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Review of Revenue Estimates in Federal, State, Agency and Local Budgets Essay


Introduction

Public budgeting can be defined as “the critical exercise of allocating revenues and borrowed funds so as to attain the economic and social goals of a given country” such as the United States (Chantrill, 2011). It also includes the management of public expenditures in a way that the most effective economic impact will be realized from the production and delivery of goods and services (Huddleston, 2005).

The budgeting process is vital in the sense that it allows governments, states and agencies to implement proper planning and management of financial resources. The prevailing economic condition often acts as a guide to help governments to prioritize and implement programs and policies that will work best for them.

The budgeting process entails four different stages or phases: budget preparation, budget authorization, budget execution and accountability. The United States and many other countries have an annual budgeting process.

Revenue estimation is an important component of the budgeting process for every government, state, local governments and agencies. This is important for ensuring that strategic planning is done to correctly pinpoint how much money should allocated to different programs. It’s also important in determining whether taxes are to be increased or decreased.

This paper seeks to review the revenue estimates in Federal, State and local Budgets. The review will include: Basic description of each budget- federal, state and local budgets; Identification of the differences and similarities between the budgets; identification of the areas that account for the most of the revenue in the different categories; determination of how the budget fits with the mission of each domain; and finally, recommendation of how the budget can be improved and revenue estimation be accurately accessed at each level.

Description of the different budget estimates

Local government budget estimates

There are many local governments across the United States. These governments usually fall under the category of general purpose governments that offer several different public goods and services or special purpose governments that provide a specific good or service (Huddleston, 2005).

There are governments for cities, others for rural areas and some representing both cities and rural areas. In some states, municipal governments provide public education while in others pubic education is catered for by special purpose governments (Huddleston, 2005).

This diversity in local governments is also reflected in the public budgets as well. However, the underlying factor in all these budgets is raising and spending of public money (Chantrill, 2011).

Budgets of general purpose local governments are usually composed of three distinct parts that operate together: annual operating budget; capital budget; and the enterprise or utilities budget (The PEW Center of the States, 2011).

The annual operating budget outlines the anticipated spending that will be carried out by all agencies under the municipality in the coming year. For instance, this may include expenditure for public safety, planning and development, and social services among others (Huddleston, 2005). The annual operating budget also includes the revenues that the local government expects to receive in the course of the year, particularly the estimated amount of property tax revenue that will be levied in the course of the upcoming financial year.

The capital budget includes the forecasted expenditure on the required infrastructure projects that will be useful for a long time to come (Huddleston, 2005). Capital budgets are formulated following extensive planning process that indicates the precise spending that will be accrued on capital items in the coming year.

General purpose local governments usually identify public services whose beneficiaries can be established. Different local government enterprises finance themselves in the sense that annual revenues cover for the annual costs accrued (Huddleston, 2005).

State budgets estimates

Different states in the United States budget differently. The different budgeting systems reflect differences in the preferences and traditions that have been developed for more than 200 years (Chantrill, 2011).

There are differences in the authority wielded by the governor and the legislature, states relations to local governments, traditions of borrowing and many other aspects of the budgeting process (McNichol, Oliff, & Johnson, 2011). To understand the State budgeting process, one needs to approach budgeting by analyzing the funds.

In the majority of the states, most of the spending is often categorized under the general fund. The general fund is sourced from general purpose and miscellaneous taxes (Huddleston, 2005). The general fund is used to finance activities such as “state operations, aid to localities, capital projects that are not in the capital fund, general obligation bonds and transfers to other funds” (Huddleston, 2005, p. 10).

In most of the states, the spending of the general fund is not permitted to go beyond the annual revenues in addition to the balances at the beginning of the year. Generally, borrowing is usually not permitted unless it’s intended for short term leveling of the seasonality that comes with tax collections (McNichol, Oliff, & Johnson, 2011).

Apart from the general fund, many states do have a special revenue funds which may be given different names such as special funds or non general funds (Huddleston, 2005). These funds are sourced from earmarked revenues, for instance, highway taxes (if they are not captured in the capital budget); “federal government grants; state lottery receipts; fees for licenses such as motor vehicle, parks and recreation, fish and game among others” (Huddleston, 2005, p. 12).

The amount of money allocated for the special funds varies from state to state. In some states the funds are usually very small, while others have large funds and still others might have multiple funds under the special funds category. Just as it has been seen with the general funds, the special funds must not exceed annual revenues in addition to the balance at the beginning of the year.

Several states do have the capital project fund which is most commonly referred to as the “capital budget” (Huddleston, 2005, p. 5). In some states, the fund only covers projects financed through borrowing, in other states it may encompass projects that are paid for through grants from the federal government.

States that borrow funds to supplement their budgets may have a “debt service fund” (Chantrill, 2011, p. 8). This fund is allocated money from the general fund to offset the interests on bonds that have been sold to finance capital projects.

Different states have different forms of budgeting, for instance Washington State has a Biennial Budget cycle.

Federal Budget

The federal budget is often “described as the president’s proposal to the U.S. Congress which recommends funding levels for the next fiscal year” (Kolawole, 2011, pp. 3). The decisions that are made by the congress in regard to the federal budget are informed by the legislative rules concerning the federal budget.

The budget data and various analyses are often performed by various government agencies. These agencies include the “Government Accountability Office (GOA), Congressional Budget Office, the Office of Management and Budget (OMB) and the U.S. Treasury Department” (Kolawole, 2011, pp. 3).

The federal budget is usually calculated mostly using the cash approach. The outlays and revenues are determined after transactions are completed. The federal budget does not reflect long term costs of entitlement programs such as Medicare, Social Security, and the federal portion of the Medicaid (Chantrill, 2011). The federal budget utilizes some aspects of accrual accounting whereby revenues and debts are only recognized once they have been incurred.

In the federal budget, the CBO often calculates 35 year baseline projections that are often of great importance during the budgeting process (Chantrill, 2011). The projections are not used as a way of forecasting the likely path of the economy but rather as a way of benchmarking the spending into the current law.

The personal income tax levied by the federal is usually progressive in the sense that high incomes often attract higher marginal taxes. There is a federal payroll tax that is usually flat and is often used to finance social security and Medicare (Chantrill, 2011). Employers and employees are often required contribute 6.2% of the gross pay earned by the workers as social security.

The amount is often charged up to a certain amount of income, normally $ 106,800, individuals who earn higher salaries do not pay for the social security. For the Medicare contribution, employees and employers are required to pay 1.45% of there gross income. This amount is subtracted from all employees and employers. Some consider the payroll tax to be some form of insurance due to the fact that it pays out some benefits to individuals who are qualified to receive them.

Social Security, Medicare, and Medicaid are often catered for by permanent appropriations and thus are considered to be mandatory spending (Kolawole, 2011). Most individuals are deducted money to go into these programs for all their lives but a few who certified to be eligible under some legal requirements are entitled to these benefits.

Other than social security, Medicare and Medicaid, the other spender of the U.S tax payers’ money is the military. Current military spending is about 6% of the GDP for both Homeland Security and the Department of defense. In the recent past, military funding particularly for wars in Iraq and Iran have fallen under the emergency appropriations bills (Chantrill, 2011).

Much of federal budget allocations that relate to state agencies will be discussed under the agency budgeting section.

The federal budget has accrued deficits for all the years, except four since 1970. This has led to the accumulation of debt totaling to about 15 trillion dollars by the end of 2011.

The U.S. financial status has progressively declined since 2001, mainly due to policy decisions and poor economic conditions (Chantrill, 2011). The main reasons include the two financial recessions that have been witnessed and the Bush Tax cuts of 2001 and 2003.

Agency Budgeting

Agency budgeting is often not done as a separate exercise, usually it’s carried out as a component of the federal and state budgets, depending on the jurisdiction of the agency in question.

There are several agencies that are allocated revenue in the federal budget, this agencies include: CIA and other intelligence agencies; the department of defense; food and drug administration; housing and urban development; health and human services; department of energy; the interior department; the treasury; justice department; environmental protection agency; U.S. Department of agriculture; department of labor; department of transportation; NASA; state department/USAID; the national Science foundation; department of homeland security; veterans department; and the department of education (Chantrill, 2011).

The department of defense often gets the biggest revenue that amounts to up to 5% of the GDP. Other departments such as homeland security and the veterans affairs also account for a significant amount of revenue allocated for use by government agencies.

Revenue estimates in the different categories

The federal estimates including agency estimates

The federal budget estimates for the year 2012 that have been proposed by president Obama will be used. The original Obama administration’s original budget request contained $ 2.627 trillion in revenues and $ 3.729 trillion in outlays (Kolawole, 2011).

Table1: Total receipts

The fiscal year 2012 is estimate to have a total of $ 2.627 trillion receipts.

Item Feb 2011 Obama Administration Request
Social Security and other Payroll tax $925 billion
Other miscellaneous receipts $20.0 billion
Individual income tax $1.141 trillion
Excise tax $ 103 billion
Estate and gift taxes $14.0 billion
Deposit of earnings and federal reserve system $66.0 billion
Custom duties $30.0 billion
Corporate income tax $329 billion

Source: Chantrill, C. (2011). Comparison: State Spending-Debt-GDP-Population. Retrieved from U.S. Government Spending.

Table2: Total spending $ 3.729 trillion

Item February 2011 Obama Administration request
Interest on National Debt $242 billion
Medicaid and the State Children’s Health Insurance Program (SCHIP) $269 billion
Medicare $485 billion
Social Security $761 billion
Troubled Asset Relief Program $13.0 billion
Unemployment/welfare/ other mandatory spending $612 billion

Source: Chantrill, C. (2011). Comparison: State Spending-Debt-GDP-Population. Retrieved from U.S. Government Spending.

Table 3: Agency spending $ 1.344 trillion

Item February 2011 Obama Administration request
Department of Defense $553.0 billion
Overseas Contingency Operations $118.0 billion
Department of Health and Human Services $79.9 billion
Department of Education $77.4 billion
Department of Veterans Affairs $58.8 billion
Department of Housing and Urban Development $49.8 billion
Department of State and other International programs $50.1 billion
Department of Homeland Security $43.2 billion
Department of energy $29.6 billion
Department of Justice $28.2 billion
Department of Agriculture $23.8 billion
NASA $18.2 billion
Department of Transportation $13.4 billion
Department of the Treasury $14.0 billion
Department of interior $12.1 billion
Department labor $12.8 billion
Department of Commerce $8.8 billion
Army Corps of Engineers $4.6 billion
Environmental Protection Agency $9.0 billion
National Science Foundation $7.8 billion
Small business Administration $1.0 billion
Corporation for National and Community Service $1.3 billion
Disaster Costs $6.0 billion
Other On –budget Discretionary Spending $44.9 billion

Source: Chantrill, C. (2011). Comparison: State Spending-Debt-GDP-Population. Retrieved from U.S. Government Spending.

In the fiscal year of 2012, the president has requested $ 553 billion for the Defense department’s base spending and another $ 118 billon has been particularly allocated for the Afghanistan and Iraq totaling to $671 billion (Kolawole, 2011). These figures indicate a rise in the base budget by $ 22 billion compared to that allocated in the 2010 budget. However, the funds allocated to Iraq and Iran has dropped by $41 billion. The defense department is by far the largest beneficiary of revenue allocation compared to other agencies.

The health and human services department comes third after the DOD and the overseas contingency services. The president requested for up to $ 79.9 billion to finance the health and human services department for the fiscal year 2012. This figure has slightly increased as compared to the previous one but it has significant cuts for instance, the discretionary funding was reduced by 1% (Kolawole, 2011).

Of important concern are the deficits that are continuously being witnessed in the federal budgets, year in year out. In the FY 2011, the deficit was projected to hit $1.26 trillion. The deficit is large but is lower than that of the FY 2010 at $ 1.6 trillion.

The U.S government overspends for different reasons: first, by overspending, the economy is automatically stimulated; secondly, there are countries such as China that are willing to lend money to the U.S government; thirdly, by overspending the government will definitely save some jobs and by extension save its political life. Some analysts’ points out that overspending may spell doom for the world economy if the debt increase is not checked (McNichol, Oliff, & Johnson, 2011).

The government should thus ensure that it strives to reduce the deficit every upcoming fiscal year with the aim of eliminating it in the long term. The Office of Management and Budget (OMB), forecasts that the deficit should be reduced by $700 billion per year through to 2020 (Chantrill, 2011).

State budget estimates

State budget estimates are often developed by state agencies. The state agencies then submit the budget proposals to the governor. Once the budget is enacted by the “legislature, agencies implement approved policies and programs within the budgetary limits imposed by the legislation” (The PEW Center of the States, 2011, p.4).

The governor’s role in the budgeting process is to recommend the budget to the legislature and this must be done in consistency with the executive policy priorities of a given state. Just like in the federal system, appropriation bills are often subjected to scrutiny by the responsible authority and mighty be accepted, rejected in part or rejected wholly.

Most states receive their revenues from “taxes, licenses, permits and fees, and federal grants” (Chantrill, 2011, pp.3). The different revenue sources or often slated for different accounts designated by law. The accounts are in turn used for the execution of state operations or capital expenditures.

About 45% of funds are often raised from taxes, an estimated 25% from federal grants, about 25% charges and miscellaneous revenues, and lastly 3 to 5% from licenses, permits and fees (McNichol, Oliff, & Johnson, 2011).

The specific figures for all the state budgets are too complex or not available for analysis in this document. However, many of the states are going through similar financial situations that will be generally discussed in this document.

State budgeting has been a really tricky exercise since the financial recession witnessed in 2008. As the U.S economy takes reels under the effects of the financial crisis so are the state revenues. For example, in New York, the official estimate of the state’s budget short fall for fiscal year 2011 worsened five times (Chantrill, 2011). The budget gap widened from $4.6 billion to $9 billion in a span of 10 months.

Missouri State also provides case that can reflect the volatility associated with state revenues. In the Missouri State, during the 2010 legislative session, Governor Jay Nixon together with the state legislature reached an agreement that the revenue for the 2011 fiscal year would stand at $7.2 billion (The PEW Center of the States, 2011).

Eight weeks after this announcement the revenue estimate was cut by about $484 million by law makers who thought they had resolved the crisis. However, after several weeks the Governor had to trim a further 301 million (Chantrill, 2011).

States across the United States are faced with challenging budgets. The public sector is bearing the brand of the cuts that following budget short falls.

In fact the “center on Budget and Policy Priorities (CBPP) has reported that from fiscal years 2009 to 2011, States have closed a cumulative budget shortfalls amounting to $430 billion” (McNichol, Oliff, & Johnson, 2011, pp. 6).

Implications of state underestimates

Research has revealed that States have tended to underestimate the revenues they will gain (McNichol, Oliff, & Johnson, 2011). Underestimating can create challenges in regard to how the state intents to spend the extra money it receives. Some states often address such a problem by undertaking tax cuts which later impact on the revenue growth.

Others states tend to add programs that become unsustainable in later years. For instance, in Louisiana, revenues from taxes went up after Hurricane Katrina as a result of a reconstruction boom. For three consecutive fiscal years (2006, 2007 and 2008), the projected sales, income and corporate tax revenues were actually 11% less than what was actually gained. The legislators in that state decided to lower income tax rates in 2008 (Chantrill, 2011).

The state become broke in the following one year as tax collections fell 3% under the estimates. The federal funds that had been flowing since the hurricane also fell. The Louisiana budget still grappled with a $ 2 billion gap in the year 2011. Another such case was witnessed in Arizona. The state had a sustained growth in revenues in the three years, 2004, 2005 and 2006. The state had a $530 million surplus in 2006 prompting the legislators to cut taxes and increase spending.

Spending was increased for the 21st century research program, an effort towards boosting Arizona’s energy and biotechnology initiatives (McNichol, Oliff, & Johnson, 2011). The budget did no take long before turning surpluses into deficits resulting in the closure of such programs. The state was later sued by a non profit group that had partnered with it to develop the program.

Thus states are required to carry out proper planning to avoid such pitfalls. This can be done through allocation of some portion these funds into the rainy day fund, though this could help create the notion that the public is being overtaxed (Chantrill, 2011).

Local government Budget Estimates

Data provided by the U.S census Bureau indicates that there are as many as 87, 000 local governments in the United States. These local governments can be categorized under any of the five general categories.

Table3: Number and description of U.S local Governments by Major Category

Category Number Description
Counties 3,043 They offer general government services. Counties can be found across all states in the United States except Connecticut, Rhode Island and the District of Columbia. They include boroughs in Alaska and parishes in Louisiana.
Municipalities 19,372 Municipalities provide basic government services to specific population groups. This include cities, boroughs (except Alaska), villages and towns ( except New England states, Minnesota, New York and Wisconsin)
Townships 16,629 They offer general government services to areas that have no population concentrations. These include towns in the New England states, Minnesota, New York and Wisconsin and Towns in eleven other states.
Special Districts 34,683 Special districts provide a single or limited number of designated services and have sufficient administrative and fiscal autonomy to qualify as independent governments
School Districts 13, 726 They provide public elementary, secondary and/or higher education and have sufficient administrative and fiscal autonomy to qualify as independent governments. Schools Districts that are administered as part of a county, municipal, town or state government are excluded.

Source: Huddleston, J. (2005). An Introduction to Local Government Budgets: A Guide for Planners. Wisconsin: University of Wisconsin-Madison.

Local governments often collect over $ 1 trillion. Schools often collect more revenues, followed by municipal county governments. Townships and Special districts often account for close to 60% of the local government units which account for about 15% of the total revenues raised by all local governments (Chantrill, 2011).

The revenues collected from all local governments usually consist of: general revenue that is generated from each type of government’s taxes, charges or other miscellaneous revenues; funds transferred from other governments; other revenues that are raised from enterprises or utilities associated with each type of government (Huddleston, 2005).

Counties, municipalities and townships the general funds raised by local governments from their own sources often form a larger portion of the all the funds available to them. This can range from 59% in the municipalities to up to 73% for townships. Generally, schools special districts get less than half of their total revenues from their own sources, this can range from 43% for schools to close to 50% for special districts (Huddleston, 2005).

The revenues received from other governments often contribute about 25% of all revenues for the general purpose governments. Schools and special districts are the largest beneficiaries of the inter-government revenues, for instance, schools receive up to 60% of all their revenues from the intergovernmental transfers and for special districts this accounts about a third of their revenues (Huddleston, 2005).

The largest portion of the transfer funds usually comes from the State governments. Funds transferred from the federal government are often small, amounting to about 4% of the total local government revenues with the exception of payments remitted to special districts.

In general terms, own source revenues that are often generated by different local governments, taxes on properties contribute the largest source of revenue, except for the special districts. Municipalities and counties also rely a lot on the property taxes and often get up to 20% of their revenues from the property taxes (Huddleston, 2005).

The largest expenditure by local governments is often associated with public safety, mostly as it pertains to municipalities. This is closely followed by expenditures on environment and housing (Kolawole, 2011). A larger share of the funds is also spent in the operation enterprises and utilities.

Townships spend up to 25% of the revenues on education, particularly on transportation, public safety, and environment and housing (The PEW Center of the States, 2011).

Short falls in the States and local governments and how the issue can be addressed

Several states across the United States are faced with a growing budget deficit that poses a long term threat to their viability (Chantrill, 2011). The same predicament that faces states is being witnessed by local governments. Public services in the local governments have been subjected to undercutting and underfunding in a bid to tame the shortfall that was triggered by the recession.

Nationally, up to 8 million jobs have been lost and other sectors such as housing and retail sales have suffered huge damages (Kolawole, 2011). There is evidence that states and local governments are recovering slowly from the revenue declines they have been suffering from since 2008.

Several measures have been proposed, however, each of them has its downside. Some states and local governments are considering the option of raising taxes. Raising taxes is not the bet decision as it’s likely to reduce the momentum of economic growth and stifle innovation. Other states are considering borrowing money to supplement their budgets. Borrowing money may cause states’ credit standings to be down rated by some rating agencies (Chantrill, 2011).

Some states such as New York have considered the option of reducing the local government entities with the aim of cutting the aid offered to these entities.

Conclusions

This paper sought to review the revenue estimates in Federal, State and local Budgets. The review included: Basic description of each budget- federal, state and local budgets; Identification of the differences and similarities between the budgets; identification of the areas that account for the most of the revenue in the different categories; determination of how the budget fits with the mission of each domain; and finally, recommendation of how the budget can be improved and revenue estimation be accurately accessed at each level.

All the areas to be reviewed have been appropriately captured in the paper: The federal estimates have been effectively analyzed, particularly by the use of the FY 2012 proposed by the Obama Administration. The agencies that take much of the federal revenues have been identified.

The ever rising debt due to budget deficit has also been analyzed. The states’ and local governments’ budgeting processes have also been reviewed. Most importantly, the economic challenges that are being faced by the federal government, states and local governments have been pinpointed and some solutions recommended for the budgeting process.

References

Chantrill, C. (2011). . U.S. Government Spending. Web.

Huddleston, J. (2005). An Introduction to Local Government Budgets: A Guide for Planners. Wisconsin: University of Wisconsin-Madison.

Kolawole, E. (2011). F. The Washington Post. Web.

McNichol, E., Oliff, P., & Johnson, N. (2011). States Continue to Feel Recession’s Impact. Washington DC: Center on Budget and Policy Priorities.

The PEW Center of the States. (2011). States Revenue Estimating: Cracks in the Crystal Ball. Washington DC: The Nelson A. Rockefeller Institute of Government.

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IvyPanda. (2019, September 9). Review of Revenue Estimates in Federal, State, Agency and Local Budgets. Retrieved from https://ivypanda.com/essays/review-of-revenue-estimates-in-federal-state-agency-and-local-budgets/

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IvyPanda. 2019. "Review of Revenue Estimates in Federal, State, Agency and Local Budgets." September 9, 2019. https://ivypanda.com/essays/review-of-revenue-estimates-in-federal-state-agency-and-local-budgets/.

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IvyPanda. (2019) 'Review of Revenue Estimates in Federal, State, Agency and Local Budgets'. 9 September.

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