Spending on Social Welfare Programs in Rich and Poor States. Final Report.. b. Need

07/01/2004

It is hypothesized that the higher the poverty and other indicators of need, the more the state will spend on programs benefiting the poor. Mogull (1989) suggests that poverty affects expenditures in two ways. First, high levels of poverty increase the pool of eligible persons. Second, increased visibility of concentrations of poor people can increase social and political activism, which in turn, leads to increased spending.

Some research has shown this positive association between poverty and social welfare expenditures. Mogull (1993) found that indicators of need, such as unemployment rates, were estimated to exert a significant effect on social welfare spending, presumably by expanding the pool of eligible families. Similarly, Hicks and Swank (1983) found a direct impact of need on welfare caseloads.

Other research has shown an inverse relationship between poverty and social welfare spending. For example, Tannenwald (1999) examined the diversity across states in preferences for the size of state and local government, given their fiscal need. If preferences for levels of state and local public services were similar across states, one would expect states with low levels of fiscal comfort (i.e., low ratio of tax capacity to need) to raise relatively more revenue from their tax bases by taxing more intensively.6 However, only a handful of states (i.e., California, Michigan, Mississippi, and New Mexico) had low fiscal comfort and above-average tax effort. Most states exhibit both low tax effort and low comfort or high tax effort and high comfort. A number of states had both high comfort and low effort. Overall, the correlation coefficient between effort and comfort was negative and statistically insignificant. This finding suggests that many low fiscal comfort states prefer lower levels of government than their fiscally more comfortable counterparts.

Another study (Jennings, 1980) examining welfare expenditures from 1964 to 1971 found an inverse association between poverty and welfare expenditures. This study found that increases in the percentage in poverty were negatively related to increases in the percentage change in welfare spending from both state funds and federal funds. However, as the authors note, this might reflect the inability of poor states to meet the needs of their poor residents given their low per capita incomes. Fry and Winters (1970) examined the effect of poverty on the ratio of expenditure benefits to revenue burdens for the three lowest income classes (the net redistributive impact). The authors hypothesized that the larger the proportion of low income families in the state, the greater the perceived need for redistribution through state revenue and expenditure policies. The study found, however, that the proportion of families with less than $3,000 annual income was negatively related to redistribution. We should note that these two studies examined a much earlier time period than our study.

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