10.4. What are the Sources of

Government Income?

As Table 10-2 also shows, taxes are the most impor­tant source of income for the federal government. Personal income taxes are the single-largest source of funds. They provide almost 45 cents of each dollar of revenue. Taxes on corporations provide about 10 cents of each revenue dollar. Excise taxes yield 4 cents. An excise tax is one levied on the manufac­ture or sale of a specific item, such as a tax on per­fume. Social insurance receipts, used to finance the Social Security program, come largely from payroll taxes on wages and salaries. These provided the sec­ond-largest source of income to the federal govern­ment in 1994, about 37 cents of each revenue dollar.

Estate and gift taxes, customs duties, and miscella­neous items account for 4 cents of the revenue dol­lar. Estate and gift taxes are paid by those receiving very large inheritances or gifts. Customs duties are taxes on imports.

10.5. State And Local Finances

The cost of governing cities and states has increased dramatically. In 1980 expenditures were about $434 billion. Today they have more than doubled to over $1 trillion. Taxes are the principal source of income to state and local governments. Of these, sales taxes account for about half of all state tax revenue. You pay sales taxes "a few cents at a time" on most of your purchases. Most states and communities col­lect sales taxes of about 4 to 7 percent. These pen­nies add up to millions of dollars. Income taxes are the second most important source of state revenue. Individuals in most states are required to pay a per­centage of their income to the state in taxes. Among local governments, the property tax provides the most revenue. Property taxes are usually based on the value of real estate, land, and buildings.

Another important source of state and local revenue is the federal government. As 10-3 shows, about 14 cents of every state and local budget dollar came from the federal government. Federal aid to states is usually in the form of a grant-in-aid. Grants-in-aid typically have two conditions attached to them-they must be used for a particular purpose, and the state or local government must share part of the cost. Over the years, the federal government has used grants-in-aid to involve state governments in programs it deemed worthwhile, like mass transit, highway, and social welfare programs.

Recently, the federal government also has made block grants to state and local governments. Block grants have no strings attached; state and local gov­ernments are free to spend the grants without pro­viding matching funds.

Replacing grants-in-aid with block grants has gener­ated some political controversy. Supporters of block grants like them because they give state and local governments more flexibility. Too often, they argue, Washington bureaucrats, with little knowledge of local needs, set guidelines that lead to wasteful spending.

Opponents, on the other hand, argue that some states would never provide for the needs of their poor, unemployed, or minorities unless the federal government designated funds for them.

States and communities spend most of their money on education. The next largest share goes to help those in need of financial help, housing, health care, and hospitalization.