California's Balance of Payments with the Federal Treasury, FY 1981-97

September 1998

California Balance of Payments

For the 11th consecutive year, California continues to be a "donor state." That is to say that Californians send more federal tax dollars to Washington than the state or its residents receive back in federal spending.

Last year, Californians racked up the biggest taxes-versus-spending deficit that this nation has ever seen. In FY 1997, California was a donor state to the tune of $14.3 billion, a single-state record.

This level represents a steep ascent from the $10 billion shortfall just one year before, in FY 1996. The 1996 level in turn had been higher than 1995 when California sent $8.15 billion more than was received, and a further increase over 1994, when the state was a donor of about $5 billion. During the defense contract buildup in Ronald Reagan's first Presidential term in the early 1980s, California's federal balance of payments was in the black for six straight years, peaking at nearly $7 billion in fiscal 1984. The balance shifted into the red, however, in 1987 and has remained there ever since.

[See Table: California Balance of Payments with the Federal Government FY 1981-1997]

This imbalance means that each individual Californian pays $443 more in federal taxes more than what they receive in federal services. Or to put it another way, California receives only $0.93 in federal services for every dollar sent to Washington. According to research conducted by the Washington, D.C. based, non-partisan, Tax Foundation, California ranks 35th among all states in balance of payments (New Mexico ranks number one with a balance of $1.89 in return for every dollar paid to Washington, while Connecticut ranks 50^th with a balance of just $0.67 for every dollar paid in).

The balance of payments figure is calculated by comparing federal spending attributable to each state (excluding unallocable costs such as overseas defense operations and interest on the national debt) against federal tax and fee revenue dollars collected from each state. The tax burden figure is then adjusted to permit an "apples-to-apples" comparison between the two.
 

Calif.'s Share of the U.S. Tax Burden, Population & Federal Spending

[See Table: California Share of U.S. Tax Burden, Population and Federal Spending FY81-97]
 
In 1997, California housed 12.1% of the nation's residents, but it paid 12.4% of federal taxes and received back just 11.4% of federal payments and expenditures.

California's share of the nation's $1.55 trillion tax load increased to12.4% in FY97 from 12.3% in 1996 and 12.1% in 1995. The state's increasing share of the nation's federal tax burden is due in part to a rebounding economy in California relative to other states. The share remains below the peak in 1991, when California shouldered 13.4% of the nation's federal tax burden. Between 1991 and 1995, a debilitating recession -- worse in California than in other states --reduced the relative share of federal contributions from our state's taxpayers.

As is always the case, California's $192 billion contribution to the federal treasury in 1997 was by far the largest raw total of federal tax dollars of any state, edging out both New York (2) and Texas (3), according to the Tax Foundation.

[It should be noted that federal income tax burden figures for each year reflect the economic condition of the prior year -- i.e., taxpayers filed their 1995 taxes in 1996. The current federal income tax system causes states such as California which have an above average income level to pay more in taxes than the average state, despite the fact that vastly higher housing prices and other costs of living mean that the average Californian may not have any more disposable income than the average resident of a lower-taxed state.

California's share of total federal spending receipts declined to 11.4% from 11.6% in 1996. These levels remain well below the 12% point at which California's federal receipts hovered for the preceding seven years. In the early 1980s, federal spending in California leapt from 12% in 1981 to 13% in 1984, propelled largely by military procurement contracts won by California's aerospace industry, before aerospace spending declines settled the figure back to the 12% mark in 1988, where it remained until 1994.

Federal spending figures reflect expenditures in various categories. In accounting for federal expenditures by state, the Census Bureau divides spending into five components: Procurement; Grants to States and Local Governments; Salaries and Wages; Direct Payments to Individuals; and Other Programs. California's 1997 share of federal spending on Procurement (which includes defense and other contract spending) declined slightly to15.2%. Californians' share of all U.S. direct payments to individuals (which includes massive outlays for social security and medicare payments) remained stable at 10.8%. The state's share of all federal salaries and wages decreased slightly to 10.7%, and federal formula and categorical grants to state and local governments again remained stable at 12%.

Procurement
[See Table: California Share of Procurement Funds Versus Population, FY 1981-97]

In FY97, total federal procurement in all states fell from $181 billion to $173 billion, while procurement in California also declined, falling from $27.7 billion to $26.2 billion.

In 1997 federal procurement expenditures declined to its lowest level this decade in current-dollar terms; the figures would be even more stark if inflation were taken into account. Over the last fifteen years, no single category of federal spending in California has experienced as precipitous a decline as procurement. California's procurement receipts in 1997 were at their lowest level since 1981, even before figures are adjusted for inflation. The disparity stems largely from the decrease in expenditures by the Department of Defense, which accounts for almost two-thirds of all federal procurement dollars. California's share of total U.S. procurement expenditures held nearly steady at the 18% mark for a decade until its decline to about 15% for the last three years.

Formula Grants
[See Table: California Share of Formula Grants Versus Population, FY 1981-97]

In FY97 California's share of federal grants to state and local governments remained stable at 12% for the third consecutive year. The bulk of these funds are distributed to states by congressionally designed formulas. These formulas are often based at least partially on population and income data gathered through the decennial census. Many of these data are outdated by the time the next once-every-ten-years census is conducted.

Roughly 60% of the $224 billion distributed nationwide in federal grants was under four programs: Medicaid, highway grants, welfare, and Title I education grants. In the single largest federal formula program, Medicaid, California's share was 9.7%in 1996. The state received $9.1 billion of the $96.4 billion distributed nationwide.

California has also been a "donor state" with regard to the federal highway trust fund. For many years, California has received back less in road projects than it has put into the fund in gasoline taxes, though overall transportation fund expenditures are more closely balanced when transit funds are calculated in the mix. California received $1.7 billion in highway planning and construction funds in 1997, or about 9% of the $19.6 billion distributed nationwide.

It is interesting to note that California houses 21.7% of the nation's adult welfare recipients, and thus has received the lion's share of that program's funding for some time. Thus, even though nationwide totals for highway programs (as defined by the Census Bureau) are larger than for welfare -- $19.6 billion in 1997 for highways versus $13.4 billion for welfare -- California received more from federal welfare payments ($3.1 billion) than for highways ($1.7 billion).

Direct Payments to Individuals
In 1997, direct payments to individuals from the federal government grew again as they have for each of the 17 years for which comparable data have been kept. The more than $84 billion received in direct payments by Californians in 1997 is more than triple the $26 billion received in 1981. Roughly half of direct payments come in the form of social security checks, while another 20% is comprised of medicare payments. California's share of direct payment dollars has remained relatively constant, growing just under 1% since 1981, which roughly tracks California's share of the nation's older population.
 
 

Federal Spending, Tax and Population Figures for U.S. and California
									04-Sep-98
U.S. Totals:								Tot. U.S.	CA Bal of
YEAR	US-total	US-procur	US-grnts	US-wages	US-direct	US-other	US pop'n	Tax Burden	Payments
1981	572,338	119,297	94,802	92,180	259,520	6,541	229,542	581,595	846
1982	613,658	135,412	88,267	97,136	286,070	6,773	231,822	597,472	6,784
1983	676,080	142,088	92,286	102,131	319,195	20,379	233,806	580,619	17,606
1984	706,451	160,150	96,744	108,649	324,390	16,519	235,847	645,043	14,210
1985	761,642	189,009	100,828	114,721	345,987	24,375	237,950	709,400	11,631
1986	802,969	186,497	108,954	119,645	360,945	26,614	240,162	744,578	8,848
1987	819,155	104,005	104,005	125,895	380,073	32,998	242,321	830,536	(3,853)
1988	849,492	164,648	109,835	133,341	404,396	37,270	244,534	884,364	(10,837)
1989	905,100	162,590	117,831	141,919	448,936	37,030	246,820	963,376	(16,411)
1990	970,415	165,781	128,947	145,012	493,266	35,797	248,710	999,473	(16,387)
1991	1,062,541	183,538	149,306	155,341	537,344	37,010	252,177	1,026,910	(9,417)
1992	1,156,038	175,152	176,756	160,494	607,033	39,387	255,082	1,059,276	29
1993	1,224,690	176,340	191,029	165,036	645,979	46,306	257,908	1,130,180	3,036
1994	1,284,893	174,293	209,328	167,736	691,114	47,119	260,341	1,230,933	1,725
1995	1,326,292	177,760	224,316	165,724	711,645	46,840	262,755	1,319,000	(7,266)
1996	1,359,350	180,909	220,537	167,291	743,038	46,748	265,284	1,423,169	(17,679)
1997	1,416,142	172,978	224,375	163,630	775,689	57,415	267,633	1,553,934	(31,354)
California Totals:								CA's Fed	CA bal of pmts
YEAR	CA-total	CA-procur	CA-grnts	CA-wages	CA-direct	CA-other	CA popn	Tax Burden	ADJUSTED
1981	69,416	21,647	10,008	11,074	25,748	940	24,216	68,570	1,937
1982	77,501	27,521	9,016	12,048	28,224	693	24,698	70,717	4,868
1983	86,364	30,856	9,207	12,791	31,252	2,258	25,367	68,758	6,301
1984	91,713	34,178	9,799	13,461	32,694	1,581	25,847	77,503	6,832
1985	97,814	35,208	10,589	14,431	35,362	2,225	26,444	86,183	5,284
1986	100,860	35,228	11,291	15,052	36,960	2,328	27,106	92,012	1,632
1987	100,753	32,212	11,006	15,506	39,261	2,769	27,781	104,606	(2,420)
1988	102,366	29,457	11,676	16,380	41,941	2,913	28,468	113,203	(6,373)
1989	108,639	29,455	11,936	17,604	46,729	2,916	29,218	125,050	(8,847)
1990	115,802	29,500	13,932	17,746	51,448	3,117	29,760	132,189	(12,544)
1991	127,684	32,101	16,885	18,519	56,631	3,549	30,380	137,101	(14,174)
1992	139,695	32,353	19,738	18,988	64,816	3,800	30,867	139,666	(12,729)
1993	147,364	31,483	21,635	19,239	70,952	4,056	31,211	144,328	(9,033)
1994	155,391	30,416	26,219	18,830	75,466	4,460	31,431	153,666	(5,011)
1995	152,534	26,537	26,934	18,376	75,818	4,868	31,589	159,800	(8,149)
1996	157,446	27,724	26,413	18,038	80,432	4,839	31,878	175,125	(9,826)
1997	160,874	26,247	27,014	17,587	84,090	5,936	32,268	192,228	(14,309)
California Percentage Share of :
YEAR	Total	Procurmt	Grants	Wages	Dir Pmts	Other	Populn	Tax Burden	Adj Tx Brdn
1981	12.1	18.1	10.6	12.0	9.9	14.4	10.5	11.8	11.8
1982	12.6	20.3	10.2	12.4	9.9	10.2	10.7	11.8	11.8
1983	12.8	21.7	10.0	12.5	9.8	11.1	10.8	11.8	11.8
1984	13.0	21.3	10.1	12.4	10.1	9.6	11.0	12.0	12.0
1985	12.8	18.6	10.5	12.6	10.2	9.1	11.1	12.1	12.1
1986	12.6	18.9	10.4	12.6	10.2	8.7	11.3	12.4	12.4
1987	12.3	18.3	10.6	12.3	10.3	8.4	11.5	12.6	12.6
1988	12.1	17.9	10.6	12.3	10.4	7.8	11.6	12.8	12.8
1989	12.0	18.1	10.1	12.4	10.4	7.9	11.8	13.0	13.0
1990	11.9	17.8	10.8	12.2	10.4	8.7	12.0	13.2	13.2
1991	12.0	17.5	11.3	11.9	10.5	9.6	12.0	13.4	13.4
1992	12.1	18.5	11.2	11.8	10.7	9.6	12.1	13.2	13.2
1993	12.0	17.9	11.3	11.7	11.0	8.8	12.1	12.8	12.8
1994	12.1	17.5	12.5	11.2	10.9	9.5	12.1	12.5	12.5
1995	11.5	14.9	12.0	11.1	10.7	10.4	12.0	12.1	12.1
1996	11.6	15.3	12.0	10.8	10.8	10.4	12.0	12.3	12.3
1997	11.4	15.2	12.0	10.7	10.8	10.3	12.1	12.4	12.4
Note that "adjusting" the tax burden figure makes it equal the federal spending figure for balance calculation. Figures not adjusted for inflation. Totals figures in millions. Totals exclude undistributed funds.  Sources: Federal Expenditures by State for FY81-97, U.S. Census Bureau; Statistical Abstract of the United States, 1991-97 U.S. Census Bureau; Budget Information for the States for Fiscal Years 1991-98, Office of Management & Budget; State Census Data Center, California Department of Finance; Tax Foundation; California Institute.

 

Information Data Sources: Federal Expenditures by State for FY 1997, Census Bureau, Washington, DC; Federal Tax Burden by State for FY 1997, The Tax Foundation, Washington, DC.

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