Podcast: Where Do Our State Tax Dollars Go?

May 6, 2009

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I’m Michelle Bazie. In this podcast we’ll discuss where our state tax dollars go. We’re joined by Nick Johnson, the Director of the Center’s State Fiscal Project.

1. Now, before we dive into this topic Nick, tell me why is it important to understand and think about these issues now?

A: Because of the recession, states face very large budget shortfalls. And what that means is that states are not taking in as much money as they need to provide a constant level of services. We’ve estimated the budget shortfall that states face over the next 2.5 years at about $350 billion. So that’s for every $7 that the state has in its budget, that’s $1 that just isn’t there, that’s just not available to spend on these public services. And as a result families may face some very real consequences.

2. What do states spend the most money on?

A: State spending is mostly in four areas: About 80% of all state spending is in education, health care, public safety, and transportation. And of those, the largest are education and health care.

3. What do the dollars that states spend on education provide?

A: State education spending covers everything from the Kindergarten level all the way up through higher education. So that means K-12 schools, elementary, and secondary schools educate about 50 million children each year. College, universities, not just flagship four-year colleges, but also community colleges at the community level. This is what state tax dollars are going to: Educating our children from a very young age all the way up through the advanced education they need to succeed.

4. What does health care spending include?

A: State health care expenditures are mostly for two programs: Medicare and SCHIP, which stands for the State Children’s Health Insurance Program. These programs provide health care to low income children, to seniors, and to people with disabilities. State health care expenditures also include what states spend on health care for public employees and for public health clinics and the like.

5. So these are services that we all have come to rely on and expect. What else do our tax dollars pay for?

A: Tax dollars pay for transportation and infrastructure. That means roads, bridges, public transit. They also provide public safety — services like police departments, fire departments, prisons.

States expenditures also cover a range of important human services. This includes aid to families that are struggling with economic hardship, child care for working-poor families, assistance for the elderly and people with disabilities.

6. Is this how states have always spent tax dollars or has this changed over time?

A: Well, total state spending has been remarkably flat as a share of the economy over the last couple of decades.

7. Has education spending changed?

A: Spending on education has also been pretty steady as a share of overall expenditures. In other words, states have held the share of their budgets that are spent on K-12 and higher education roughly constant over two or three decades.

8. What about health care spending — how has it changed?

A: States are spending a rising share of their budgets on health care, including Medicaid and SCHIP. This mostly reflects the reality in the economy as a whole that healthcare costs are growing as a share of the economy over time. That’s something that’s true in the private sector as well as in the public sector.

9. Is this budget makeup the same across all states?

A: It varies somewhat state to state. All states spend the greater share of their money on these areas - on education and health care. But obviously states with more kids spend more on education. And states where health care costs more broadly tend to be higher spend more on health care. And of course states have made different policy choices. Some are more expansive with their health care programs than others.

10. Can you give us an example of one of the states on the low or high end of the spectrum?

A: Sure. For instance, Alaska and West Virginia each spend around 11% of their budgets on K-12 education. At the other end of the spectrum, Michigan spends about 1/3 of its budget on K-12 education. And this reflects a couple of things. They have fewer kids in Alaska and West Virginia. And Michigan has a greater share of the responsibility for paying for education at the state level as compared with at the local school district level.

11. So given the variation among states, what's a message that residents of all states can take away from this discussion?

A: A couple things are important to take away. State taxes dollars, the money that you pay to the state in the form of sales taxes or income taxes or others,,are paying for some pretty important services that we rely on now and that will be important to the long term growth of our economy over time (education, health care, infrastructure, public safety). The second thing to take away is that when those revenues decline - when states, because of the recession, are taking less in sales taxes and income taxes - that's putting these really important services at risk. And so, the third point is that when we're faced with budget shortfalls, such as we are now, it's important not just to think about cuts cuts cuts, but also to think about the revenue side of the budget.

Thank you for joining us, Nick.

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