FIN 400 Week 3 Budgets, Spending and Assistance Programs Example

One Surplus, Three Proposals: Weighing Rebate Checks, a Larger State Earned Income Tax Credit and Child Care Aid Against a State's Recurring Budget

[Student Name]

University of Phoenix

FIN/400: Public Finance

Week 3 Assignment

[Instructor Name]

[Date]

The state, its budget and the proposals are composites written for a model paper; budget concepts and research findings come from the sources listed.

The legislature of a composite state closed its fiscal year with a $1.2 billion surplus, about 5 percent of its general fund budget. Most of it came from capital gains tax receipts that ran far above forecast and from federal pandemic aid that let the state delay some spending. Three proposals reached the governor. The first would mail a $300 rebate to every resident tax filer. The second would raise the state earned income tax credit from 10 percent to 30 percent of the federal credit. The third would fund child care subsidies for 15,000 more children of working parents. Before comparing what each proposal does for families, the state has to ask whether the money behind it will still be there next year. This paper answers that question first.

How the State Budget Is Built

The state's general fund pays for schools, Medicaid, prisons, universities and local aid, financed mainly by income and sales taxes. Much of it is effectively committed by formulas: school aid follows enrollment, and Medicaid follows caseloads and federal matching rules. A smaller share is discretionary and set each year. Capital projects are financed separately with bonds. Like nearly every state, this one must balance its operating budget each year, so a recurring cost added today must be matched by recurring revenue tomorrow (Gruber, 2022).

One-Time Money and Recurring Money

The surplus is mostly one-time money. Capital gains receipts swing with the stock market, and the delayed spending will come due. Budget offices treat such money as suitable for one-time uses: rebuilding reserves, paying down debt or funding projects with an end date. A permanent program funded from a temporary surplus creates a structural gap in the following year. That rule changes the comparison: the rebate is a one-time use, while the tax credit expansion and the child care subsidy are recurring commitments.

Costing the Proposals

The rebate would cost about $810 million once, based on 2.7 million resident filers. The tax credit expansion would cost about $190 million a year, since the current state credit costs about $95 million at 10 percent of the federal amount and the expansion triples it. The child care subsidy would cost about $165 million a year, or about $11,000 per child, close to the state's average subsidy rate for full-time care. Over five years, the two recurring programs would cost nearly $1.8 billion together, more than the surplus itself.

Targeting

The rebate goes to every filer regardless of income, so most of it reaches households that are not poor. The earned income tax credit reaches working families with low and moderate earnings, with the largest amounts going to parents. The child care subsidy reaches a narrower group, working parents with young children and incomes below an eligibility limit, but delivers a large benefit to each. Targeting matters because a dollar of aid matters more to a family with little income.

Work Incentives

Assistance programs can discourage work if benefits fall sharply as earnings rise. The earned income tax credit is designed to do the opposite in its phase-in range, where each dollar earned increases the credit, and research has linked its expansions to higher employment among single mothers (Gruber, 2022). Its phase-out range does reduce the reward for extra earnings, though gradually. Child care subsidies also support work, since they are paid only while parents work or study. The rebate has no effect on work either way.

Long-Run Effects

The strongest evidence on long-run effects concerns help that reaches children. Hoynes et al. (2016) studied the county-by-county rollout of the food stamp program in the 1960s and 1970s and found that access in early childhood reduced the incidence of metabolic syndrome in adulthood and, for women, increased economic self-sufficiency. Hendren and Sprung-Keyser (2020) compared more than 130 policies using the marginal value of public funds and found that many direct investments in children's health and education return much of their cost through later tax revenue and reduced spending, with some paying for themselves. Their framework favors programs that reach children over untargeted transfers.

A Recommendation the Budget Can Carry

The state should use most of the surplus for one-time purposes: $500 million to the rainy day fund, which stands below the level its own policy recommends, $300 million for a smaller targeted rebate to filers below the median income and $400 million to pay cash for capital projects the legislature had planned to finance with bonds, which avoids decades of interest. It should fund the earned income tax credit increase in part, raising the credit to 20 percent of the federal amount at a recurring cost of about $95 million, and phase in the child care subsidy over three years at a recurring cost reaching $110 million. Together the recurring commitments of about $205 million a year fit within projected revenue growth of 2.5 percent, which adds roughly $600 million a year to the general fund.

How the State Would Measure Results

A recommendation is easier to defend when the state says in advance how it will know whether the money worked. For the tax credit increase, the revenue department can report each year how many filers claimed the larger credit, the average amount by income band and employment rates among single parents compared with neighboring states that did not expand their credits. For child care, the human services agency can track the number of children served, the share of subsidized slots filled, the waiting list and parents' employment twelve months after enrollment. The rainy day fund needs only one measure: its balance as a share of general fund spending against the 8 percent target in state policy. Publishing these figures alongside the budget keeps the recurring programs under review rather than letting them run on autopilot.

Risks

Revenue growth could fall short in a recession, and the recurring programs would then compete with schools and Medicaid. The rainy day deposit reduces that risk. The child care expansion depends on providers accepting subsidy rates, which may need to rise.

Conclusion

A state surplus tests budget discipline more than generosity. Matching one-time money to one-time uses, and new recurring programs to recurring revenue, protects future budgets. Within that discipline, the evidence favors targeted help for working families with children, delivered through the earned income tax credit and child care, over an untargeted rebate.

References

Gruber, J. (2022). Public finance and public policy (7th ed.). Worth Publishers.

Hendren, N., & Sprung-Keyser, B. (2020). A unified welfare analysis of government policies. The Quarterly Journal of Economics, 135(3), 1209-1318. https://doi.org/10.1093/qje/qjaa006

Hoynes, H., Schanzenbach, D. W., & Almond, D. (2016). Long-run impacts of childhood access to the safety net. American Economic Review, 106(4), 903-934. https://doi.org/10.1257/aer.20130375