The Federal Budget and the States Fiscal Year 1999 Report Released

Contact: Adrianne Kaufmann
Phone: 617-495-8290
Date: December 15, 2000

CAMBRIDGE, Mass. -- The 24nd annual Federal Budget and the States report, which will be released in a Capitol Hill press conference Friday, provides a state-by-state analysis of the $1.5 trillion of Federal spending that Congress allocates each year and the distribution of the Federal tax burden required to support that spending.
The report, produced by Professors Herman B. Leonard and Jay H. Walder of Harvard University’s John F. Kennedy School of Government, addresses the ongoing concern about whether states receive a "fair share" of Federal spending or pay more than their "fair share" in taxes.
From a national perspective, the Kennedy School researchers find significant differences in the way the Federal budget affects individual states. Most striking is that the ten states with the largest deficits have remained virtually unchanged for the past eight years. These ten states, all but two of which are in the Northeast and Great Lakes regions, had a combined outflow of about $93 billion in FY 1999 – up from $87 billion in FY 1998. Connecticut once again had the distinction of having the largest deficit in the nation, nearly $2,800 per person.
The states with large surpluses are less concentrated than the states with large deficits, but there is a noticeable geographic pattern toward the south. New Mexico led the nation with a per capita surplus of nearly $4,000, and a total of ten states had surpluses that exceeded $2,000 per person.
In addition to the analysis of the FY 1999 data, this year's report contains a 15-year analysis of the shifts in the geography of Federal spending and taxes – comparing FY 1983/84 with FY 1998/99. Looking over this longer timeframe, the researchers found that about half of the states had dramatic changes in their balance of payments. At the extremes, residents of Alaska have experienced a gain of more than $2,800 per person and the deficit for residents in Connecticut increased by nearly $2,500 per person.
Professors Walder and Leonard commented that, "In effect, the Federal government provided a net economic impulse to the state of Alaska, while at the same time, a Federal economic brake was being applied to Connecticut. Other states experienced similar, if less intense, versions of this same phenomenon."
What Drives the Results?
The researchers offered three explanations for the long-term results that they observe:
· Taxes. The tax side of the balance of payments equation is systematic and very strong. Taxes are highly correlated with income; states with higher income will pay more in Federal taxes. Income shifts over the period account for a significant portion of the changes in the balances of payments.
· Changes in the budget mix. The priorities of Federal spending have changed significantly. Most dramatically, over the course of the study period, defense spending fell from being about 26% of domestic expenditures to about 13%. At the same time, Medicare and Medicaid drove a large portion of Federal spending growth. Defense spending is much more variable and much more concentrated than other areas of Federal spending; as funds shifted away from defense, states with formerly high defense spending have not experienced offsetting growth in other Federal spending areas.
· Shifts in the Geographic Location of Spending within Federal Programs. The change in spending patterns within each spending area also drove changes in the balance of payments. The geographic distribution of defense shifted considerably more than the patterns of other spending, but other spending areas also experienced significant shifts in location. For example, Social Security and Medicare spending increased in every state. But the Social Security and Medicare spending in many southern states increased far more than would be expected by shifts in the location of elderly Americans.
In sum, Professors Leonard and Walder found that, "defense spending drives the outcomes considerably more than one would expect by examining its budget share alone."
A one-page profile of individual states is available. You can receive a complete copy of the 1999 Federal FISC Report by contacting Adrianne Kaufmann in the Kennedy School Press Office at 617-495-8290.
You can also view the complete report, including an introduction by Senator Daniel Patrick Moynihan and the one-page profiles for each state, on the web at: www.ksg.harvard.edu/fisc99.

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