FURTHER GROWTH IN PROSPECT

In recent years a number of investigators have projected State and local revenue and expenditure patterns. They have taken two basic approaches: (1) projection of the government sector within the framework of the National economy (National income and product accounts); and (2) projection of governmental finances within the classification framework of the Census of Governments.

The first approach is exemplified by a projection of U.S. economic growth to 1970 and 1975 recently published by the Joint Economic Committee of the U.S. Congress. It estimates an almost doubling of GNP by 1975 with a commensurate growth in governmental expenditures. In relation to GNP, Federal aid and State and local expenditure can be viewed as the growth elements in the governmental sector.

The Committee assumed for the purpose of its study that there would be no change in Federal tax or expenditure policy. On this assumption, they came up with a substantial Federal Government surplus ($17.6 billion for 1970 and $54.2 billion for 1975). In fact, however, as the Committee points out, a policy that permitted such Federal surpluses simply to accumulate would impede maximum economic performance and would result in serious dislocations.2/ Accordingly, the Committee made alternative projections, based upon policy decisions mainly involving adjustments in the public sector. After allowing for a small surplus, the remainder of the Federal surplus was distributed one-third to tax reduction and two-thirds to increased Federal expenditure, largely in the form of aid to States and localities. Based on these policy assumptions, the GNP projections remain unchanged, but the government sector is increased from 27 percent of the GNP in 1965 to almost 30 percent by 1975.

The Joint Economic Committee's projections for 1975 conform closely to projections of the National Planning Association. That organization estimates 1975 GNP at between $1.1 and $1.2 trillion; Federal Government expenditure between $185 and $221 billion; State-local expenditure, between $154 and $178 billion; and total government expenditure, between $318 and $365 billion.

On the basis of explicit economic and demographic assumptions, the "government finances approach" examines each major revenue and expenditure item in detail to explain its determinants and to project its future behavior.

Two recent studies based on this approach are: (1) "Project '70," conducted under the auspices of the State-Local Finances Project of George Washington University and published in a series of separate documents by the Council of State Governments;* and (2) Fiscal Outlook for State and Local Government to 1975. Tax Foundation, Inc. (New York: 1966).

The "Project '70" study projected the State-local tax base for each tax source by State, and estimated the yield of each in calendar 1970, assuming the rates and structures in existence in mid-1965. It also included projections of Federal assistance to States and localities under the then existing grant programs. On this basis State and local taxes were projected at $70.3 billion

*

A summary entitled "Project '70: Projecting the State-local Sector," appears in Review of Economics and Statistics, May 1967.

(the fiscal 1965 total was $51.2 billion); total available revenue, including Federal aid, was projected at between $102 and $108 billion in 1970, and total fund requirements at $122 billion. The difference between "fund requirements" and "available revenues" would be made up from a $14 billion to a $20 billion increase in the annual rate of new borrowing.

The Tax Foundation study which makes projections of State and local revenue, expenditure, and outstanding debt for fiscal 1970 and 1975, uses essentially the same approach and assumptions and arrives at similar findings. A comparison of the two projections appears in Tables 6, 7 and 8.

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Using

The Committee for Economic Development takes a somewhat different tack in projecting State and local revenues and expenditures to 1975.4 an aggregative technique, but applying the same general assumptions as to the growth in the economy and changes in population, the CED concludes that it "would require an increase of about $24 billion in general expenditures of State and local governments between 1965 and 1975 simply to maintain the 1965 overall

level of scope and quality "5/ Hence (with 1965 general expenditure at

$74.5 billion) CED projects State and local general expenditure for 1975 (in 1965 prices) at $98.5 billion.

However, CED finds also that keeping the State and local tax structure constant and with normal additions to debt the State-local revenue yield would be $126 billion in 1975. This, according to CED, would allow for a "scope and quality" increase of 21 percent in general expenditure, bringing it to $119 billion. Then, if the States were to follow the CED recommendations to broaden their use of the general sales tax and also to make more extensive use of personal income taxes, they could raise their "scope and quality" of the service to 33 percent and increase their State-local expenditure to $131 billion (again at 1965 prices

We noted earlier the close conformity between projections of Statelocal expenditures to 1975 developed by the Joint Economic Committee and the National Planning Association on a national income and product accounts basis. Because "Project '70," Tax Foundation, and CED projections are based on the "government finances" concept, it is difficult to wrench all five projections into the same mold. The four projections for 1970 are similar in magnitude, but the four projections for 1975 begin to diverge as the recapitulations in Table 9 shows. The convergence of 1970 projections and divergence of 1975 projections may well stem from underlying assumptions. Over the long pull, varying assumptions as to rates of growth in the components of government expenditures can result in substantial differences in the aggregates. The common thread that runs through all the projections is obvious: State and local government expenditures will rise sharply over the next decade.

Source: Tax Foundation, Inc., Fiscal Outlook for State and Local Government to 1975 (New York: 1966).

TABLE 7.--COMPARISON OF PROJECTED LEVELS OF STATE AND LOCAL

GOVERNMENT TAX COLLECTIONS, 1970 AND 1975

Source:

Tax Foundation, Inc., Fiscal Outlook for State and Local Government to 1975 (New York, 1966).

TABLE 8.--COMPARISON OF PROJECTED LEVELS OF STATE AND LOCAL
GOVERNMENT GENERAL EXPENDITURES, 1970 AND 1975

1/ Includes $1.1 billion public welfare expenditure under the Poverty Program.

Source: Tax Foundation, Inc., Fiscal Outlook for State and Local Government to 1975 (New York, 1966), and The Council of State Governments, Financing Public Welfare: 1970 Projections, July, 1965.