The Federal Budget

Does the federal government budget and spend your tax dollars wisely?

14.5 Funding State and Local Government

Like the federal government, state and local governments must make decisions each year about how to collect the revenue they need and how to spend those tax dollars. The chief executive of each state, county, or city usually prepares the annual budget. The budget is then approved by the state legislature, county board, or city council. However, unlike the federal government, state and local governments often face limitations that make the creation of budgets especially difficult.

State and Local Versus Federal Budget Making

State and local governments, like the federal government, raise most of their revenue from taxes. However, they are often more limited in their power to spend money than is the federal government.

Many state constitutions, for example, require their legislatures to approve a balanced budget each year. They are not allowed, like Congress, to borrow money to fill a gap between revenue and expenses. Instead, lawmakers must either cut programs or raise taxes when revenues fall short of proposed expenditures.

Some state constitutions prohibit state lawmakers from enacting certain types of taxes. Seven states, for instance, ban the imposition of taxes on personal income. Other constitutions limit how much certain taxes can increase from year to year. In Massachusetts, for example, taxes on property cannot rise by more than 211z percent a year. Such restrictions can be changed only if voters approve amending the state constitution.

In addition, citizens playa much larger role in tax policy at the local and state levels than at the federal level. Many states and localities require voters to approve tax hikes through referenda. Some states, such as California, require a supermajority of two-thirds of the votes cast to approve increases in many types of taxes.

Faced with these limitations, state and local leaders often scramble to generate needed revenue. The list above shows eight sources of revenue commonly used to raise money for state and local government services.

How State and Local Governments Spend Their Funds

At the federal level, the bulk of spending goes to entitlements for the elderly and national defense. In contrast, state and local governments devote large shares of their budgets to services that affect young people and their families in direct ways.

The most important of those services is education. By 2012, almost 50 million children were enrolled in public elementary and secondary schools across the United States. The average amount spent on each of these students exceeded $11,400 per year. More than 85 percent of that money came from state and local governments.

Law enforcement and fire protection are also responsibilities relegated mainly to local governments. The United States did not even have a national police force until the creation of the Federal Bureau of Investigation in 1909. In many communities, police protection is the second largest public expense after education.

State and local governments also fund a variety of health and welfare services, often with assistance from the federal government. Typical examples include public health clinics for low-income families, health care centers for the mentally ill, and childcare for low-income working families.

Many other services are funded at the state and local levels. For example, state and local governments spend money to build and maintain roads and bridges. They create and maintain parks and playgrounds for the public to enjoy. They fund public libraries, civic auditoriums, and museums. All of these services have been developed in response to public demand. The ever-present challenge is finding the money to pay for what the public wants.

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