Spending on Social Welfare Programs in Rich and Poor States. Final Report.. C. Review of Related Literature

The following literature review touches on the highlights of prior literature on trends in social welfare spending, issues in measurement of state fiscal capacity, and determinants of state and local spending on social welfare, including state fiscal capacity, need for services, and political and institutional factors.

• 1. Trends in Spending on Social Welfare Programs

  • Researchers have tracked changes in spending over time. According to Census data, total real general expenditures on social welfare increased from about $2,000 to about $2,600 per capita from 1988 to 1997, a 30 percent increase. Almost half of the increase in state spending resulted from increased spending for social welfare. Merriman (2000a) found that this increase in social welfare spending was due primarily to growth in federal Medicaid expenditures.

    Boyd et al. (2003) analyzed state spending on social service programs other than Medicaid between state fiscal years (FY) 1995 and 1999 in 16 states (Arizona, California, Colorado, Connecticut, Louisiana, Maryland, Michigan, Minnesota, New York, Ohio, Oregon, Rhode Island, Tennessee, Texas, Virginia, and Wisconsin) and the District of Columbia and found that spending on cash assistance declined sharply. In contrast, state spending on child care and work support services increased in all study states and the District of Columbia. State spending on child welfare also increased in 14 study states and the District of Columbia.

    The reduction in state spending on cash assistance was generally consistent with the dramatic reductions in welfare caseloads. The caseload decline began in 1994, before welfare reform at the federal level was enacted in 1996. This decline accelerated after 1996, and, as of September 2003, caseloads were 54 percent lower than in 1996. These savings allowed states to undertake new programs designed to move people to work, improve child well-being, or accomplish other objectives of the welfare law.⁴ Boyd et al. also found that states with higher cash assistance benefits had greater cash assistance savings per person in poverty because they saved more per case that left the welfare roles. These high-benefit states generally had higher per capita income than the low-benefit states.

• 2. Measuring Fiscal Capacity

  • The term fiscal capacity can be measured several ways, although this term is generally used to represent a states potential to raise revenue and not the actual fiscal choices made. Common ways for measuring fiscal capacity include the following:

    • Per capita personal income (PCPI). This measure represents the total personal income of the states residents (e.g., wages and salaries, interest income, social security benefits, SSI, AFDC/TANF cash assistance and pensions, but not Food Stamps, housing vouchers, and EITC) divided by the states total population. PCPI is widely used to measure fiscal capacity because data are readily available and because it is a relatively good indicator of residents ability to pay taxes, which, in turn, can fund services. It is also used in determining the federal match for Medicaid reimbursement. One shortcoming of this approach is that it ignores the extent to which states can impose tax burdens on nonresidents.⁵ PCPI data are available from the Bureau of Economic Analysis for 1929 through 2001.
    • Representative tax system (RTS). To measure state tax capacity, the Advisory Commission on Intergovernmental Relations (ACIR) applies the average tax rate on income, consumption, and real property over all states to each states tax bases. The ACIR produced the RTS between 1962 and 1991.
    • Total taxable resources (TTR). This measure, which has been calculated by the U.S. Department of Treasury since 1992, captures a states ability to raise revenues. It is equal to the states Gross State Product increased by residents income earned out of state, federal transfers, and accrued capital gains less federal taxes paid and depreciation.

    Of the three measures, only the PCPI data are available from FYs 1977 through 2000, the period examined for this study. Generally, states that rank low on one measure also rank low on the other measures. However, some states are ranked differently. For example, Alaska is ranked the 17th highest state using the PCPI, the 3rd highest using the RTS, and the 5th highest using the TTR. These differences can be explained, for the most part, by the fact that a large portion of the income produced in Alaska is earned from oil and natural gas production (Compson & Navratil, 1997) by individuals residing outside Alaska.

• 3. Determinants of Social Welfare Spending

  • We hypothesized that three factors drive state spending on social welfare programs: fiscal capacity, need, and political and institutional factors. Prior literature has attempted to explain the connection between these factors and spending.

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