Off the Charts Blog | Center on Budget and Policy Priorities

As Tax Day approaches, we’ve updated three backgrounders that explain the sources of federal tax revenues and how we spend both federal and state tax dollars.

Where Do Federal Tax Revenues Come From?

In fiscal year 2012, the federal government spent $3.5 trillion on the services it provides.  Of that $3.5 trillion, federal revenues financed close to $2.5 trillion. The remaining amount (about $1.1 trillion) was financed by borrowing; this deficit will ultimately be paid for by future taxpayers.

The three main sources of federal tax revenue are individual income taxes, payroll taxes, and corporate income taxes; other sources of tax revenue include excise taxes, the estate tax, and other taxes and fees (see chart).

Where Do Our Federal Tax Dollars Go?

In 2012, about three-fifths of federal expenditures went to three areas:  defense and international security assistance, Social Security, and the major health insurance programs (Medicare, Medicaid, and the Children’s Health Insurance Program).  Two other categories together — safety net programs and interest on the federal debt —accounted for another fifth of federal spending.  The remaining fifth of federal spending supported a wide variety of other public services, including providing health care and other benefits to veterans and retirement benefits to retired federal employees, assuring safe food and drugs, protecting the environment, and investing in education, scientific and medical research, and basic infrastructure such as roads, bridges, and airports.

Where Do Our State Tax Dollars Go?

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.

Click here for the backgrounder on where our federal tax dollars come from, here for the backgrounder on where our federal tax dollars go, and here for the backgrounder on where our state tax dollars go.

On PBS’s “Need to Know” that aired on Friday, CBPP Senior Fellow Jared Bernstein participated in a panel discussion on economic inequality, mobility, debt, and the state of the American economy in the wake of the Great Recession.  In this exchange with host Jeff Greenfield, he highlighted the importance of investing in public goods like education to increasing economic growth and mobility:

JEFF GREENFIELD: But if social mobility is lessening in part because of structural reasons — the need for a more educated workforce, let’s say — does it tell us much about what public policy ought to be doing?

JARED BERNSTEIN: I mean, public policy plays a huge role in what economists call “public goods,” and education is a key part of that.  And in fact, if you actually look at the numbers and recent budget trends, our investments in the public school system and the public university system, systems that I think have been crucial to providing the kind of upward ladders of mobility that we are sorely in danger of losing, we are disinvesting in those kinds of public goods.  And frankly, I think that’s the way forward, in terms of growth and in terms of inequality and opportunity, is to think much more about an investment model and the kinds of things that will generate a productive economy moving forward — and to obsess far less about tweaks in the marginal tax code, and obsessing over the kind of root canal economics that I hear so much about these days.

We’ve documented the harmful effects of cuts to K-12 and higher education (see chart below).  Click here for 50-state data on higher ed cuts and here for 50-state data on cuts to K-12 programs.

Click here for the full video of this episode of “Need to Know.”

States have slashed funding to public colleges and universities over the past five years, as I explained earlier this week and we detail in our new paper.  After adjusting for inflation, every state except North Dakota and Wyoming is spending less per student on higher education — 28 percent less, on average — than they did before the recession.

Consequently, as the chart below shows, the schools have increased tuition to help make up for lost state revenue.  As a result, the average cost of attending a public college or university has surged.

Average annual published tuition at four-year public colleges — the “sticker price” — has grown by $1,850, or 27 percent, in real terms between the 2007-08 school year, the academic year that began just prior to the recession, and the current 2012-13 school year.

Tuition increases have been both substantial and widespread.  Since the 2007-08 school year, after adjusting for inflation, the average tuition at public four-year colleges has increased by:

• More than 50 percent in seven states;
• More than 25 percent in 18 states; and
• More than 15 percent in 40 states.

Two states, Arizona and California, have increased tuition by more than 70 percent.

Click here to read the full paper.

State cuts to higher education funding in the last five years have been severe and almost universal, as we explain in a new paper.  After adjusting for inflation:

• States are spending $2,353 or 28 percent less per student on higher education, nationwide, in the current 2013 fiscal year than they did in 2008, when the recession hit.
• Every state except for North Dakota and Wyoming is spending less per student on higher education than they did before the recession.
• Eleven states have cut funding by more than one-third per student, and two states — Arizona and New Hampshire — have cut their higher education spending per student in half (see chart).

Deep state funding cuts have major implications for public colleges and universities.  States (and to a lesser extent localities) provide 53 percent of the revenue that is used to support instruction at these schools.  When this funding is cut, colleges and universities generally must either cut spending, raise tuition to cover the gap, or both.

That’s just what they’ve done.  Over the last five years, public colleges and universities have both steeply increased tuition and pared back spending, often in ways that compromise the quality of the education that they offer.

Reversing these trends and reinvesting in higher education should be a high priority for state policymakers.  A large and growing share of future jobs will require college-educated workers.  Investing in higher education to keep tuition low and quality high at public colleges and universities, and to provide financial aid to students who need it most, would help states to develop the skilled workforce they will need to compete for these jobs.

But to strengthen state investment in higher education, state policymakers will need to make the right tax and budget choices over the coming years.  The weak economic recovery and the need to reinvest in other services that also have been cut deeply means that many states will need to raise revenue to rebuild their higher education systems.  At the very least, states must avoid shortsighted tax cuts, which would make it much harder for them to invest in higher education, strengthen the skills of their workforce, and compete for the jobs of the future.

Click here to read the full paper.

State-run pension plans for teachers, police and other state and local workers have made important progress toward restored financial health without breaking state budgets, according to a new study by one of the premier research organizations in this field.

That suggests that the more drastic kinds of changes that some have proposed for those pension funds, like converting them to 401(k)-style plans that would put retirees largely at the mercy of the stock market’s ups and downs, won’t be necessary.

The Boston College Center for Retirement Research sampled 32 of the nation’s largest state pension funds (in 15 states) and looked at how their prospects have changed since 2008.

Investment losses hit these pension funds hard in 2008, when the stock market fell sharply.  But the stock market has since recovered, and most states have enacted changes to their pension plans, mostly through modest benefit cuts and increases in employee contributions.  In fact, only three of the 32 plans in the BC study have done nothing to lower their long-term obligations.

Those fixes seem to be working.  The BC study found that three decades from now, when pension funds feel the full impact of the recent reforms, many states will likely spend a smaller share of their budgets on pensions than before the 2008 stock market decline.

The BC researchers recommend taking these results with some caution.  The study assumes that pension funds will continue to get the kinds of returns on their investments that they’ve historically received, that states will stick with the reforms that they’ve enacted, and that states will make full contributions to the funds (something they didn’t always do during the worst of the recent fiscal crisis).  Further, the study doesn’t look at every state.

But the study confirms what we and many other analysts have long argued.  For most states, modest reforms rather than radical overhaul is the appropriate path to long-term solvency.