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In all realms of life citizens demand the greatest value they can get for the price they pay. Government is no exception. Citizens are constantly assessing the relationship between value and price as they judge their governments. If the value / price relationship improves they favor the work of government. If the value / price relationship worsens, that is, if the price rises too fast or if the value of services falls, citizens demand drastic action. Sometimes that takes the form of throwing out incumbents. Other times it becomes the basis for tax limitation legislation or a referendum.
Interestingly enough, while this thinking process goes on in the minds of citizens (often unconsciously) it almost never surfaces in the explicit thinking of those who run government or comment on it. That is because government managers and most observers focus entirely on the cost of government - its expenses. The focus on cost has obscured or ignored the issues of price and value. These are the issues that matter most to citizens.
Governments, through taxes fees and charges, use economic resources to provide services for citizens. Those taxes, fees and charges constitute the price of government. Since they are paid out of the economic resources of the community (its income), the price can be calculated as the sum of taxes, fees and charges divided by the total income of the community. The price represents the number of cents out of every dollar in the community committed to pay for government services.
POG = (Taxes + Fees + Charges) / Community Income
Measuring the price of government allows us to track the "burden" of government on the economy. It also reminds us that the price can go up or down in two ways. First, by increasing or decreasing government revenues. This has been the traditional focus. Second, by growing or shrinking the local economy. The connection between the health of the local economy and the price of government is crucial to reminding government managers and citizens alike that they have a common stake in making the economy as robust as possible.
The graph below tracks the federal government's revenue as a percentage of Gross Domestic Product (GDP) over the last 50 years. Note how it fluctuates within a relatively narrow band. When the price gets too high or too low it regresses back to the norm-almost as if there were a thermostat keeping it at an acceptable level. When the temperature drops to the bottom of the comfort zone, the democratic process signals the burner to kick in. When the temperature reaches the upper limit, the democratic process tells the burner to knock off.
The price of government does not exist in isolation. Citizens pay for government, food, clothing, housing, health care and all of their other other needs out of their income. In every case they want as much value for their dollar as possible. As the following graph shows over the last 30 years citizens have:
- Lowered the 'price' - the share of personal income - for food and clothing (while getting better quality in stores and eating more meals out of the home).
- Maintained the price for housing and transportation (while buying bigger and better homes, more reliable cars, and much more air travel).
- Raised the price of services and health care in response to changing needs and costs.
- Lowered savings - to pay for health, services and the deficit.
Government has not been exempt from these same pressures. Look again at how stable the price of government has been over the last 50 years. Within that price limit our government, among other things, built the interstate highway system, educated the baby boom generation, put a man on the moon, created Medicaid and Medicare, and won the Cold War. The challenge for government leaders, then, is to deliver more value every day for the price citizens have chosen to pay.
Ideally, calculating the price of government would involve simply adding up the locally generated taxes, fees and charges and dividing by the local gross gross economic product (comparable to the national GDP). Unfortunately there is no readily available information on local gross economic product. A good substitute is the aggregate personal income in the community. This is the sum of the income that individuals in the community derive from work, dividends, interest, rent and transfer payments (e.g. social security, Medicare, food stamps, etc). As such, aggregate personal income represents the broadest measure the "purchasing power" of citizens in the community out of which government services are purchased. (The graph below uses aggregate personal income to track the price of all governments in the US - federal, state and local - for the last 30 years.) Data on personal income is collected by the Bureau of Economic Analysis and reported for states, regions and counties. Another alternative is 'money income' which is calculated somewhat differently. Its focus is on cash received by individuals so it includes pension income and child support but excludes in-kind transfers (e.g. Medicare or food stamps.) Data on money income is collected by the Census Bureau and is most often reported as per capita income in cities and counties that can then be multiplied by population to get aggregate money income for the jurisdiction.
Finding the Data
State and Local Personal Income Data
The data
The personal income of a state, region and individual county government can be found on the Bureau of Economic Analysis' web page. Personal income summaries are found in section CAI-3.
Information on personal income is not available for cities, school districts or other local governments. For these jurisdictions money income will be a better measure. Information on money income can be calculated based on data on per capita income and population obtained from the Census Bureau. When these two pieces of information are multiplied they produce aggregate money income.
For comparisons over time it is best to review historical information going back at least 20 years in order to take account of several economic cycles.
The needed data should be available locally. For comparison purposes, the census bureau and often the state auditor collect and report data, though there is a time lag in reporting.
The first step is to determine what revenues to include and exclude.
The census bureau's measure of "General revenue from own sources" is the broadest measure.
At the County and Local level general revenue from own sources includes:
- Property taxes
- Other taxes (including local option)
- Licenses, Fees and Service charges
- Fines
- Sale and lease of property
- Other operating revenue
- Interest
Excluded are:
- Intergovernmental revenue/transfers
- Debt proceeds
Revenue data can usually be found in two places.
- Historical data is published by the Department of Commerce, Bureau of the Census in its reports on Government Finances. Information is posted on the Bureau's web site (http://www.census.gov/ftp/pub/govs/www/estimate.html)
- Additionally, State Auditors often collect and publish revenue and make it available on web sites.
The Calculation
Calculate the price of government by dividing the state's or county's revenues (minus intergovernmental revenues/transfers and debt proceeds) by its aggregate personal income. For individual cities or schools divide the revenue by the aggregate money income. For overlapping jurisdictions e.g. all the cities and schools within a county, or all the governments within a city divide the revenues by the personal income or the money income of the larger jurisdiction.
Check that the numbers used in the calculation are expressed in the same scale (e.g. $ millions) so that the resulting decimal is interpreted as cents per dollar (e.g. .012 = 1.2 cents per dollar of personal income).
Using the Price of Government
The price of government in a jurisdiction reflects the unique choices made about what services to provide, how to provide them, and how much to pay for them. There is substantial variation in the prices that governments have chosen. The tables that follow show the prices in 2000 for all states and the largest local governments in the country. In each case the price reflects that jurisdiction's choices about what is adequate, acceptable and competitive.
The price of government can be used to establish the target price in a jurisdiction based on an analysis of:
- The price in the jurisdiction over time - this will show trends and the community's norm.
- Other jurisdictions of similar size - this will show how other jurisdictions have combined the adequacy, competitiveness and affordability of their government services.
- Overlapping jurisdictions that draw their revenue from the same community - i.e. all the governments in a county, region or state - this will show the price of one jurisdiction in the context of the 'total' price for government paid by the community and the trends in the relative share of the price taken by each.
But be careful in making comparisons. One price is not better or worse. They are different mostly because of the choices being made about adequacy, affordability and competitiveness.
Once the target price of government is established it can be multiplied by a forecast of 'community' income to determine the overall revenue to be used in Budgeting for Outcomes to purchase the results that matter most to citizens.
The Price of Government for various juridictions
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