Policy Basics: Where Do Our State Tax Dollars Go?
PDF of this Policy Basics (3pp.)
Updated April 12, 2013
Summary
With state revenues still deeply damaged by the recession, policymakers continue to confront major choices about how to pay for important services now and in the future. To inform this crucial decision making, it is useful to examine where state tax dollars go as well as changing trends over time.
In total, the 50 states and the District of Columbia spent a little more than $1 trillion in state revenues in fiscal year 2011, according to the most recent survey by the National Association of State Budget Officers (NASBO). (This figure does not include the federal funds that states also spent that year.)
By far the largest areas of state spending, on average, are education (both K-12 and higher education) and health care. But states also fund a wide variety of other services, including transportation, corrections, pension and health benefits for public employees, care for persons with mental illness and developmental disabilities, assistance to low-income families, economic development, environmental projects, state police, parks and recreation, housing, and aid to local governments.
Overall, state spending as a share of the economy remained at about the same level from the early 1990s until recently, when it dropped as a result of the recession. Education stayed a fairly constant share of state spending over this period. The shares of state budgets devoted to Medicaid and corrections have grown, however, while the shares devoted to transportation and cash assistance to low-income families have declined.
Most State Dollars Go Toward Education and Health Care
Three areas of spending make up over half of state spending, on average:
K-12 education
States are one of the main funders of the nation’s public elementary and secondary schools, which some 50 million students — almost nine out of ten enrolled school-age children — attend. One-fourth of state spending on average, or about $260 billion, goes toward public education. States generally provide grants to local school districts (or to cities or counties, where those entities are responsible for administering schools) to fund schools, rather than paying teacher salaries and other school costs directly. Local governments are the other primary funder of public schools. The federal government pays only about 13 percent of public school costs.
Higher education
States play a large role in funding higher education through their support of public community colleges, university systems, and vocational education institutions. This support accounts for about 14 percent of state spending, or some $140 billion.
Health care
Along with the federal government, states fund health insurance for low-income families through Medicaid and the Children’s Health Insurance Program (CHIP). These programs provide health coverage or coverage for long-term care to nearly 60 million low-income children, parents, elderly people, and people with disabilities in a typical month. Together, they constitute about 15 percent of state budgets, or about $150 billion. While education’s share of total state spending has remained relatively constant since NASBO began its annual survey of state spending in 1987, Medicaid’s share has grown. This growth is due to rising health care costs and increased enrollment, especially of children. Medicaid remains a significantly smaller share of state budgets than education, however.
States spend the remaining half of their budgets on a wide variety of programs.
For example:
Transportation
State funding for transportation totals some $54 billion, accounting for 5 percent of state spending on average. These funds are used to build and repair roads and bridges and for public transit systems.
Corrections
Prisons, juvenile justice programs, and parole and other corrections programs make up about 5 percent of state budgets, or $50 billion. While these costs have grown significantly over the years, overall they remain a relatively small share of state spending.
Assistance for the poor
Cash assistance to low-income individuals through Temporary Assistance for Needy Families (TANF) and some smaller programs, such as general assistance, makes up only a tiny share of state spending — about 1 percent or $13 billion.
Other spending
Comparable national data do not exist for the individual areas of spending that make up the remaining 35 percent of state budgets. But some of the larger items in this “Other” category are contributions to public employees’ pension and health benefits and general aid to local governments, such as unrestricted aid.
Averages
The figures above show how states spend their tax dollars on average for the entire country. But the specific mix of spending varies from state to state, depending on such factors as how the state and its localities share funding responsibilities for public services and how much state policymakers choose to invest in health care, education, and other areas.
In some cases, this variation is significant. For example, West Virginia spends 10 percent of its budget on K-12 education, while Vermont, at the other end of the spectrum, spends 32 percent. Similarly, Medicaid makes up only 9 percent of the state budget of Wyoming but 34 percent in Arizona.
Though the mix varies from state to state, it is clear that tax dollars raised in states fund essential services — and that revenue declines caused by the downturn place those services at risk.
