August 1997

California's Balance of Payments

For the 10th consecutive year, California remains a "donor state." That is to say that Californians send more in federal tax dollars to Washington than the state or its residents receive back in federal spending. In Fiscal Year 1996, California sent $9.83 billion more to the federal government than was returned in federal expenditures for contracts, services, grants and payments. This represents an increase over 1995 when California sent $8.15 billion more than was received, and a significant increase over 1994, when the state was a donor of more than $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: Calif. Balance of Payments with the Federal Government, FY 1981-1996]
This imbalance means that each individual Californian pays more than $300 in federal taxes over what they receive in federal services. Or to put it another way, California receives only $0.94 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 36th among all states in balance of payments (New Mexico ranks number one with a balance of $1.83 in return for every dollar, while New Jersey ranks number 50 with a balance of $0.69 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.

California's Share of the U.S. Tax Burden, Population & Federal Spending
[See Table: Calif. Share of Tax Burden, Population and Federal Spending FY81-96] 

In 1996, California housed 12% of the nation's residents, but it paid 12.3% of federal taxes and received back just 11.6% of federal payments and expenditures.

California's share of the U.S. tax burden increased to12.3% in FY96 from 12.1% the previous year. The increase in California's share of the nation's federal tax burden from 1995 to 1996 is due in part to a rebounding economy in California relative to other states. This represents the first rise since 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 $175 billion contribution to the federal treasury in 1996 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 1994 taxes in 1995. Due to the progressive income tax system, states such as California which have an above average income level can be expected to pay more in taxes than the average state.

California's share of total federal spending receipts ticked slightly upwards to 11.6% in 1996 from 11.5% in 1995. While the short-term rise was good news, the level remains below the 12% point at which California's federal receipts hovered for the preceding seven years. In the early 1980s, federal spending in California jumped from slightly more than 12% in 1981 all the way to 13% in 1984, propelled largely by military procurement contracts won by California's aerospace industry. With the decline in such spending, California's share of federal receipts returned 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 1996 share of federal spending increased in Procurement (which includes defense and other contract spending) by 0.4% to 15.3%. Californians' share of all U.S. direct payments to individuals (which includes massive outlays for social security and medicare payments) increased by a modest 0.1% to 10.8%. Finally, California's share of all federal salaries and wages decreased by 0.3% to 10.8%, and federal formula and categorical grants to state and local governments remained stable at 12%.

Procurement
[See Table: California Share of Procurement Funds Versus Population, FY 1981-96] 

In FY96, total federal procurement in all states grew from $177.8 billion to $180.9 billion. Procurement in California also experienced growth moving from $26.5 billion to $27.7 billion. Thus, the state's defense and other contractors won more than one-third of the $3 billion increase in nationwide procurement expenditures from 1995 to 1996.

However, while an upsurge in procurement spending is welcome, it is important to note that the current level of spending is still well below the levels set in the mid-1980s. 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 1996 remained more than $7.5 billion below the 1986 level, 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 two years.

Formula Grants
[See Table: California Share of Formula Grants Versus Population, FY 1981-96] 

In FY96 California's share of federal grants to state and local governments remained stable at 12% for the second 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. Therefore, to ensure the maximum payout to California, the most accurate census data is essential. During the 1990 census, for instance, California was undercounted by 834,000 persons, more than 2.7% of the state's actual population.

Roughly 60% of the $220 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 grant program, Medicaid, California's share was nearly 10% in 1996. The state received $9.1 billion of the $92 billion distributed nationwide.

California has also been a "donor state" with regard to the federal highway trust fund. 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 1996, or 9.6% of the nationwide $18.2 billion distributed.

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 -- $18.2 billion in 1996 for highways versus $11 billion for welfare -- California received more from federal welfare payments ($3 billion) than for highways ($1.7 billion).

Direct Payments to Individuals

In 1996, direct payments to individuals from the federal government grew again as they have for 17 straight years. The more than $80 billion received in direct payments by Californians in 1996 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.