Fiscal Federalism 12: Federal Aid by Agency

In yesterday’s post on Federal Aid to the States, I asked if anyone knew why states such as New Hampshire and Texas received so much less federal aid, on a per capita basis, than their surrounding neighbors. Table 1 below reveals the answer.

To hunt down the culprit I decided to turn to my favorite two-state comparison–New Hampshire and Maine. One reason why I like to compare the two states, besides the fact they are economically and politically opposites, is that they have nearly identical populations right now. As such, I can show the dollar amounts without having to adjust them into per capita terms since the relative difference won’t change.

So let’s dive into the data. First, notice just how long the list is of federal agencies that dole out aid to the states.  If you are into pork, there is a federal agency out there for you. The obvious question from this list is . . . are there no limits to what the federal government can do?

Despite having identical populations, Maine receives $1.4 billion more from Uncle Sam than New Hampshire–$3.4 billion versus $2 billion, respectively. Where does this “Maine subsidy” come from? The vast majority of the difference is under the Department of Health and Human Services: Centers for Medicare and Medicaid Services to a tune of $1.1 billion.

So Medicaid is the single largest driver of the difference in Federal aid to the states accounting for $256 billion of the total $552 billion doled out. It dishes more aid than the Department of Agriculture ($31 billion), Department of Education ($45 billion), Department of Housing and Urban Development ($47 billion), Department of Labor ($10 billion) and Department of Transportation ($57 billion) COMBINED!

So the key to freeing your state from federal dependency, um, aid, is to control your state’s Medicaid program. Doing so will also reduce the “crowding out” of the private sector by the public sector which I’ve discussed previously– meaning a larger private sector will also result in greater economic prosperity.

Table of Federal Aid to State and Local Governments by Agency for Fiscal Year 2009

The State of America’s Private Sector XX: February 2011

Today the U.S. Department of Commerce’s Bureau of Economic Analysis released their monthly personal income data for February 2011 (pdf).

The chart below shows the private sector share of personal income from January 1959 to February 2011.  Since the private sector hit its inflection point in April 2010, the private sector continues to rebound up to 70.47 percent in February from 70.39 percent in January.  The private sector has now grown in 10 of the past 11 months adding a total of 0.78 percentage points.

Note: “Supplements to Wages and Salaries” (benefits) in the BEA data are not broken down into “private” sector” versus “government” components. I used the ratio of private wages and salaries to total wages and salaries in order to disaggregate supplements.

Private Sector Share of Personal Income for February 2011

The State of America’s Private Sector XVIII: January 2011

Today the U.S. Department of Commerce’s Bureau of Economic Analysis released their monthly personal income data for January 2011 (pdf).

The chart below shows the private sector share of personal income from January 1959 to January 2011.  Since the private hit its inflection point in April 2010, the private sector had its largest gain of 0.5 percentage points between December 2010 and January 2011.  The private sector has now grown in 9 of the past 10 months adding a total of 0.66 percentage points.

It will be interesting to see if the private sector can maintain this momentum in the face of the Egyptian riots and consequent rise in oil prices.  As David R. Kotok, Chairman and Chief Investment Officer of Cumberland Advisors, recently said in one of his email updates: “The risk of recession in the US and European economies is rising daily.”

Note: “Supplements to Wages and Salaries” (benefits) in the BEA data are not broken down into “private” sector” versus “government” components. I used the ratio of private wages and salaries to total wages and salaries in order to disaggregate supplements.

Private Sector Share of Personal Income for U.S. in January 2011

The State of America’s Private Sector XVII: December 2010

Today the U.S. Department of Commerce’s Bureau of Economic Analysis released their monthly personal income data for December 2010 (pdf).

The chart below shows the private sector share of personal income from January 1959 to December 2010. The private sector grew again by another 0.08 percentage points and has now grown for 4 consecutive months adding a total of 0.31 percentage points.  Interestingly, the revisions to recent months have downshifted the growth in the private sector.

Now that the Bush tax cuts extensions are now law, will the private sector be able to continue its growth against another round of government spending?  All of the new spending contained in the bill will show up in personal current transfer receipts, thus accelerating the growth in government spending.  As long as the private continues to grow as it has, I think the new spending will cause the private sector to plateau for awhile but not retreat.  Of course, in the long-run, I think the opposite is true with the downward trend in the private sector continuing.

Note: “Supplements to Wages and Salaries” (benefits) in the BEA data are not broken down into “private” sector” versus “government” components. I used the ratio of private wages and salaries to total wages and salaries in order to disaggregate supplements.

Private Sector Share of Personal Income for December 2010

The State of America’s Private Sector XVI: Illinois Edition

Last week a massive, massive tax increase was announced in Illinois–did I mention that is was massive?  The details of the Illinois tax increase, according to the Chicago Tribune, are as follows:

Under the proposal, the state’s 3 percent personal income-tax rate would rise to 5.25 percent for four years, then fall to 3.75 percent. All told, that’s a 75 percent increase.

The personal income-tax hike is expected to net the state roughly $6.2 billion, and a corresponding corporate income tax increase could raise an additional $1 billion, Cullerton said. The rate businesses pay would temporarily jump from 4.8 percent to 8.4 percent.

The cigarette tax increase, which is expected to raise $377 million, would go into what was described as a “lock box” to increase education funding. Lawmakers said they hoped to double that amount using other funds to provide more than $700 million in new school funding this spring.

To gain votes for the package, the plan also would provide $325 in property tax credits to homeowners this year and a direct check to taxpayers in subsequent years.

As a measure of how desperate state government’s finances are, Cullerton said the state would use the income-tax hike to borrow $12.2 billion. Of that, $8.5 billion would pay overdue bills and $3.7 billion would cover a government worker pension payment lawmakers skipped when putting together the current budget, he said.

Using the relationship that shows the public sector crowds-out the private sector, I recently showed that two other modest tax increase proposals (modest is relative) would impose a significant cost on Illinois.  I’ve estimated that under this proposal Illinois’s economy could suffer a $17.3 billion reduction in personal income over the next three to five years as a result of this tax hike, translating into $3,625 less in personal income per household or the loss of 288,473 private sector jobs. Adding insult to injury, the average Illinois household also faces an increase in their state tax burden of $1,598.

The Tax Foundation also finds that this is a very bad deal for Illinois’s business tax climate.  They have also found that Illinois would also sport the “highest state corporate income tax in the United States and the highest combined national-local corporate income tax in the industrialized world.”  Yikes!

There will also be higher crime due to increased cigarette smuggling stemming from the higher cigarette tax.

If you live in Illinois and are wondering how much this tax hike will cost you . . . check out this tax calculator from the good folks at the Illinois Policy Institute.