Census data shows, on average, state and local government spending as a percentage of personal income rose sharply between 1962 and 1977, but then flattened out in the years leading up to 2020. However, there is substantial variation across jurisdictions: while some states have seen little overall change in the percentage of income devoted to government spending since 1962, others experienced dramatic growth.

The animation below shows how state and local government spending have evolved in all fifty states and DC since 1962. Spending data comes from the Census Bureau’s Annual Survey of State and Local Government Finances, and includes expenditures of federal funds as well as own-source revenue. State personal income data comes from the Bureau of Economic Analysis. We used personal income for the second quarter of each year, since June 30 is the most common fiscal year end date for U.S. state and local governments.

In nominal terms, government spending has skyrocketed over the last sixty years. Evaluating spending as a proportion of a national income measure (like personal income or GDP) over time corrects for inflation and economic growth.

But the notion that government spending should remain a constant proportion of personal income is open to debate. Some essential industries decline as a percentage of income as our society grows richer. For example, an analysis of USDA data shows that food expenditures (both at home and away from home) fell from 16 percent of personal income in 1962 to 10 percent in 2021. Over the same period, expenditures on “clothing, footwear, and related services” fell from 7 percent to 2 percent of personal income.

State and local government spending (including their expenditures of federal funds) in the median state rose from 15.92 percent in 1962 to 20.50 percent in 1977. For 2020, the most recent year Census data is available, the median ratio was little changed from 43 years earlier at 20.67 percent.

The runup in state and local spending during the 1960s and 1970s is linked to the inception and rollout of Great Society programs under President Lyndon Johnson. During this period, Congress established Medicaid, a state-administered program that provides health coverage to individuals on low incomes. It also expanded Aid to Families with Dependent Children and the food stamp program (now known as the Supplemental Nutrition Assistance Program).

Once Medicaid was fully implemented and some level of cost control was put in place, the program stabilized as a percentage of personal income in many states. But in the District of Columbia, Medicaid spending has continued to grow rapidly, reaching $3.4 billion in 2022, which is over $5,000 per resident. One cost driver is high enrollment: as of late 2022, 43 percent of DC residents were enrolled in the program (or its sibling, the Children’s Health Insurance Program), a proportion higher than any of the fifty states.

DC also has relatively high educational costs. In 2020, DC’s per pupil cost of public education (excluding capital expenditures) was higher than every state except New York and 69 percent above the national average.

New York is among the states that saw the most rapid growth of spending relative to revenue. Aside from high educational costs per pupil, it also has a high level of Medicaid dependency with over 37 percent of Empire State residents on either that program or CHIP. Another challenge for New York, relative to other large states, is slow personal income growth. This, in turn, is related to the state’s relatively slow population growth. In the 1960 Census, New York was still the nation’s most populous state; it has now fallen to fourth.

Alaska also has relatively high Medicaid enrollment and costs. But the main cause of its surge in state spending after 1977 was exploitation of the Prudhoe Bay Oil Field. A gusher of energy revenue inspired legislators to implement a costly industrial policy, increase transfer payments to individuals, and raise public employee compensation. A drop in oil prices in the 1980s constrained personal income growth, contributing to a further rise in the spending to income ratio. Since peaking at over 55 percent in 1987, the ratio has been trending downward.

Two other states that have seen relatively rapid spending growth relative to personal income growth are New Mexico and Delaware. New Mexico’s Medicaid dependence is second only to DC’s with about 42 percent of the state’s population currently enrolled. Medicaid spending of $8.4 billion is roughly 8 percent of personal income. Delaware’s Medicaid costs are less of an issue, and it does not appear that any one factor is driving cost growth in the First State. In the 1960s and 1970s Delaware experimented with big government, raising marginal income tax rates to over 18 percent (a level unmatched anywhere back then or ever since). But these confiscatory taxes were rolled back under Governor Pete Dupont in the late 1970s.

With some notable exceptions discussed here, it appears that interstate competition for residents and the need to balance budgets are keeping a lid on state and local spending, at least as it relates to state personal income. But whether state and local governments need to grow proportionately to their economies remains a debatable proposition.