserves to preclude eventual budget deficits.

1. Stephen Moore and Stephen Slivinski, Fiscal Policy Report Card on America’s Governors: 2002. Washington, D.C., Cato Institute, September 20, 2002.

This week’s Snapshot by EPI economist Max B. Sawicky.

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