Lecture 17 POLS 207Outline of Last Lecture:Education Funding: National v. State/LocalI. Property wealth inequality and unequal school fundingA. SCOTUS and 14th AmendmentB. State courts and state constitutions (“Judicial Federalism”)II. Fiscal and policy capacity of the statesA. One source of “modern centralization”B. Public sector outpacing economic growthC. National debt v. balanced state budgetsOutline of Current Lecture:Government Revenue and ExpendituresI. Two types of expendituresA. “Purchases” (aka “building things”)B. “Transfers” (aka “entitlements”) II. Tax revenueIII. Federal grants-in-aidA. Degree of state dependency on federal aidCurrent Lecture:Biggest change over past 35 years…rises of “healthcare” (esp. Medicaid) in state-local budgets.  Remember that Reagan offered for national budget to take over Medicaid and states refused – that was a stupid move on the part of the states because now Medicaid competes with education funding.We can think of government expenditures as a composition of national vs. state (domestic) expenditures- “Purchases”  “building things”o E.g. infrastructure-type programs…highways, airports, public buildings, utilities, etc., including the labor force necessary to carry out these activities (e.g. teachers, police, firefighters, utility workers, etc.)o National: 20% State/local: 80%- “Transfers”  “entitlements”o Payments to and for “individual” beneficiaries (NOT in exchange for a service provided), it is usually possible to identify these individual beneficiaries o Not thought of as “consuming resources,” thought of as “transferring resources.”o National: 80% State/local: 20% e.g. OASDHI, UI, and WC food stamps, TANF One of Conservatives’ arguments against entitlements: So many people are direct beneficiaries that it becomes hard to get a handle on expenditures.“Entitlements” as percent of federal aid: Driving force behind change…health care costs (esp. Medicaid) Medicaid: Fiscal Year ’10: $389 billion total w/ $263 billion through federal aid system (~44% of all federal aid)Towards the end of the first decade of the 20th century, better than 2/3 of the Federal aid system was devoted to entitlements. The driving force behind this is healthcare. Medicaid consumes almost ½ of federal aid to state/local government.State/local government tax revenue sources – See D&M 14:471 – 76 (Nearly half of state/local government revenue comes from sales tax) State-local revenue sources changes since 1950s…As percent of total tax revenue- State/local governments’ revenue from property taxes is going down (property tax is not decreasing, just decreasing as a proportion of revenue)- Especially since 1970s there have been barriers in place to raising local property taxes (e.g. special exemptions, voter approval for rate/valuation increases) - See also D&M 14:472 – 76, 478 – 80 and 2:55, 57 on “Prop 13” in CA that initiated in ’78the nation’s modern “tax revolt”- Sales/user taxes are going UP- State Income-based taxes are UP- In ’09 there were 7 states without an “individual income tax,” including AK, FL, NV, SD, TX, WA, and WY (See table 14-1) Another kind of state and local revenue…federal grants-in-aid See D&M 3:84, 87 – 91 and Halter Chapter 10:209 – 10 and Figure 10.7Also see D&M Tables 3-2 (pg. 93) and 3-3 (pg. 96) and 3-4 (pg. 88) and RANKINGS (pg.90)Keep in mind that federal aid is only a portion of state/local government’s revenue. Most of what state and local governments take in is money generated from within their own borders.Degree to which state/local governments are dependent upon federal aid varies enormously, not only by state, but also by policy area.State variation: Some very dependent states (Approx. 40% of budgets come from federal aid): Mississippi, Louisiana, Montana, South Dakota, New Mexico Some less dependent states: Colorado, NJ, Connecticut, NebraskaAbout 20% of Texas’ budget comes from Federal aid.**The single biggest federal grant-in-aid program is Medicaid. It is an income-tested program.Policy area variation:- Education (Fed. Government only funds about 10% of education expenditures)- Healthcare (About 75% of all publically funded healthcare is funded by the federal government)- There are infinitely many more policy areas that could be discussed, but education and healthcare are good