In the discussion of public expenditures, it was shown that the unit of government that directly provides a public service or benefit isn’t necessarily the unit of government that pays for it. In this section, the overall structure of funding of government revenues will be discussed in detail. One finds nationally that local governments, which are responsible for a very large share of the direct provision of public services, pay for relatively little of this in local taxes. Fees for services, fines for misbehavior, and aid from higher levels of governments account for the majority. And many local government services are not only funded by state governments, or federal aid passing through state governments, but are provided under rules set by state governments. Under our federal system, the federal government collects most of the money, and local governments do most of the work, but it is the state governments that actually make most of the decisions on the margin. Here in New York City, there is an important difference. Local taxes pay for 60 percent of the city’s spending, even though that spending includes services and benefits, particularly public assistance and a Medicaid, that are state functions just about everywhere else. Still, the rest of the state in many ways controls the city’s budget.

One of the attached spreadsheets presents the composition of federal, state and local government revenues in 1995. These totaled $2.68 trillion, somewhat less than the $2.82 trillion in government expenditures as a result of deficit spending that year. Virtually all federal revenues were from “own sources” rather than from intergovernmental aid, but only 76 percent of all state revenues and 66 percent of local government revenues were from their “own sources.” Federal and state intergovernmental aid accounted for the rest.

Taxes and Licenses accounted for 55 percent of total government revenues, but just 42 percent of state government revenues and just 35 percent of local government revenues or barely more than a third. Personal income taxes accounted for 27 percent of total government revenues, but nearly 40 percent of federal revenues. Corporate net income taxes accounted for 7.0 percent of total revenues, but 10.5 percent of all federal tax revenues. Therefore, income taxes in general accounted for 38 percent of total government revenues, but half of all federal revenues. The federal government, in turn, accounted for over 80 percent of all income taxes collected.

Sales and gross receipt taxes accounted for 10.7 percent of total government revenues, but 20.5 percent of total state revenues, and nearly half of all state tax revenues. State governments, in turn, accounted for 65 percent of all tax collections in the category. Property tax revenues accounted for just 7.6 percent of total government revenues, but 25.6 percent of total local government revenues, and nearly three-quarters of all local government tax revenues. As a simplification, therefore, it may be said that the federal government taxes income, state governments tax spending, and local governments tax property wealth. Other taxes were less important. Death and gift taxes accounted for less than one percent of all government revenues, and license taxes for just one percent.

Insurance trust revenues accounted for 24 percent of all government revenues in 1995. They accounted for just 2.0 percent of local government revenues, and 15.7 percent of state government revenues, but they accounted for one-third of all federal revenues. The federal payroll tax for Social Security and Medicare accounted for 17.4 percent of total government revenues and 31.2 percent of federal revenues; state unemployment insurance payroll taxes accounted for 1.2 percent of total revenues and 3.7 percent of state government revenues. If these are counted as taxes, then taxes would have accounted for 73 percent of total government revenues and 87 percent of federal revenues. Whether payroll taxes ought to be described as taxes or as insurance premiums, and the implications of this for government obligations and the relative tax burden among income groups, can be debated. Among other insurance trust revenues, employee contributions to and investment returns on public employee pension fund were the most important, accounting for 4.2 percent of all government revenues, and over 10 percent of state revenues.

Charges for Services accounted for 12.6 percent of total government revenues in 1995. They accounted for 3.6 percent of federal revenues, with most of this collected by the post office and federal utilities; they accounted for 7.6 percent of state revenues, with most of this collected in tuition payments to state universities and bill payments to state hospitals. At the local level, however, charges for services accounted for 22.7 percent of all revenues. Local governments charge parking fees, road tolls, airport charges, transit fares, water and sewer charges, garbage collection charges, housing rents, and hospital fees among others. Some local governments operate electric and gas utilities as well.

There are politicians who refer to charges for services as taxes. That is misleading. When you pay a tax, there is no direct relationship between what you pay and the service you receive. When you pay a charge, you do so in exchange for a service received at the time, directly in proportion to the service received.

Insurance trusts are a half-way house between these two categories. Those paying into the trusts do not receive anything at the time – most of those paying Medicare taxes do not receive Medicare, and most of those receiving Medicare do not pay Medicare taxes. In theory, however, those paying into insurance trusts are earning the right to a service or an income stream at a later date, hence the term “trust.” Half of federal payroll taxes, and all state payroll taxes, are paid by employers rather than employees. In the “insurance trust” framework, however, the employers are paying on behalf of the employees as a legally mandated non-wage benefit. These benefits might be thought of, and are classified as, a benefit not unlike private employer payments for their employee’s health insurance or pensions. Therefore, these payments not classified as taxes by the Census Bureau, even though the employer does not benefit directly.

In the private equivalent of public insurance trust programs, the rights are contractual, and there are public agencies whose job is to make sure that private parties do not take in the revenues, take them out of the trust, and then declare bankruptcy when it is time to repay. Among the public trust funds, however, benefit payments are legislative rather than contractual, and are subject to change. The question is whether or not to “trust” the government. I continue to advise today’s young people not to trust anyone eligible to join the AARP, but it is those very people who control the government. They have been ruthless in the pursuit of their self-interest for years, with more benefits for themselves today financed by debts to be paid back tomorrow, at the federal, state and local level. Not only have young people’s interests not been represented, the interests of older people who care about their children and grandchildren have not been represented either.

Other revenue categories are less important. Sin taxes, duties and revenues, as discussed previously, accounted for 1.5 percent of total government revenues, but 3.0 percent of state government revenues. Interest revenues, primarily on pension fund assets, supplied 2.5 percent of total government revenues.

The federal government funds most of its own expenditures, either through taxes, insurance trust revenues, borrowing, or other sources. At the state and local level, on the other hand, a given public service may be funded in part by aid from another government, in part by charges for the service, and in part through trust fund investment returns. These funding sources may be in addition to, or in place of, funding through taxes and other more “general” revenues not directly related to the service provided. And, among tax and license revenues there are some, such as motor vehicle fuel taxes, which are thought of as a kind of user fee or charge, and are in theory dedicated to a particular service through a trust fund. Some of these can be identified with readily available data, and some cannot.

The second spreadsheet attached to this post includes two tables, one for state government and one for local government, which show the share of total spending on selected categories of public services and benefits that are paid for by aid revenues; the share paid for by related and dedicated taxes, charges and investment returns; and the share paid for by general funds such as taxes. The data is for 1995.

As presented in the state table, taxes and other general revenues sources accounted for just half of total state revenues; federal aid revenues accounted for a quarter, and other revenues directly related to a particular service such as charges, investment returns, and dedicated taxes also accounted for a quarter. It should be noted that these are shares of total expenditures, not direct expenditures. The source of revenues states use to provide aid to local governments, as well to provide services directly, is tabulated here.

Among major categories of state expenditure, state colleges and universities covered only 40 percent of their expenditures with tuition payments, other charges, and similar revenue sources, with 60 percent covered by general state revenues. Even among the 40 percent paid for through tuition, however, not all is strictly private; in some cases the tuition payments themselves are financed by federal or state scholarship grants and student loans.

On the other hand, state tax and other general revenues covered just 41 percent of expenditures in the public welfare, social services, and Medicaid categories, with 59 percent paid for by the federal government through federal aid. While these services may be classified as “state” or even “local” services based on the level of government that directly provides them, therefore, they are primarily federal services when classified by the level of government that pays for them. The federal share, however, varies greatly from state to state; it is just 50 percent in New York, but 60 to 75 percent in most states. Unlike payments to private hospitals, state hospitals and state public health agencies covered 57 percent of their expenditures with general state funds. The federal government covered just 17 percent, and charges just 26 percent, of state health and hospital expenditures. Most state hospitals are mental hospitals.

Investment returns on trust fund assets equaled only 10.5 percent of state unemployment insurance payments, with most of the rest covered by unemployment payroll taxes. On the other hand, investment returns covered 37 percent of state worker compensation payments, leaving only 63 percent to be covered by payroll taxes.

In 1995, the investment returns on state managed public employee pension funds were nearly double the level of payments from those funds. While, in theory, that represents a “profit” to be used for other purposes, in practice most of this additional revenue should be retained within the pension funds themselves as a reserve against years with lower investment returns. High returns, however, may permit state and local governments to reduce their tax-funded contributions to their employees’ pensions, reduce employee contributions, and/or increase benefits – provided that returns don’t turn negative later on. Like state governments, local governments made a profit on their pension funds in 1995. That profit, as a result of deals cut in the late 1990s, has turned to a massive loss, resulting in the massive diversion of tax revenues into the pension plans. The “profits” from that decade were really an off-the-books debt.

State revenues for and related to streets and highways, on the other hand, really did generate a surplus used for other things. Federal aid revenues, mostly from the federal gasoline tax trust fund, paid for one-third of state expenditures while tolls, state motor vehicle fuel taxes, parking revenues, license fees and others covered three-quarters. Not all state revenues related to transportation are easily tabulated. For example, in 1997 the State of New York collected over $1 billion in special sales, business income and utility taxes dedicated to mass transit, and an additional $1 billion in general sales taxes on motor vehicles and fuel. The Census Bureau tabulated these revenues with other similar tax revenues, rather than breaking them out separately.

Aside from streets and highways, states generally fund and supervise local government services in the “infrastructure and amenities” categories, rather than providing those services directly, so it is local governments that collect the related revenues. Therefore, a relatively high share of state expenditures on transit, water, sewers, solid waste and the like are covered by general funds such as taxes. State parks, however, covered 29 percent of their costs through charges for services in 1995, while state electric utilities, led by the New York Power Authority, covered 94 percent. State police and inspectors covered 19 percent of their costs through fines and seizures.

As demonstrated by the local government table, taxes and other general revenues sources is an even smaller share of total revenues for local governments than for state governments. While accounting for just half of total state revenues, taxes and other general revenues accounted for about one-third of all local revenues. Federal and state aid, and charges and other related revenues, also each accounted for about one third.

In the elementary and secondary school category, 43 percent of total expenditures were paid for by local taxes and other general revenues, while state and federal aid (mostly state) covered 54 percent. Charges, mostly for school lunches, covered less than three percent. Over the decades, states have paid for a growing share of public school expenditures. Local taxes covered an even lower share of spending on higher education, generally community colleges, just 22 percent, while tuition payments and other related revenues covered 30 percent, and federal and state aid covered 48 percent. Although the majority of local government education expenditures was not covered by local tax revenues, however, education still absorbed more than half of such tax revenues in 1995. Education is such a large part of local government that it is still the biggest item on a typical property tax bill.

The importance of education, both to the recipient and the taxpayer, is such that if the allocation of resources in education is unjust than there is reason to question if state and local government has any real value. In New York State, state and local education funding formula have, for 30 years, redirected educational resources away from New York City’s children, leaving them worse off that if state school aid did not exist. Certainly, any resident of New York City who has been a child or the parent of a child over the past 30 years has ever reason to object to paying taxes for the benefit of the rest of the state, so overwhelming has the victimization has. Regardless of the what happens in the future.

Nationally local governments pay for very little if any of their expenditures on public welfare, social services, public hospitals, and Medicaid payments to private health and social service providers. Of the $95 billion in local government expenditures in these categories 1995, local taxes and other general revenues paid for just $23 billion. Federal and state aid covered about 80 percent of the cost of welfare, social services and Medicaid. Charges covered 55 percent, and aid covered 19 percent, of the cost of public health and hospitals. Only in New York and a couple of other states are these types of expenditures paid for, in large part, with local tax revenues. This is because local areas with large numbers of public health, welfare and social service beneficiaries tend to be poor in general, with limited local tax bases relative to population, so funding a high share of these service locally leads to ruinously high taxes and poor services.

Housing and community development is a category of services for which almost all expenditures are made by local governments, but it is also a service that is primarily funded by the federal government, with the federal money often going directly into fiscally independent local housing authorities. Federal and state aid paid for 72 percent of local expenditures in the category; of the $14 billion in aid received by local governments, $13 billion came from the federal government. Thus, while state governments (and in New York local governments) are expected to pay for a substantial share of health and social service expenditures, the federal government paid for virtually all local subsidized housing expenditures in 1995. With housing and community development spending concentrated in New York State in general and New York City in particular, however, it has just about the only category of spending to fall in recent years. As public housing continues to deteriorate, it is likely that New York City will end up cutting other services and raising taxes further to maintain that housing, a fiscal bomb likely to go off in the lap of the next Mayor. In 1995 local general revenues accounted for just 12.2 percent of total expenditures in the category, or $2.3 billion, nationally. The City of New York accounted for a substantial share of this. Charges, generally rent paid by residents of public housing, accounted for 16.6 percent local government expenditures in the category. With rents limited to 30 percent of income, and a large share of available public housing units generally set aside for the sick, addicted and dependent, most public housing projects require subsidies to cover their costs.

Far more than other types of local government services, infrastructure and amenities tend to be funded by charges. For example, taxes and other general revenues covered just 50 percent of spending on streets and highways, and just 40 percent of spending on public mass transit. Fares and similar revenues covered 25 percent of the (operating and capital) costs of public transit, while tolls, local motor vehicle taxes, parking revenues, and other motor vehicle related revenues covered 16 percent of the cost of streets and highways. Federal and state aid, often from dedicated taxes, covered about one-third of the cost of each.

Charges cover almost all of the expenditures on airports, publicly operated seaports, public water systems and public sewer systems. Nationally 62 percent of public solid waste expenditures were covered by charges, with some localities charging 100 percent of the cost and a few, like the City of New York, not charging at all. In 1995, local governments made a net profit on their electric and gas utilities. Even public parks and cultural facilities cover 25 percent of their expenditures through charges. As discussed earlier, local infrastructure and amenities, along with the Post Office, are the only public services many taxpayers – those who are not elderly and do not have children in public schools and colleges – actually see. These services, however, are in large part not paid for with taxes. They pay for them, or they do not get them, something that may increasingly be true of public schools as well in the future as more and more tax dollars go for health care, pensions, and interest on debts.

Local police protection, inspectors, fire departments and jails, on the other hand, are primarily paid for with taxes and other general revenues. Police and inspectors generate four percent of their revenues with fines and forfeitures, and local jails receive 17 percent of their funding from state aid, but otherwise local taxes foot the bill. Fire Departments are almost entirely funded by local tax revenues: a few dollars from other sources may be lumped in with charges, donations and aid not broken out separately, but such are not broken out separately because they are rare. These protective services are the second greatest use of local taxes and other general revenues, behind education. Nationally public schools, local police, local jails, fire departments, and local inspectors together accounted for more than 75 percent of all local expenditures funded by local tax revenues in 1995.