1. STATE GOVERNMENT REVENUE SOURCES The largest source of state revenue consists of intergovernmental revenue —funds collected by one level of government that are distributed to another level of government for expenditures States receive the majority of these funds from the federal government to help fund the state’s expenditures for welfare, education, highways, health, and hospitals. Employee Retirement State employees contribute to their own retirement funds.

2. Sales Taxes A sales tax is a general tax levied on consumer purchases of nearly all products. Individual Income Taxes All but seven states—Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming—rely on the individual income tax for revenue. The tax brackets in each state vary considerably, and taxes can be progressive in some states and proportional in others Other Revenues States rely on a variety of other revenue sources, including interest earnings on surplus funds; tuition and fees collected from state-owned colleges, universities, and technical schools; corporate income taxes; and hospital fees.

3. STATE GOVERNMENT EXPENDITURES some states have a balanced budget amendment— a constitutional provision requiring that annual spending not exceed revenues. Intergovernmental Expenditures the largest category of state spending is intergovernmental expenditures— funds that one level of government transfers to another level for spending. Public Welfare The second largest category of state expenditures is public welfare. These payments take the form of cash assistance, payments for medical care, spending to maintain welfare institutions, and other welfare expenditures

4. Higher Education In most states, the tuition that students pay covers only a portion of higher education expenses. Employee Retirement Many states have their own insurance and retirement funds for state employees. The money in these funds is invested until employees retire, become unemployed, or are injured on the job.

5. LOCAL GOVERNMENT REVENUE SOURCES Local governments receive the largest part of their revenues—slightly more than one-third—in the form of intergovernmental transfers from state governments. Property Taxes The second-largest source of revenue for local governments is the property tax —a tax on tangible and intangible possessions The property tax that raises the most revenue is the tax on real estate. Sales Taxes Many cities have their own sales taxes

6. Utility Revenues The fourth-largest source of local revenue is the income from public utilities that supply water, electricity, sewerage, and even telecommunications. Because of economies of scale, many of these companies are natural monopolies. Demand-Side Policies Keynesian Economics fiscal policy —the federal government’s attempt to influence or stabilize the economy through taxing and government spending. Fiscal policies are derived from Keynesian economics, an approach designed to lower unemployment and raise output by stimulating aggregate demand

7. John Maynard Keynes put forth these theories in 1936 and dominated the thinking of economists until the 1970s. Impact of Demand-Side Policies Keynes concluded that the problem during the Great Depression was a lack of spending. His solution was relatively simple. Only the government was big enough to step in and offset changes in investment-sector spending. Automatic Stabilizers Another key component of demand-side policies is the role of automatic stabilizers, programs that automatically trigger benefits if changes in the economy threaten income.

8. One important automatic stabilizer is the progressive income tax. For example, if your father loses his job or works fewer hours because of cutbacks and earns less, he may end up in a lower tax bracket, paying fewer taxes. That leaves him with more money to spend than he would have otherwise had. unemployment insurance —insurance that workers who lose their jobs through no fault of their own can collect from individual states for a limited amount of time. Most entitlements —broad social programs that use established eligibility requirements to provide income supplements—function as automatic stabilizers.

9. SUPPLY-SIDE POLICIES Goals of Supply-Side Policies Supply-side policies target producers, who are also suppliers, to stimulate their output, and therefore provide jobs Supply-side theory became a political force after conventional demand-side economics seemed to falter in the 1970s The change came in 1981 when Ronald Reagan was elected president. A Smaller Role for Government A key goal for supply-siders is to reduce the economic role of the federal government Lower Federal Taxes Lower tax rates allow individuals to keep more of the money they earn, which encourages them to work harder

10. During the 1980s, optimistic supply-siders even argued that lower individual income tax rates would stimulate the economy so much that the government could collect even more taxes than before. This idea is expressed mathematically in the Laffer curve —a possible relationship between federal income tax rates and tax revenues. Deregulation Supply-siders also have sought deregulation, relaxing or removing government regulations that restrict the activities of firms in certain industries.