| June 16, 2010

State Government Growing Faster than Oklahomans' Ability to Pay

Last month in these pages we demonstrated that Oklahoma’s state and local government spending is outstripping Oklahoma taxpayers' ability to pay. This month we will disaggregate state and local government spending into its constituent components—state government spending and local government spending—to better understand where the growth in government is coming from.

Chart 1 and Table 1 illustrate the growth differentials between state government expenditures, local government expenditures, and two different benchmarks. The data are for fiscal years (FY) 1992 to 2007 (the latest year of data available from the Census Bureau).

The most dramatic change is shown in the growth rate of state government expenditures. Between FY 1992 and FY 2000, state government expenditures were growing at the same pace as the population-plus-inflation benchmark. As a result, the burden of state government was shrinking over this time period because personal income was growing significantly faster.

However, between FY 2000 and FY 2002, state government expenditures (thanks largely to Medicaid expansion) jumped a whopping 51 percent to $11.3 billion in FY 2002 from $7.5 billion in FY 2000. This pushed state-government spending growth far ahead of personal-income growth. In fact, in FY 2002, the growth index value for state and local expenditures was 1.89, versus 1.69 for personal income.

Disturbingly, this jump in state government expenditures has resulted in a permanent upward shift in the yearly rate of growth in expenditures. Prior to FY 2000, state government expenditures grew at the rate of population plus inflation. After FY 2002, state government expenditures are growing at the same rate as personal income. As a result, the burden of state government now automatically grows with the economy, whereas pre-FY 2000 the burden of state government lessened over time.

It’s time to put a speed limit on spending, i.e., to insist that government spending can only grow at a predetermined rate. Based on this analysis, that speed limit should be the one that OCPA has been suggesting for years: the growth in population plus the change in inflation.

Research Notes

Expenditure data are net of intergovernmental transfers. For example, in FY 2007 Oklahoma’s state government sent $3.9 billion to localities—mostly for education. The Census Bureau properly counts this money as being spent at the local level, not at the state level. Additionally, in FY 2007 the state government received transfers from the federal government of $5.2 billion—mostly for Medicaid matching funds. As a result of these transfers, state and local governments spend more than they raise in taxes and fees alone. The comparative growth indices shown in Chart 1 and Table 1 were created by setting the base year (1992) equal to one and then multiplying each successive year by the growth rate. This makes it easier to visualize the relative growth differentials without worrying about the differences in starting values.

Economists J. Scott Moody (M.A., George Mason University) and Wendy P. Warcholik (Ph.D., George Mason University) are OCPA research fellows.

Loading Next