The Government Sectors

A purpose of the SAM is to analyze the dynamics of California state revenue. However, the SAM must account for government expenditure in order to trace any feedback effect to state revenue from changing demand for goods, services, and factors as expenditure changes. Further, some elements of government are mandated to change their expenditures as their revenue changes (such as Cal Trans) and the State’s distribution of expenditure changes as its General-Fund revenues change (Proposition 98).

As a result of these considerations, government sectors must be organized so that both revenue flows and expenditure flows can be traced explicitly. The major government revenues are taxes, sales of services, and intergovernmental transfers. The major government expenditures are the purchase of goods and services, transfer payments to households, wages, and intergovernmental transfers. Federal, state, and local governments all engage in revenue collection and expenditure, and all three levels of government are represented in SAM. California state government revenue and taxation receive the greatest scrutiny while federal and local governments are held primarily exogenous to the model.

For the SAM, 36 government sectors representing federal, state, and local governments have been created. This sectoring allows the modeler to trace explicitly the major government expenditure and revenue flows. A description of the criteria and sectoring for each level of government follows. The sectoring of the government sectors is nearly the same as in the original SAM; the change from the original SAM is the inclusion of additional detail on State government.

Federal-Government Sectoring

In order to model the federal government for the purposes of SAM, seven federal government sectors are created: five to account for federal government revenue flows and two to account for federal government expenditure flows. The primary sources of revenue for the federal government are personal income tax, corporation income tax, social insurance taxes, excise taxes, estate and gift taxes, and customs duties.

Federal government expenditure is divided into two sectors to separate the pattern of defense expenditures (goods and service acquisition from particular sectors and rental of labor) from the rest of the federal government’s expenditures in California (transfer payments to individuals, intergovernmental transfer payments, purchases of goods and services, and factor rentals).

Note that most elements of the federal government are exogenous to California. Taxation rates, purchases of goods and services, and rental of factors are fixed in real terms, though nominal expenditures are allowed to change in response to prices. Transfer payments to individuals (Social Security and federal pensions) are fixed in per-household nominal terms with the number of households receiving these held at a fixed fraction of non-working households derived from analysis of tax sample data. The federal government sectors are described in detail below.

SOCIAL SECURITY (FTSOC)

This is the social-security component of federal revenues. The primary source of payments made by industries, households, and other governments to FTSOC is DOF personal income data estimates. The primary source of the distribution of payments from FTSOC is FTB’s stratified tax sample for year 2000.

PERSONAL INCOME TAX (FTPIT)

This is the personal income tax component of federal revenues. Data for federal personal income taxes are from Internal Revenue Service (IRS) data stratified by FTB staff and made available to DOF. These data are allocated according to SAMs household types. Discrepancies between federal and state tax tables are accommodated by applying an overall correcting constant to each household type’s tax calculation to return estimates of actual taxes received. It is important to note that the model explicitly accounts for the deductibility of state and local taxes from federal incomes subject to taxes. The FTB-supplied average rates of itemized deductions are used for each household type.

CORPORATION TAX (FTPRO)

This is the corporation tax component of federal revenues. Corporate Profit Tax (FTPRO) is taken from the IRS 2002 Data Book, updated by 9%, and then allocated to Payments to Capital line of the Industry I/O matrix.

DUTIES (FTDUT)

Non-sector specific excise tax (FTDUT) was allocated on Payments to Capital for goods producing industries, only. This is the import duty tax component of federal revenues. Import and export data for regional economies are quite poor in detail. One major problem with the data is the lack of ability to distinguish which items are simply passing through the state en route to a final destination.

MISCELLANEOUS (FTMSC)

This is the miscellaneous tax component of federal revenues. All other federal taxes are grouped into the miscellaneous component. Of this aggregation, excise taxes on tobacco, alcohol, and liquid fuels are the major taxes. The others are distributed across the rest of the industrial sectors by their percentage share of domestic demand.

FEDERAL NONDEFENSE SPENDING (FSNON)

This sector accounts for federal non-defense spending and receives its income from the five federal revenue sectors. Its expenditures are of two kinds: purchases of goods and services combined with rentals of factors and intergovernmental transfers to FSDEF (defense spending), California expenditure units, and local expenditure units. Published summaries of local government revenue and expenditure combined with the State’s budget summary identifies the destination of all but FSDEF transfers. The FSDEF transfers are made equal to FSDEF expenditures.

While not fully implemented at the federal level, it is assumed that all intergovernmental transfers from the federal government to California and local governments are block grants[1]. Given the indirect relationship between liquid fuels taxes and transfers for transportation and the thrust at the federal level to turn all health and human services into block grants, this seems a reasonable assumption. In making this assumption, any connection between economic activity in California and federal grants to California and local governments is ignored.

FEDERAL DEFENSE SPENDING (FSDEF)

This sector accounts for federal defense spending. An intergovernmental transfer from FSNON to FSDEF is established to equal the total of expenditures.

State Government Sectoring

In order to model the California State government for the purposes of DRAM, 27 state government sectors are created: Twenty to account for government revenue flows and seven to account for government expenditure flows.

State revenues are collected into three types of funds: the General Fund, Special Funds, and Non-governmental Funds. The General Fund is the largest government accounting unit. Most taxes and fees that are collected without a specific expenditure allocation are deposited into the General Fund. Revenue collected from special taxes, fees, or revenue designated to a specific expenditure destination are collected through Special Funds. Non-governmental funds are managed by the State of California but are off-budget items. Two non-governmental funds (unemployment/disability insurance and workers’ compensation) are explicitly modeled in SAM. State revenues are also augmented by federal funds. These are a source of income for California but are counted as inter-government transfers. All California state government revenue details are extracted from the California State statistics.

The units for California revenue and expenditure are best summarized in table form, with the first table identifying the sources of revenues and the second, how expenditures are grouped in SAM.

Model Sector	Major departments	Major sources of revenue	Expenditure
CSTRA	Cal Trans, CHP	Highway Users Taxes Motor-Vehicle Fees	Engineering Services Construction Transfers to Local Gov’ts
CSCOR	Youth and Adult Correction Agency	General Tax Revenue	Labor Goods & Services
CSK14	Education	General Tax Revenue	Transfers to Local Gov’ts
CSUNI	Higher Education	General Tax Revenue	Labor Goods & Services
CSWEL CSHTH	Health and Welfare	General Tax Revenue Transfers from USA	Transfers to Households and Local Gov’ts
CSOTH	Legislative, Judicial, Executive, State and Consumer Services, Business, Housing, Trade and Commerce, Resources, General Government	General Tax Revenue Special Funds subvened to Local Governments	Rental of Factors Goods & Services Transfers to Local Gov’ts

One revenue account, CGENF, deserves special mention. This account receives transfers from revenue units according to proportions reported in the Budget Summary. It transfers its revenues to expenditure units according to three guiding principles. The first is the application of Proposition 98 in either its Test 2 or Test 3 forms. When Test 2 is applied, a transfer from CGENF to LSK14 education is made in amounts proportionate to previous transfers updated by changes in average daily attendance and per-capita personal income. Test 3 mandates a transfer in proportion to changes in average daily attendance and per-capita General-Fund revenues. Without belaboring the details of Proposition 98, the choice of Test 2 or 3 is more of a public choice decision than an economic one. The computable general equilibrium model that was built from this SAM accounts for these flows and can accommodate either decision.

For each expenditure unit, published summaries of expenditures are consulted to obtain the most precise distribution of these expenditures across SAM’s industry, factor, and household sectors.

Local Government Sectoring

Because local governments are exogenous to our model, their level of detail in SAM is minimized. As with federal units, the major sources of local revenue and expenditures from published reports (relying generally on the series of Financial Transactions Concerning... annual reports issued by the Controller’s Office for Cities, Counties and other local governmental units) are identified. The local revenue sources fall into four categories: property taxes, fees, miscellaneous revenues, and intergovernmental transfers from the federal government and California. The sectoring of local government revenue agencies reflects these sources. Local government expenditure agencies are sectored according to expenditure on transportation, corrections and legal affairs, education, health and welfare, etc. A description of each of the local government sectors is given below.

LOCAL PROPERTY TAX (LTPRP )

Many local entities, such as counties, cities, and special districts, have the legal authority to levy taxes on certain real property. With the advent of tax reform in the 1970s (such as Proposition 13), these revenues have fallen to about a quarter of local government revenues.

Since the taxed value of property has a limited relationship to market prices and since no data appear to exist to properly identify the value of real estate by industry or household type, the overall level of property tax revenue by all local governments is identified and treated as a per-working household tax and as an excise tax on business. The per-household rate is set proportionate to incomes in the base data but not allowed to vary in the model from these levels.

LTSAU GOVERNMENT LOCAL TAX SALES AND USE

LTFMS GOVERNMENT LOCAL TAX MISCELLANEOUS ON FIRMS

LTHHS GOVERNMENT LOCAL TAX MISCELLANEOUS ON HOUSEHOLDS

LOCAL MISCELLANEOUS (LTMSC)

Local governments operate some utilities at a profit, generate profits from other business-type activities, and have other minor sources of income. While not a major source of local governmental revenues, these are included as a separate “taxing” authority of local governments.

LOCAL TRANSPORATION (LSTRA)

Transportation is a key element of expenditure at the local level. Other sources of revenue account for only about one-half of the revenue for transportation.

LOCAL CORRECTIONS (LSCOR )

Local Corrections, including courts, are established to reflect the State’s pattern of expenditures.

LOCAL KINDERGARTEN THROUGH 14 (LSK14 )

The LSK14 expenditures total over $80.73 billion. Approximately one-half of these expenditures are funded by California intergovernmental transfers that are guided by Proposition 98. The remainder of revenues is from local property taxes and other local revenues.

LOCAL WELFARE (LSWEL)

LOCAL OTHER (LSOTH)

The remainder of local governments is aggregated into this local other grouping. Policing, Fire, Utilities, Refuse and Parks and Recreation form the majority of this sector. Revenue and expenditure not specifically allocated to other local governments and identified in published reports is allocated to LTMSC.

[1]A block grant is an unrestricted federal grant.

Sector	Name
CTHHS	VARIOUS HOUSEHOLD TAXES
CTBOZ	ALCOHOL TAXES
CTCIG	CIGARETTE TAXES
CTHOR	HORSE RACING
CTEST	ESTATE TAXES
CTTRL	TRAILER FEES
CTLIC	MOTOR VEHICLE LICENSE FEES
CTDIE	DIESEL FUEL TAXES
CTREG	MOTOR VEHICLE REGISTRATION FEES
CTMSC	MISCELLANEOUS
CTINS	INSURANCE GROSS PREMIUM TAX
CTGAS	GASOLINE FUEL TAXES
CTSAU	SALES AND USE TAXES
CTBAC	BANK AND CORPORATION TAX
CTLAB	LABOR TAXES UI AND WORKERS COMP
CTPIT	PERSONAL INCOME TAX
CTRGU	REGULATORY LICENSES AND FEES
CTSVC	SERVICES TO THE PUBLIC
CTPAM	USE OF PROPERTY AND MONEY
CGENF	GENERAL FUND