| In fact, spending at the state is expected to increase in future years as well. States experienced a dramatic slowdown in tax revenues with the bursting of the stock market bubble and the ensuing recession. Federal aid was delivered as part of the 2003 federal tax cut to help states with their budget gaps which only perpetuated new spending. Since 2004 state tax revenues have exploded and states are now spending in larger amounts. At the same time, healthcare and pension costs are soaring but very little action is being taken to reform these programs and make more them more efficient. Absent significant reforms we expect spending to continue to grow above national income growth thus extending the cost of government day.
State Spending
To better gauge how states are spending their money, ATR has updated our state spending index which calculates state spending as a percentage of each state’s contribution to national income. The index examines state spending plus federal aid to the state for the time period of 1998-2003.
This was an important time period for state governments. The beginning of the study period reflected the healthiest time period for state budgets as tax revenues were soaring with a strong economy and a bullish stock market. By 2001, however, revenues began to decelerate and our analysis suggests that states did not slow spending in response. In fact, many raised taxes to keep the spending on an upward track.
All but just three states (North Dakota, South Dakota, and Alaska) spent more than the growth rate of their state’s economy during this time period. Ohio increased spending relative to the state’s economy more than any other state in the country. Gov. Bob Taft (R) raised taxes significantly and with that came increased spending. The second highest state was California under former Gov. Gray Davis’ (D) leadership, nearly bankrupted the state.
South Carolina, which increased spending more than any other state from 1998-2002, dropped back to fifth place. The large increase in spending was the direct result of the state introducing a lottery in 2000 which sent spending from 15.8 percent of the state’s income to 19 percent. It is becoming quite apparent that states with lotteries do not save taxpayers’ money as supporters claim but rather increases spending and further burden taxpayers. Interestingly, the state which spends the most relative to their economy is Alaska, which requires more than 100 days of work (double the national average). However, this is because oil revenues, paid mostly by out of state residents, finance Alaska’s spending.
State Spending as a Percentage of National Income CY 1998-2002
State |
Percent Change in Spending Relative to State Contribution to National Income:
1998-2002 |
Days Worked (2002) |
State |
Percent Change in Spending Relative to State Contribution to National Income
1998-2002 |
Days Worked (2002) |
South Carolina |
24.6% |
69.2 |
Pennsylvania |
13.6% |
54.1 |
Vermont |
23.8% |
77.5 |
Rhode Island |
13.6% |
65.5 |
California |
23.2% |
58.7 |
Texas |
13.2% |
39.0 |
Ohio |
23.1% |
57.9 |
Maryland |
13.0% |
48.9 |
Oklahoma |
22.9% |
64.7 |
Washington |
12.5% |
55.8 |
Mississippi |
21.2% |
78.3 |
Maine |
12.1% |
68.5 |
Kentucky |
20.9% |
63.3 |
Arizona |
11.6% |
45.9 |
New Hampshire |
20.2% |
44.8 |
Iowa |
11.5% |
54.2 |
West Virginia |
20.1% |
88.0 |
Indiana |
11.5% |
45.6 |
Arkansas |
19.9% |
67.8 |
Alabama |
11.0% |
59.9 |
Minnesota |
19.9% |
57.3 |
Utah |
10.4% |
57.5 |
Connecticut |
19.6% |
50.8 |
Montana |
8.9% |
75.5 |
Illinois |
19.5% |
42.6 |
Hawaii |
6.8% |
70.6 |
Georgia |
19.1% |
43.1 |
Florida |
6.8% |
42.9 |
New York |
18.4% |
64.2 |
Louisiana |
6.7% |
57.5 |
Wisconsin |
17.2% |
58.9 |
North Carolina |
6.1% |
46.4 |
Michigan |
16.9% |
58.8 |
Nevada |
4.9% |
38.7 |
Missouri |
16.4% |
46.6 |
South Dakota |
4.8% |
46.8 |
Oregon |
16.2% |
64.5 |
North Dakota |
3.8% |
64.0 |
Nebraska |
15.9% |
45.2 |
Idaho |
3.8% |
57.0 |
Kansas |
15.1% |
49.6 |
Virginia |
3.5% |
41.0 |
New Mexico |
14.9% |
80.0 |
Wyoming |
3.0% |
63.2 |
Colorado |
14.9% |
40.2 |
Delaware |
1.4% |
41.6 |
Tennessee |
14.7% |
44.5 |
Alaska |
1.1% |
107.8 |
New Jersey |
13.7% |
47.2 |
Massachusetts |
-1.9% |
46.9 |
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