Taxes, Transfers, and Fees

State and local governments fund their operations from two major sources: federal (and, for local governments, state) transfers, and own-source taxes. But there is a third source of income: own-source non-tax revenues. These range from higher-ed tuition payments to sewerage fees to lottery proceeds. The graph below suggests an interesting story:

The sharp increase in state own-source revenue in the late 1960s is principally attributable to increased tax revenues (fueled, as I’ve argued here, by federal Great Society transfer payments.) Soon thereafter, taxes took a nosedive, largely due to the property tax revolt; by 1990, they had recovered a bit but flattened out at slightly under 10% of GDP.  Other revenues increased sufficiently first to prevent an own-source revenue collapse and then to allow growth. Over time, then, the proportion of non-tax revenues to total own-source revenue has increased quite substantially. Since 1990, however, non-tax revenues, too, have moved essentially sideways, leaving own-source revenues stuck at about 14% of GDP. The gap between that (purple) line and state and local expenditures (green) roughly represents federal transfer payments.

Is state and local governments’ increased reliance on non-tax own-source revenues a good or a bad thing? Impossible to say without a careful look. For example, the trend could signal an increased reliance on hidden taxation or a healthy migration to user-fee finance. (If states absolutely have to run elite universities like the University of Virginia, a high-tuition, high-need-based-assistance system makes more sense than tax-financed cross-subsidies for rich white kids from McLean.) What the chart supplies is an additional piece of evidence for a point made earlier: state and local governments aren’t going to tax their way out of fiscal trouble.

Michael S. Greve is a professor at George Mason University School of Law. From 2000 to August, 2012, Professor Greve was the John G. Searle Scholar at the American Enterprise Institute, where he remains a visiting scholar. Before coming to AEI, Professor Greve cofounded and, from 1989 to 2000, directed the Center for Individual Rights, a public interest law firm. He holds a Ph.D. and M.A. in government from Cornell University, and completed his undergraduate studies at the University of Hamburg. Currently, Professor Greve also chairs the board of the Competitive Enterprise Institute and is a frequent contributor to the Liberty Law Blog. Professor Greve has written extensively on many aspects of the American legal system. His publications include numerous law review articles and books, including most recently The Upside-Down Constitution (Harvard University Press, 2012). He has also written The Demise of Environmentalism in American Law (1996); Real Federalism: Why It Matters, How It Could Happen (1999); and Harm-less Lawsuits? What's Wrong With Consumer Class Actions (2005). He is the coeditor, with Richard A. Epstein, of Competition Laws in Conflict: Antitrust Jurisdiction in the Global Economy (2004) and Federal Preemption: States' Powers, National Interests (2007); and, with Michael Zoeller, of Citizenship in America and Europe: Beyond the Nation-State? (2009).

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