Chapter Summary

Dealing with finances is a highly politicized process for states and localities. Expenditures and the budgetary process in general provide clues to the political and policy priorities of a state’s government and its local governments. State and local governments have six primary sources of revenue, including sales taxes, income taxes, excise taxes, and property taxes. Variation in state resources, geography, culture, history, and demographics has resulted in widespread variation in the use of such taxes among the states. For instance, states that forego income taxes rely heavily on property and sales taxes and are likely to have different tax rates to adjust to a different tax base. This variation among taxing mechanisms is reflected in variation in public policies.

The budget process among states and localities is defined primarily by the relationship between entitlement spending and discretionary spending. As entitlement spending (for example, Medicaid and welfare) increases, the ability of states to experiment with new policies and programs decreases. Meeting public expectations with regard to spending on education, healthcare services, highway infrastructure, and correctional institutions further limits the discretionary budgetary authority of states. Those states that adopted the referendum and initiative process also have had to deal with a strong “antitax” sentiment among their citizens, further limiting their ability to raise revenue. Such constraints have forced states and localities to be innovative. The resulting variation highlights the need for a comparative approach to studying finances in states and local governments.

Learning Objectives

After reading this chapter, you should understand:

• the primary sources of revenue for states and localities
• the different types of taxes utilized by states and localities
• why tax capacity and tax effort vary among the states
• who controls the budget process
• how the state budget process differs from the federal budget process
• what the largest areas of expenditures are for state governments
• the difference between discretionary spending and entitlement spending