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Intergovernmental grants are important sources of revenue for both state and local governments. When economic times are good, such grants help states, cities, municipalities, and townships carry out their regular functions. However, during hard economic times, such as the Great Recession of 2007–2009, intergovernmental transfers provide much-needed fiscal relief as the revenue streams of state and local governments dry up. During the Great Recession, tax receipts dropped as business activities slowed, consumer spending dropped, and family incomes decreased due to layoffs or work-hour reductions. To offset the adverse effects of the recession on the states and local governments, federal grants increased by roughly 33 percent during this period.

Jeffrey L. Barnett et al. 2014. 2012 Census of Governments: Finance-State and Local Government Summary Report , Appendix Table A-1. December 17. Washington, DC: United States Census Bureau, 2.

In 2009, President Obama signed the American Recovery and Reinvestment Act (ARRA), which provided immediate economic-crisis management assistance such as helping local and state economies ride out the Great Recession and shoring up the country’s banking sector. A total of $274.7 billion in grants, contracts, and loans was allocated to state and local governments under the ARRA.

Dilger, “Federal Grants to State and Local Governments,” 4.
The bulk of the stimulus funds apportioned to state and local governments was used to create and protect existing jobs through public works projects and to fund various public welfare programs such as unemployment insurance.
James Feyrer and Bruce Sacerdote. 2011. “Did the Stimulus Stimulate? Real Time Estimates of the Effects of the American Recovery and Reinvestment Act” (Working Paper No. 16759), Cambridge, MA: National Bureau of Economic Research. http://www.nber.org/papers/w16759.pdf

How are the revenues generated by our tax dollars, fees we pay to use public services and obtain licenses, and monies from other sources put to use by the different levels of government? A good starting point to gain insight on this question as it relates to the federal government is Article I, Section 8, of the Constitution. Recall, for instance, that the Constitution assigns the federal government various powers that allow it to affect the nation as a whole. A look at the federal budget in 2014 ( [link] ) shows that the three largest spending categories were Social Security (24 percent of the total budget); Medicare, Medicaid, the Children’s Health Insurance Program, and marketplace subsidies under the Affordable Care Act (24 percent); and defense and international security assistance (18 percent). The rest was divided among categories such as safety net programs (11 percent), including the Earned Income Tax Credit and Child Tax Credit, unemployment insurance, food stamps, and other low-income assistance programs; interest on federal debt (7 percent); benefits for federal retirees and veterans (8 percent); and transportation infrastructure (3 percent).

Data reported by the Center on Budget and Policy Priorities. 2015. “Policy Basics: Where Do Our Federal Tax Dollars Go?” March 11. http://www.cbpp.org/research/policy-basics-where-do-our-federal-tax-dollars-go
It is clear from the 2014 federal budget that providing for the general welfare and national defense consumes much of the government’s resources—not just its revenue, but also its administrative capacity and labor power.

A pie chart shows the division of the Federal Budget of 2014. The chart is divided as follows: defense and international security assistance, 18%; social security, 24%; medicare, medicaid, CHIP, and marketplace subsidies, 24%; non-security international, 1%; education, 2%; science and medical research, 2%; other, 2%; transportation infrastructure, 3%; interest on debt, 7%; benefits for federal retirees, 8%, safety net programs, 11%. The bottom of the chart lists its source as “Office of Management and Budget. “Fiscal Year 2016 Historical Tables.” February 2, 2015.
Approximately two-thirds of the federal budget is spent in just three categories: Social Security, health care and health insurance programs, and defense.

[link] compares recent spending activities of local and state governments. Educational expenditures constitute a major category for both. However, whereas the states spend comparatively more than local governments on university education, local governments spend even more on elementary and secondary education. That said, nationwide, state funding for public higher education has declined as a percentage of university revenues; this is primarily because states have taken in lower amounts of sales taxes as internet commerce has increased. Local governments allocate more funds to police protection, fire protection, housing and community development, and public utilities such as water, sewage, and electricity. And while state governments allocate comparatively more funds to public welfare programs, such as health care, income support, and highways, both local and state governments spend roughly similar amounts on judicial and legal services and correctional services.

This chart lists State and Local Government Expenditures in 2014. On utilities, state expenditures were around 20 million dollars while local expenditures were around 180 million dollars. Judicial state and local expenditures were both around 20 million dollars. State spending on solid waste is 0, while local spending is around 20 million dollars. State spending on sewerage is 0, while local spending is around 50 million dollars. Housing expenditures are about 10 million by the state and 50 million by local government. Corrections expenditures are around 50 million by the state and 25 million by the local government. Fire expenditures are 0 in state and around 50 million by the local government. Police expenditures are around 10 million by the state and around 90 million by the local government. Highway expenditures are around 100 million by the state and 60 million by the local government. Public welfare expenditures are around 430 million dollars by the state and around 50 million dollars by the local government. K-12 education expenditures are around 5 million dollars by the state and around 550 million dollars by the local governemnt. Higher education expenditures are around 210 million dollars by the state and around 600 million dollars by the local government. At the bottom of the chart, a source is cited: “U.S. Census Bureau. Appendix Table A-1: “State and local government finances by level of government in 2012” in “2012 Census of Governments: Finance—State and local government summary report.” December 17, 2014.
This list includes some of the largest expenditure items for state and local governments.

Federalism is a system of government that creates two relatively autonomous levels of government, each possessing authority granted to them by the national constitution. Federal systems like the one in the United States are different from unitary systems, which concentrate authority in the national government, and from confederations, which concentrate authority in subnational governments.

The U.S. Constitution allocates powers to the states and federal government, structures the relationship between these two levels of government, and guides state-to-state relationships. Federal, state, and local governments rely on different sources of revenue to enable them to fulfill their public responsibilities.

Questions & Answers

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