Assessing the New Federalism is a multiyear Urban Institute project designed to analyze the devolution of responsibility for social programs from the federal government to the states, focusing primarily on health care, income security, employment and training programs, and social services. Alan Weil is the project director. Researchers monitor program changes and fiscal developments. In collaboration with Child Trends, the project studies changes in family well-being. The project aims to provide timely, nonpartisan information to inform public debate and to help state and local decisionmakers carry out their new responsibilities more effectively.
Key components of the project include a household survey, studies of policies in 13 states, and a database with information on all states and the District of Columbia, available at the Urban Institute's Web site. This paper is one in a series of discussion papers analyzing information from these and other sources.
The project has received funding from the Annie E. Casey Foundation, the W.K. Kellogg Foundation, the Robert Wood Johnson Foundation, the Henry J. Kaiser Family Foundation, the Ford Foundation, the John D. and Catherine T. MacArthur Foundation, the Charles Stewart Mott Foundation, the David and Lucile Packard Foundation, the McKnight Foundation, the Commonwealth Fund, the Stuart Foundation, the Weingart Foundation, the Fund for New Jersey, the Lynde and Harry Bradley Foundation, the Joyce Foundation, and the Rockerfeller Foundation.
The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
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Contents
Introduction
State Revenues and Expenditures and State Business Cycle
Elasticities of Stat Revenues and Expenditures
Summary of Findings and Policy Implications
References
Notes
About the Authors
Introduction
With the 1996 Personal Responsibility and Work Opportunity Reconciliation Act, the federal government dramatically changed its partnership with the states for financing state welfare expenditures. Previously, the federal government provided matching grants to states in the form of Aid to Families with Dependent Children (AFDC) at an average rate of 60 percent, with poorer states receiving a higher matching rate than richer states. Under the new law, states receive block grants for Temporary Assistance for Needy Families (TANF), so that they now bear the full impact of money spent on income-support programs above the amount financed by the federal block grant.
1
The 1996 act set the level of the block grants at the amount of the matching grants for fiscal year 1994. Because the matching grants in 1994 were relatively generous and the states? economies have been solid (or even booming) since then, states have had little trouble financing welfare programs under the new regime. Given that the federal block grants are essentially fixed, a question on everyone?s mind is, What will happen to state welfare spending when the next recession occurs?
In an attempt to provide a partial answer to this question, we examine the recent history of fiscal responses of the states to business cycles. In previous work (Dye and McGuire, 1998) we examined the two major revenue sources of state governments: the individual income tax and the general sales tax. We were able to approximate policy-free measures of these two taxes, in other words, measures that hold the tax rules constant. Using these policy-free measures we estimate cyclical elasticities for each tax for each state. In this paper, because we are interested in expenditures as well as revenues of state governments, and because we are unable to calculate policy-free measures of expenditures, we present a different set of calculations. We calculate the elasticities of different categories of real revenues and expenditures with respect to real gross state product (GSP) using actual revenue and spending data. The use of actual budget data combines automatic revenue and spending responses to changes in economic conditions with revenue and spending policy changes, some of which are likely responses to changes in economic conditions. While based on historical data in a period predating the 1996 welfare legislation, the information is valuable as it reflects states? actual experiences with and responses to economic cycles. Because this measure of responsiveness reflects policy preferences, it is arguably of more interest than policy-free elasticity measures.
The remainder of the paper is organized as follows: The following section is a description of state revenue and expenditure systems and of state business cycles as measured by percent changes in GSP. The next section presents calculations of elasticities of revenues and expenditures over a long time period and, because of our interest in recessions, over just the years of negative growth in GSP. The final section summarizes our findings and draws policy implications.
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Notes
1. Several authors have recently reviewed and interpreted the literature on block grants to draw implications for state spending under the new federal grant structure. See, for example, Chernick (1998). Brueckner (1998) and McGuire (1997) have reviewed the theoretical and empirical literature pertaining to the fiscal federalism of welfare policy.
The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
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