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Prepared by Iryna Ivaschenko.
State and local governments are typically aggregated because the breakdown of data between these two levels of government varies across states (see Stotsky and Sunley (1997) and references therein). Local government expenditures were of roughly the same magnitude as those of state governments during 1960–1990.
Federal grants for Medicaid are currently administered on a cost-sharing basis, with the federal share varying across states—from 50 percent to 80 percent—depending on state’s per capita income. Welfare programs are financed on a block-grant basis.
Historically, state estate taxes have been set equal or above the federal estate tax credit—a credit that taxpayers receive against their federal estate tax liability for state estate and inheritance tax payments. However, the federal estate tax is scheduled for repeal beginning in 2005 under the Administration’s 2001 tax package.
In most states, the fiscal year runs from July 1 to June 30. The budgetary forecast for FY 2004 is based on data provided by 41 states to the National Conference of State Legislatures through April 2003; and on data from NASBO and NGA (2003).
Specifically, the following measures in the Economic Growth and Tax Relief Reconciliation Act of 2001 affected states taxable income base: the increased standard deduction, new rules for individual retirement accounts, and additional deductions for education expenses. In addition, the recently enacted Jobs and Growth Tax Relief Reconciliation Act of 2003 is likely to further reduce state tax revenues. The “bonus depreciation” tax break for corporations, additional deductions for small and mid-size businesses, and increases in deduction for married couples are estimated to cost states $3 billion in lost revenues, absent any measures by states to undo the effect (Johnson, 2003; McLaughlin, 2002).
Vermont does not have balanced-budget restrictions of any form.
These included tightening eligibility requirements and creating preferred drug lists. Currently 19 states have authorized the use of such lists, compared to three states two years ago, according to the National Conference of State Legislatures. Drug expenses are one of the largest Medicaid spending items (New York Times, 2003).
State and local governments can borrow to ease short-term revenue shortfalls. Stotsky and Sunley (1997) also note that some state governments used short-term borrowing to conceal deficits in their operating budgets.
Most of these results were obtained for the general government.
Generalized impulses—a modification of the Cholesky factorization that does not depend on the VAR ordering—are used in the estimation. See Pesaran and Shin (1998) for details.
The estimation results should be interpreted with caution since most components of SLG budget data available in the National Income and Product Accounts (NIPA) are available only with a two-year lag and the most recent data are estimated. In addition, most quarterly data are being interpolated from the annual data.