State and Local Budgets

The focus of this course is mainly on policy determination at the national level. However, since the budget-making process at the level of state and local budgets differs so substantially from the federal level, the subject deserves mention. There are three main differences which are noted below.

The federal budget needs not balance revenues and expenditures for each fiscal year. That is not true for state and local governments. At the subnational level, appropriations must not exceed revenues. This restriction is mandated for almost all state and local finances, either by constitutional charter or by statute. This imposes a discipline at state and local government which the federal government may chronically evade. States cope by setting aside reserves in good years to hopefully cover deficits in bad revenue years.
State and local government budgets distinguish between the capital budget and the operating budget, a distinction not made at the national level. The operating budget is financed through anticipated revenues. The capital budget includes the purchase of land and the construction of public works and reflects priorities among building projects articulated in a formal capital budget plan. Large scale capital spending may be met only through authorized borrowing, such as a bond issues which must be approved through popular referenda. These expenses are generally quite large and lumpy, not easily divided into a series of small steps. The capital account is therefore singled out for closer scrutiny than the operating account and the absence of a deficit more closely links expenditures with revenues and imposes a strict discipline. Many advocate that the federal budget process be revised to include a capital budget and plan.
The growth of state and local government employment has been far more rapid than growth in federal government employment. Federal employment has actually remained steady from 1957 to 1985. State and local government employment, on the other hand, has increased from about 5.8 million in 1957 to about 14.2 million. In the era of Gramm-Rudman-Hollings, this trend is hardly expected to reverse.

Specific States Matter

A national recession can devastate state and local budgets. California, for example, has closed many schools and cut teachers' salaries, although this was recently voided by a court order. Spending has been cut in many states while taxes have been raised.

But no state has become more significant in budget matters lately than New Jersey. Let's examine this. The issue of the state budget was widely discussed in the last New Jersey gubernatorial election, 1989. Republican James Courter stressed the conservative theme: No new taxes. Democrat James Florio deflected Courter's promise on taxes with a convenient and dubious ploy to find the money through an audit of state spending increases during the Kean administration, a promise to raise taxes only as a last resort (due to its political unpopularity, it always is), and the clever stratagem of citing automobile insurance premiums as the main pocketbook issue, thus deflecting the tax increase issue. Either candidate would have a tough time balancing the state budget in the face of perhaps a half-billion dollar shortfall of revenues against expenditures left by the outgoing administration of Thomas Kean, a two-term Republican governor.

Once elected, Governor Florio quickly pushed through the Democratic Assembly and Senate a significant hike in the state sales tax and in the state income tax. The latter was steeply progressive, hitting upper income groups hardest. Nationally, savvy politicians watched New Jersey closely, observing a sharp and broad-based tax revolt. The Popularity rating of the Governor plummeted to under 20%. Previous Governors had also raised taxes, but had enjoyed two terms in office: Thomas Kean and Brendan Byrne. Despite the outcry, state taxation in New Jersey remains relatively moderate compared with all other states, including its regional neighbors --- and competitors --- , New York, Connecticut (which recently enacted a state-wide income tax) and Pennsylvania.

The next legislative election in New Jersey was an unmitigated disaster for the Democratic party there. A solid majority in the Assembly was wiped out and the slim majority in the state senate became a lopsided minority. The New Jersey case has demonstrated nationally that liberal Democrats, often associated with tax-and-spend public policy, can expect defeat at the polls. The recent election of Bill Clinton, a former governor, does not defy this conclusion: Clinton carefully avoided pledges of major new-spending programs and promised to raise taxes only on the wealthy. President Bush's campaign accusations of tax-and-spend policies in the offing were brushed aside by the voters.