The season of giving is wrapping up (pun intended), and hopefully hard-working, tax-paying Americans are enjoying some nice Christmas presents this year. But taxpayers are not the only ones who get gifts. So too does the government. That is if taxes and other revenue taken from the population at large can be classified as gifts. Last month, the U.S. Census Bureau released the most recent data on state and local government revenue. The data, from 2009 since numbers are released on a two-year lag, shows some early signs for how the recession impacted revenue and offers some surprising numbers for those clamoring for increased tax rates: We find that even accounting for recession induced revenue declines, state and local governments collected more revenue in 2009 than they should have since the last recession in 2002.
In the below infographic, we show how much money state and local governments got for Christmas and where they got it from.
Reason Foundation Holiday Infographic (Click on image to zoom)
The Census Bureau's State & Local Government Finance Summary Report covers a population containing 50 state governments, 90,248 local governments (including counties, municipalities, townships, special districts, and school districts), and the District of Columbia. Overall, state and local governments collected $2.4 trillion in general revenue in 2009, and $2.6 trillion in total revenue-minus some serious losses to insurance trust funds (which we'll discuss below).
General revenue can be broken into four major categories: 53 percent came from taxes; 22 percent came from the federal government; 16 percent came from charges (highway tolls, park fees, etc.); and 9 percent came from a range of other sources.
There are interesting details digging deeper into these numbers, particularly in light of discussions about substantively overhauling the tax code. For instance, the relatively small revenue from corporate income taxes suggests either the possibility of eliminating it entirely to boost business growth or increasing it since it is too low—depending on your political persuasion. Another fascinating bit of data to dig into is that property taxes grew to 16.5 percent of overall revenues even with falling property values, a subject matter that could generate a discussion about whether property taxes might be a more or less appropriate way to tax Americans.
However, what is even more interesting in the near-term is contrasting the overall revenue numbers with prior years. Relative to 2008, state and local total revenue fell 22.1 percent in 2009. And compared to the $3.067 trillion revenue haul in 2007, the recession-beleaguered 2009 saw revenue come down a dramatic 32.6 percent.
Clearly the recession had an impact on revenue both from taxes and other sources like utility usage. But does that mean governments actually have a revenue problem?
This is a frequently heard refrain in public discourse, particularly as debates rage over whether taxes should be increased or decreased to address the weak economy and looming debt. Looking back over the past decade, though, the supposed revenue problem may only be relative to what government leaders want to spend, and not relative to the historical costs of government.
There are two usual classifications for government revenue: general revenue and total revenue. General revenue includes things like income taxes, sales taxes, property taxes, and fees. Total revenue includes money collected by utilities (like water and power facilities), liquor store revenues, and interest earned by insurance trust funds plus general revenues. The easiest way to think about the difference is that general revenue is determined by tax and fee collection, and total revenue is determined by government operated business activities plus tax and fee collection.
With that in mind, consider that in 2002 general revenue was $1.7 trillion. Whether or not state and local governments spent all of this or had a surplus, there has been ample time to adjust tax codes to what is needed to fund government services. (We select 2002 since it was when the nation was coming out of the first recession of the 21st century and when the economy began its five-year surge in growth.) Assuming that cost of government between 2002 and 2009 grew relative to inflation (19.3 percent) and population growth (6.3 percent), we would expect revenues to increase 25.6 percent.
However, 2009's $2.4 trillion in general revenue for state and local governments was 43.24 percent higher than 2002. And that is factoring in the full impact of the recession from December of 2007 to June of 2009.
The money collected in excess of a baseline assumption of revenue growth since 2002 theoretically should have left state and local governments with a surplus. But we know that did not happen. In fact, nearly every state faced a budget deficit in 2009 and most continued to struggle in 2011. This would suggest that states have a spending problem, not a revenue problem, but confirmation of this hypothesis would require a study of state spending habits over the same period, (research which Reason plans to release in early 2012) but is beyond the scope of this newsletter's focus on revenue trends.
In contrast to the general revenue surge relative to the inflation plus population baseline, total revenue (once you factor in government business revenue and trust fund gains or losses) increased only 14.4 percent from 1.8 trillion 2002 to 2.1 trillion in 2009. This is less than the baseline would estimate state and local governments would need to collect to provide services. The reason why is because the collective employee retirement trust funds lost a horrifying $497.9 billion. This is the first time in recent memory that collective state and local trust funds have not made at least $10 billion, including during the weak economy in 2001 and 2002. Had the public pension money managed by state and local governments just broken even in 2009, meaning an adjusted total revenue of 2.6 trillion, then total revenue would have actually increased 41.9 percent from 2002 to 2009, which is clearly above the baseline estimate of 25.6 percent.
Beyond the question of revenue vs. spending troubles, there are a handful of disturbing trends.
The Federal government gave state and local governments $536.8 billion in 2009, relative to $478 billion in 2008 and $361 billion in 2002. Most of the increased funding from 2008 was due to the American Recovery and Reinvestment Act, popularly known as the Stimulus, and was allocated to education, pubic safety, transportation, and other municipal budgets. This money stopped flowing in 2011, so it will be interesting to see how state and local revenue streams recover as the next few years of data comes out. Given the fact that general revenue grew beyond the expected baseline in growth despite the recession, a relevant question to answer in the near term is whether this money was needed because of the recession or due to over-expansion in state and local spending.
Another negative trend was the clear impact of the recession on certain types of revenue.
General sales tax revenue was down 5.1 percent on decreased spending in 2009 largely due to a slow economy, unemployment, and overall uncertainty in household financial prospects. Individual and corporate income taxes fell 11.3 percent and 19.2 percent respectively from 2008. And of course there were the substantial trust fund losses with the markets down nearly across the board in 2009.
A third negative trend is one that is actually nothing new: the propensity of state and local governments to levy regressive taxes on alcohol and cigarettes. Policymakers frequently turn to sin taxes to boost revenue—Washington State, Chicago, Maryland, and Minnesota have all proposed increases in the past year, among others-but they are so relatively small to overall revenues that they rarely bring much substantive benefit. (These “sin taxes” also rarely meet estimated targets and hurt lower income households the most, but that is a subject of a forthcoming newsletter.) Tobacco product sales and alcoholic beverage sales, added up to $23 billion in 2009, a 68.1 percent increase from the $13.7 billion collected in 2002.
In conclusion, a number of news reports on 2009 state and local revenue data have noted that overall revenue is still lower than pre-recession levels. We think the more important story is that, despite this reality, revenue is not coming up short compared to a historical baseline. Further study can clarify this story, but if this is the case, and revenue is higher than it should be due to elevated taxation, it would be important to remember that the more revenue politicians are able to gift to themselves at the taxpayer’s expense, means the fewer gifts Americans can give to themselves and to one another.
Ahead of the Curve is an economics newsletter on national trends by Anthony Randazzo, Reason Foundation director of economic research. This issue was co-authored by Harris Kenny, policy analyst at Reason Foundation. Click here to subscribe.