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25.1

26.6

1962

19.1

1.5

25.3

26.8

1963

19.3

1.5

26.1

27.6

1964

20.2

2.1

25.7

27.8

1965

20.4

2.2

26.4

28.7

1966

21.5

2.3

28.3

30.6

1967

22.5

2.2

29.4

31.5

1968

22.5

3.9

30.2

34.1

1969

22.3

3.1

30.8

33.9

1970

21.9

4.3

31.3

35.6

1971

23.4

4.7

32.3

37.0

1972

24.1

5.7

31.0

36.7

1973

24.4

7.5

30.9

38.4

1974

22.7

7.7

31.6

39.3

1975

23.3

8.3

31.8

40.1

1976

23.2

14.0

29.9

43.9

1977

22.8

13.5

29.2

42.7

1978

22.6

12.9

29.2

42.1

1979

22.3

12.6

30.4

42.9

1980

22.5

10.8

30.9

41.7

1981

22.0

9.1

31.0

40.1

1982

20.1

0.7

32.6

33.2

1983

19.5

6.9

29.1

36.0

1984

19.4

6.2

28.9

35.1

1985

19.5

5.6

29.4

35.0

1986

19.5

5.2

29.5

34.7

1987

18.7

3.4

29.7

33.1

1988

18.8

3.7

29.8

33.5

1989

18.7

3.5

30.2

33.7

1990

19.0

4.9

29.1

34.0

1991

20.7

4.1

29.6

33.7

1992

21.7

4.1

30.5

34.6

1993

22.3

3.9

30.5

34.4

1994

23.1

3.7

30.2

33.8

1995

22.7

4.1

30.6

34.6

Source: U.S. Census Bureau, StatisticalAbstract of the United States and the Tax Foundation, Facts and Figures onGovernment Finance.

Beginning with the column showing transfersfrom federal to state governments, we see that there have not been any sizeable changes in theimportance of federal transfers as a source of state revenues. Federaltransfers constitute roughly 20% of state revenues, with only slight variationsaround that percentage in the period from 1960 to 1995. There has, however, been greatervariation in the importanceof federal transfers in local government revenues. In particular, therewas a large increase in intergovernmental grant programs in the 1960s and 1970sunder the Johnson and Nixon administrations. Significantly, many of theseprograms specified direct transfers from the federal government to localgovernments, thereby by-passing state governments altogether. This trendcame to an end in the 1980s under the Reagan administration and, today, directfederal transfers to local governments represent only a small share of local governmentrevenues. This small share is misleading, however, because if we examine theimportance of state transfers to local governments, we recognize that a significantproportion of federal transfers to state governments are passed on to localgovernments. By themid-1990s, local governments relied on state and federal transfers for roughly35% of their revenues. This percentage has increased gradually overtime.

Vertical FiscalImbalances

Vertical fiscal balance occurs whensubnational governments are able to raise sufficient revenues to finance theirexpenditures. This allows them full autonomy and accountability to their citizens.In most federations vertical fiscal imbalances are the norm and are dealt withthrough intergovernmental transfers from higher levels of government to lowerlevels. While this compromises lower-level governments’ autonomy and accountability, there are arguments infavour of assigning greater revenue-raising abilities to higher levels ofgovernment. These arguments are described in Section C.

Table B4 reports figures for verticalfiscal imbalances in the United States without intergovernmentaltransfers. In Table B4, the vertical fiscal imbalances for the federalgovernment are measured as the difference between expenditures net of transfersto lower-level governments and revenues as a percentage of expenditures net oftransfers. The vertical fiscal imbalances for the states are measured asthe difference between expenditures net of transfers to local governments and own-sourcerevenues as a proportion of expenditures net of transfers. In the lastcolumn, the vertical fiscal imbalances for the local governments are thedifference between expenditures and own-source revenues as a proportion ofexpenditures.

Vertical fiscal imbalances excludingtransfers measure both the extent of deficit financing and the extent that ownexpenditure needs exceed own-source revenues. Since deficit financing ismuch more accessible to the federal government in the United States, thedeficit financing component of the vertical fiscal imbalance is evident for thefederal government in Table B4.25 In particular, weobserve a sharp turn-around in the early 1980s when the federal governmentbegan to run very large budget deficits. During this period, the verticalfiscal imbalance went from negative to positive, reflecting the large deficitsof the federal government.

Table B4: Vertical Imbalances BetweenFederal, State, and Local Governments[(Expenditures-Revenues)/Expenditures]*100

Including IntergovernmentalTransfers

Excluding IntergovernmentalTransfers

Year

Federal

State

Local

Federal

State

Local

1960

-10.5

-18.8

30.3

-2.6

-3.4

4.5

1961

-3.6

-13.4

30.4

3.4

1.2

5.2

1962

-0.7

-18.5

30.2

6.2

-2.5

4.6

1963

-3.9

-18.2

29.8

3.6

-2.5

3.0

1964

-4.4

-19.9

29.6

4.0

-5.3

2.6

1965

-5.7

-22.5

30.8

3.2

-6.1

3.0

1966

-8.6

-26.7

31.9

1.3

-7.6

1.9

1967

-6.3

-18.0

33.0

3.3

-2.9

2.2

1968

0.7

-21.2

34.3

10.4

-3.8

0.4

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