UNITED STATES OF AMERICA

The United States is a federal republic composed of 50 federated states. It also oversees over five permanently inhabited, unincorporated territories: American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands. The country has an elected head of state, the President, and a bicameral legislature composed of the Senate and the House of Representatives. The 435 voting members of the House of Representatives represent congressional districts proportionally to the population of the states. In the Senate, the 100 seats are occupied by two members of each of the 50 states, directly elected for six years, regardless of their size. The Senate has full legislative powers and an absolute veto over all legislation. The president is elected indirectly by an Electoral College of 538 electors. Each state has an entitled allotment of electors, which equals the numbers of members in the Congressional delegation. The capital, the District of Columbia, is allotted the number of electors that it would have if it had congressional representation. Territories have neither electors nor representatives in the House of Representatives or the Senate.

The United States has a three-tier system of subnational government made up of state governments, counties, and municipal governments. The 1787 Constitution and Bill of Rights developed concepts of federalism based on dual sovereignty of the federal government and the states (Art. 4, 5 and 6). The 10^th amendment of the Constitution defines the balance of powers between the federal government and the states, and specifies that all powers not specifically attributed to the federal level remain with the states. Each of the 50 states and five territories are headed by governors, who are directly elected for four-year mandates (except for the states of New Hampshire and Vermont). The federal capital, the District of Columbia, is neither a state nor a territory, and is governed by a mayor and council, with oversight from Congress. Governors serve as both chief executive officers and commanders-in-chief. Every state (except Nebraska) has a bicameral legislature, made up of an upper and a lower house.

The US has a highly decentralised election administration system, with variations across and within states. Local governments are not formally recognised in the federal Constitution as a separate order of government. They belong to the states and their types and structure vary according to their state’s constitution or legislation, from counties to cities, townships or villages. Depending on the state, local governments can be governed by general law (Dillon’s Rule), or they may be allowed to have their own charters, which consist of unique sets of laws that form the legal foundation of the local system. Even though chartered cities and counties are still subject to state laws, they are more autonomous than others regarding local laws and regulations. Some states allow local governments to adopt a charter on their own, whereas in others the state legislature directly grants charters to municipalities. All general-purpose local governments, including counties and municipalities, have elected representatives. Elections for general-purpose local governments are usually administered at the county level.

The vast majority of local governments operate on one of two governing models: a mayor-council system or a council-manager system. Under the mayor-council system, voters elect both a mayor and members of the city council. The city council performs legislative functions and the mayor the executive functions. In a council-manager system of government, either the members of the city council are elected by voters along with a mayor who presides over the council, or the voters elect members of the city council and the mayor is chosen from among them. In either case, the city council will then appoint a city manager to carry out the administrative functions of the municipal government.

Most intergovernmental relations take place through ad hoc and short-lived intergovernmental fora, committees, task forces and sectorial working groups. The states lobby the federal government via their associations. Among others, the Intergovernmental Policy Advisory Committee (IGPAC) provides advice on trade policy matters of importance to state and local governments. The National League of Cities, created in 1924, represents US cities, towns, and villages along with 49 state municipal leagues. With over 2000 member cities, it plays a role in convening organisations, support networks, and representatives in federal affairs. At the state and local levels, some states have created Advisory Commissions on Intergovernmental Relations (ACIR) such as Connecticut, or a Local Government Advisory Commission (as in Massachusetts).

TERRITORIAL ORGANISATION
MUNICIPAL LEVEL	INTERMEDIATE LEVEL	STATE LEVEL	TOTAL NUMBER OF SNGs (2017)
35 748 municipalities and townships	3 031 counties	50 states
Average municipal size: 9 135 inhabitants
35 748	3 031	50	38 829

OVERALL DESCRIPTION: The United States federal structure is composed of 50 state governments, 3 031 counties at the intermediary level and 35 748 municipalities (according to the latest census of state and local governments from 2017). States determine their own systems of local government, including their number, territorial organisation and powers. In practice, there are 50 different systems of local governments in the US, one for each state.

Additionally, there are 51 296 special purpose governments, which include special district governments and independent school districts.

STATE LEVEL: The federal entities consist of 50 states. States differ in population size with California being the most populous state (39.237 million inhabitants in 2021, i.e. 12% of the US population), and Wyoming the least populous (578 803 inhabitants, i.e. less than 0.2% of the US population) while the average size is 6.638 million inhabitants, in 2021. With the exception of the federal capital, the District of Columbia, GDP per capita levels are relatively similar across US states in comparison with other OECD countries, as measured by the ratio of top 20% over bottom 20% of regions. However, regional disparities, in terms of GDP per capita, have slightly increased over the last 20 years.

INTERMEDIATE LEVEL: Counties were originally created to serve as administrative arms of state government, performing state-mandated duties. Their role was strengthened as urban populations began to spread beyond city boundaries, and county governments started to be devolved greater autonomy from the states. Organised county governments are found in every state but Connecticut, Rhode Island, and the District of Columbia.

MUNICIPAL LEVEL: Municipalities have population thresholds that vary according to each state. Towns and townships exist in less than half of the states, located in areas that are not incorporated as municipalities, and typically have more limited powers. The distinction between towns and cities is primarily based on population size, as townships were established to govern areas without a minimum population concentration. The Census Bureau’s 2020 population estimates for cities and town noted that out of the 19 500 incorporated municipalities in the United States, roughly 76% (or 14 820) had a population of less than 5 000 inhabitants, while just 4% (780) had a population greater than 50 000 inhabitants.

OTHER ADMINISTRATIVE DIVISION AT THE SUBNATIONAL LEVEL: Besides general-purpose subnational governments, there are numerous types of elected special-purpose subnational governments in charge of providing governmental services, sometimes at the scale of several municipalities (inter-municipal cooperation). The main ones, recognised by the Census Bureau, are school districts and special district governments such as transport districts, fire districts, and water districts. They are governed by a board, with members either elected by the public or appointed by the states, counties, municipalities, or townships forming the special district. They receive funds from federal, state and local sources.

The United States also comprise subnational administrative divisions, overseen by the federal government including: 14 territories in the Caribbean Sea and Pacific Ocean, among which five commonwealth territories are permanently inhabited: American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands; 326 Indian reservations, managed by Native American tribes recognised by the federal government; and the Federal District of Columbia. The latter (Washington, D.C.) is the capital of the United States and the seat of the federal government. As the U.S. Constitution provided for a federal district under the exclusive jurisdiction of the U.S. Congress, the District is not a part of any state. Despite the existence of a locally-elected mayor and council since 1973, the Congress maintains supreme authority over the city.

HORIZONTAL COOPERATION: Inter-municipal cooperation takes place through special-purpose governments; but also through formal shared service arrangements that are usually led by state governments. They are sometimes based on state legislation or dedicated shared services programmes. Cooperation between municipalities at the scale of metropolitan areas is promoted by state governments but also by the Federal government, which from 1960 encouraged inter-municipal cooperation in major cities to deal with problems, especially transport-related issues, that seemed relevant at the metropolitan level. It supported the creation of two major cooperation arrangements in several US cities: the Councils of Governments (COG) and the Metropolitan Planning Organizations (MPO). They bring together local government institutions in the field of metropolitan planning and studies and regional policy exchange. Funded by the federal government, these entities are also responsible for allocating federal subsidies to public transport. In the 1980s, the federal government continued to support these bodies using environmental problem to justify its intervention. Gradually, the COGs (also called “metropolitan councils” or “regional councils”) and MPOs therefore gained skills and resources. As of 2021, there are 420 MPOs in the United States.

Powers specifically granted by the Constitution to the federal government include the power to declare war, to collect taxes, coin and borrow money, make treaties with foreign nations, and regulate commerce between the states. According to the Tenth Amendment to the U.S. Constitution, “the powers not delegated to the United States by the Constitution nor prohibited by it to the states, are reserved to the states respectively, or to the people.” These reserved powers, often called the police powers, allow states to legislate and regulate to protect the health, safety, and morals of citizens.

Typically, states are responsible for economic development, education, intra-state commerce, the state police force, state parks, economic affairs, energy, etc. They also exercise full control over local governments within their jurisdiction. Although the U.S. Constitution appears to make the division of powers between the federal governments and the states clear, the reality is different. In practice, many powers belonging to the federal government are also shared by state governments (concurrent powers), such as taxing, borrowing, and public welfare.

The powers of counties arise from state law and vary widely, from almost no powers to a large range of responsibilities, including public education, social services, transport, etc. In between these extremes, counties have a moderate scope, which typically includes courts, public utilities, libraries, hospitals, public health services, parks, roads, law enforcement, and jails.

Overall, counties and municipalities are in charge of a large array of responsibilities related to social services, local roads and economic development, community services and the provision of basic services. School districts are responsible for elementary and secondary education while special districts are active in various areas (hospitals, water and sewerage, housing, public transportation, airport districts, fire protection, etc.).

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	State level	Intermediate level	Municipal level
1. General public services (administration)	Civil registries; State criminal law; Prisons; Issuing licences; Organisation and control over local governments	Internal administration; County courts; County jails	International administration; Local ordinances; Municipal courts
2. Public order and safety	State police; Motor vehicle regulation	Law enforcement	Local police and fire protection; Traffic control
3. Economic affairs / transports	State economic development; Intra-state commerce; Highways; Railways; Airport; Energy	County roads; County economic development	Local economic development; Public transportation; Local roads
4. Environment protection	Environmental protection; State parks;	Parks	Green areas and parks; Sanitation and waste disposal
5. Housing and community amenities	Water resources management; Zoning law	Public utilities	Local land use and zoning; Building regulations; Housing services; Urban development; Water utilities; Street lighting
6. Health	Health	Public hospitals; Health services	Emergency medical services
7. Culture & Recreation		Libraries	Recreation and libraries; Stadiums
8. Education	Higher education
9. Social Welfare	Income support (cash and in-kind, particularly health care for the poor through Medicaid)	Income support and social services

Scope of fiscal data: At state level: 50 state governments; state temporary disability insurance systems; state workers’ compensation systems; At local level, general purpose governments, special district governments, public school systems. Note: Subnational finance data for the United States are provided only in an aggregated and consolidated manner, without distinction between state and local governments.

SNA 2008

Availability of fiscal data: Medium

Quality/reliability of fiscal data: High

GENERAL INTRODUCTION: The federal government’s fiscal powers are defined by the US Constitution (Art. 1, Section 8). The Constitution, however, does not clearly define the fiscal roles and relationships of the federal and state governments. The definition and control of local government fiscal policy is devolved to the states. Overall, subnational governments have large autonomy regarding their fiscal policy, with few limitations imposed by the federal constitution, despite a growing influence of the federal government over time. At local level, local fiscal autonomy differs markedly from one state to the next. In some states, local governments are under strict fiscal constraints while in others, large local governments may have considerable discretion to build their own financing systems.

This high degree of decentralisation generates wide fiscal disparities among states and local governments that are not fully compensated by weak intergovernmental transfer schemes. State and local government finances were severely impacted by the 2008-09 economic crisis, partly due to the strict balanced budget rules applied to subnational governments, and to their heavy reliance on specific sources of revenues (such as the property tax for many municipalities). In the decade since the economic and financial crisis, the fiscal situation of states and municipalities had been slowly improving but faced a major setback due to the COVID-19 pandemic which caused a concurrent increase in expenditures and steep decline in subnational government revenues, particularly sales taxes and user charges and fees.

Subnational, state and local government expenditure by economic classification
2020	Dollars PPP / inhabitant			% GDP			% general government			% subnational, state and local government
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total expenditure	12 027	-	-	19.0%	-	-	39.7%	-	-	100%	-	-
Inc. current expenditure	10 738	-	-	16.9%	-	-	38.4%	-	-	89.3%	-	-
Compensation of employees	4 678	-	-	7.4%	-	-	75.9%	-	-	38.9%	-	-
Intermediate consumption	2 748	-	-	4.3%	-	-	67.5%	-	-	22.9%	-	-
Social expenditure	2 453	-	-	3.9%	-	-	19.2%	-	-	20.4%	-	-
Subsidies and current transfers	2	-	-	0.0%	-	-	0.1%	-	-	0.0%	-	-
Financial charges	857	-	-	1.4%	-	-	34.6%	-	-	7.1%	-	-
Others	0	-	-	0.0%	-	-	0.0%	-	-	0.0%	-	-
Incl. capital expenditure	1 289	-	-	2.0%	-	-	55.2%	-	-	10.7%	-	-
Capital transfers	0	-	-	0.0%	-	-	0.0%	-	-	0.0%	-	-
Direct investment (or GFCF)	1 289	-	-	2.0%	-	-	56.4%	-	-	10.7%	-	-

Note: The breakdown between the states and local government is not available in the national accounts.

EXPENDITURE: Subnational governments in the US are key social and economic actors. In 2020, their total expenditure accounted for 19% of GDP and 39.7% of total general government expenditure, which was higher than the OECD average (18.3% and 34.3%, respectively) and slightly lower than the average of the nine federal OECD countries (20.6% and 43.5%, respectively). Local governments represented a slightly larger share of subnational government expenditure than state governments (54%) in 2019, which is due to the fact that localities often administer programs with funds transferred from state governments. Between 1977 and 2019, total subnational government expenditure increased by 190% in real terms, with the largest increases in spending directed towards welfare (Medicaid), health, and elementary and secondary education.

Subnational governments are also key public employers, accounting for more than 75% of total public staff spending. Per capita spending by both state and local governments varies between states, with the highest being Alaska (USD 17 596) and the lowest being Arizona (USD 7 251), in fiscal year 2019. Differences in spending arise from variations in geography, demographics, history, and other external factors. They can also arise from state policy choices, such as degree of provision of service, eligibility rules for social services, or tax policy.

DIRECT INVESTMENT: Subnational governments in the US are key investors, accounting for the majority of public investment (56.4%) in 2020. This is in line with the OECD average (54.6%) but below the average of the nine OECD federal countries (61.5%). Among subnational governments, local governments are the biggest investors, accounting for 63% of total subnational capital expenditure in fiscal year 2019, according to the 2019 Annual Survey of State and Local Government Finances. The federal government has implemented several programmes to support subnational public investment including the American Recovery and Reinvestment Act-ARRA in 2009, the Water Infrastructure Finance and Innovation Act Program in 2014, and most recently, in 2021, the Infrastructure Investment and Jobs Act (IIJA), better known as the Bipartisan Infrastructure Law. The IIJA authorizes USD 1.2 trillion in transportation and infrastructure spending, with USD 550 billion of that figure going toward “new” investments and programs. Part of the funding is allocated directly to states using formula-based grants, and another part (USD 113 billion) is allocated via competitive grants that all subnational governments are eligible to apply for.

The use of public-private partnerships (PPPs) to fund infrastructure projects has increased at all levels of government in recent decades. PPPs are a matter of state or municipal regulation; there is no national PPP authority or law in the US although some federal agencies, such as the Federal Highway Administration, provides support and training on PPPs. Currently, 36 states plus the District of Columbia and Puerto Rico have dedicated PPP laws, many of which limit the use of PPPs to certain kinds of projects. For example, in Virginia PPPs can only be used for transportation and education projects, and in Colorado for transportation projects only.

Subnational, state and local government expenditure by functional classification
2019	Dollars PPP / inhabitant			% GDP			% general government			% subnational, state and local government
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total expenditure by economic function	-	-	-	-	-	-	-	-	-	-	-	-
1. General public services	1 703	-	-	2.6%	-	-	44.5%	-	-	14.2%	-	-
2. Defence	0	-	-	0.0%	-	-	0.0%	-	-	0.0%	-	-
3. Security and public order	1 086	-	-	1.7%	-	-	84.8%	-	-	9.1%	-	-
4. Economic affairs/transports	1 684	-	-	2.6%	-	-	68.4%	-	-	14.1%	-	-
5. Environmental protection*	0	-	-	0.0%	-	-	0.0%	-	-	0.0%	-	-
6. Housing and community amenities	184	-	-	0.3%	-	-	48.0%	-	-	1.5%	-	-
7. Health	2 964	-	-	4.5%	-	-	40.0%	-	-	24.8%	-	-
8. Recreation, culture and religion	163	-	-	0.3%	-	-	90.3%	-	-	1.4%	-	-
9. Education	3 648	-	-	5.6%	-	-	92.1%	-	-	30.5%	-	-
10. Social protection	541	-	-	0.8%	-	-	10.3%	-	-	4.5%	-	-

Note: The breakdown between the states and local government is not available in the national accounts.

* Environmental protection expenditure is included in “housing and community amenities” area.

Subnational governments in the US spend most of their resources on education and health, which together represented 55% of subnational government total expenditure in 2019. Spending in education is focused on elementary and secondary education, with 40% of local government (school districts) direct expenditure going towards this in 2019, versus less than 1% of state expenditure. In contrast, for higher education, states accounted for 16% of direct expenditure in this category, while local governments accounted for 3%. Spending on health was mainly covered by states (43%). Much of health spending is Medicaid spending, which is jointly funded by states and the federal government, but administered by state governments (and local governments in a few states). Economic affairs and transport is the third main area of subnational government spending (14.1%), covering highways and roads.

Regarding their share in total public spending by sector, subnational governments are also responsible for the large majority of total public spending in the areas of security and public order, recreation and culture and religion, and education (well over 80% in all three categories).

Subnational, state and local government revenue by category
2020	Dollars PPP / inhabitant			% GDP			% general government			% subnational, state and local government
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total revenue	12 075	-	-	19.0%	-	-	58.6%	-	-	100%	-	-
Tax revenue	5 977	-	-	9.4%	-	-	48.7%	-	-	49.5%	-	-
Grants and subsidies	3 370	-	-	5.3%	-	-	-	-	-	27.9%	-	-
Tariffs and fees	2 374	-	-	3.7%	-	-	-	-	-	19.7%	-	-
Income from assets	293	-	-	0.5%	-	-	-	-	-	2.4%	-	-
Other revenues	60	-	-	0.1%	-	-	-	-	-	0.5%	-	-

Note: The breakdown between the states and local government is not available in the national accounts.

OVERALL DESCRIPTION: The federated states have a large degree of fiscal autonomy (defined in their respective constitutions), and broad authority over their fiscal policy, including taxation (collection, rate setting, bases) and budgetary priorities. This can also be the case for local governments in some states, when the state has granted them such autonomy. In 2020, subnational government revenue in the US accounted for 58.6% of total public revenue, which was in line with the OECD average for federal countries in the same year (57.5%). Taxation is the primary source of revenue for subnational governments in the US, accounting for a share of subnational government revenue above the OECD average for federal countries (49.5% vs 45.8%). This is also the case for tariffs and fees, which amount to 19.7% of subnational government revenues in the United States, compared to an average of 15.4% in OECD federal countries. In contrast, the share of grants and subsidies in subnational government revenue is below the OECD average for federal countries (27.9% versus 35.3%, respectively).

TAX REVENUE: Tax revenue represented 49.5% of all subnational government (SNG) revenues in 2020. Based on the last available breakdown of tax revenue for state and local governments, available for the year 2019, taxes accounted for 49% of total state government revenues and 42% of local government revenues.

There are no tax sharing arrangements between the federal government, the states, and local governments. Some states, however, have established tax sharing arrangements in their jurisdictions, for example, in Michigan and in New Mexico. Most SNG taxes are therefore own-source taxes.

For the overall subnational government sector, the primary sources of tax revenue are recurrent property taxes (29.8% of SNG tax revenue and 15% of total SNG revenues), personal income taxes (PIT) (23.7% of SNG tax revenue and 12% of total SNG revenues), and sales taxes (21.6% of SNG tax revenue and 11% of total SNG revenues).

At the state level, PIT is the largest source of tax revenues (21.8% of state government tax revenue). The structure of state PIT varies from state to state. Eight states impose no income tax, while New Hampshire is a unique case, as it imposes a flat rate of 5% on interest and dividend income only. Sales tax is the second largest source tax revenues for state governments, accounting for 16.7% of total state tax revenues in 2020. The sale tax rate varies across states, ranging from 2.9% in Colorado to 7.25% in California; five states do not have sales tax. Other major state taxes include excise taxes, license taxes, the corporate income tax, motor fuel tax, and severance taxes on natural resource extraction.

Local government taxes vary from state to state, and by type of local authority, but the most important source of own revenue for local governments is the recurrent tax on immovable property, levied in all 50 states on both residential and business property, based on market value. In 2020, recurrent property tax revenues accounted for 71% of total local government tax revenues, and 2.7% of GDP, slightly above the OECD average of 2% of GDP in 2020. Real property tax rates differ widely across and within states, and local governments use various methods to calculate their real property tax bases. School districts also collect property tax revenue, which account for a significant portion of their revenue. The remaining part of the local government property tax is collected by Special Districts such as water and sewer authorities. Excise taxes are the second most important tax revenue source for local governments, accounting for 21% of total local government tax revenue in 2020. In addition, 37 states have implemented tax-sharing systems with local authorities within their jurisdictions, by allowing them to impose their own general sales taxes in addition to the state tax. Local rates range from 0.5% to 8.3%. In 2020, the share of local government sales tax accounted for 12% of local tax revenue. Other shared taxes may include the local individual income tax (4.5% of local tax revenue in 2020) and corporate income tax.

The last major tax reform, passed at the end of 2017, changed the ability of US taxpayers to deduct state and local taxes (SALT). SALT deductions were introduced with the Revenue Act of 1913, which also introduced the federal income tax, stating that “all national, state, county, school, and municipal taxes paid within the year, not including those assessed against local benefits,” could be deducted. The Revenue Act of 1964 later named specific state and local taxes that could be deducted, including real and personal property, income, and general sales taxes. The 2017 law partially eliminated the SALT deduction, now capped at USD 10 000 for property, plus income or sale taxes. In addition to this change, the reform also reduced the maximum marginal corporate tax rates down from 35% to 21%.

GRANTS AND SUBSIDIES: Over the years, the federal intergovernmental system in the US has become increasingly centralised, with the federal government using federal grants and mandates to expand its influence in many policy areas. In this sense, the Congress has a central role in determining the scope and nature of the federal grant system. Transfers increased rapidly from 2008 to 2010, to assist state and local governments recover from the 2007-2008 economic crisis, especially with the enactment of the 2009 American Recovery and Reinvestment Act of (ARRA). They increased again after 2014 due to the expansion of Medicaid eligibility (Patient Protection and Affordable Care Act – ACA), which positioned healthcare as the leading category of federal assistance to subnational governments. Another steep increase occurred in 2020 and 2021, as Congress transferred a large amount of funds to local governments as part of the CARES Act, the Coronavirus Response and Relief Supplemental Appropriations Act, and the American Rescue Plan. In 2020, 93% of subnational government transfers were current transfers, while capital transfers represented the remaining 7%

Unlike most other federations, there is no federal unconditional general grant, or equalisation grant system, to either state or local governments in the US. However, some intergovernmental transfers may contain equalising elements, through the inclusion of per capita income in various grant formulas, and targeted categorical grants. There are three general types of federal grants to state and local governments: categorical grants (to be used only for relatively narrowly-defined purposes), block grants (for a specific aid programmes), and general revenue sharing. The main categorical grant refers to the Children’s Health Insurance Program (CHIP – Medicaid). State and local governments discretion over federal earmarked grants varies based on the grant (the Community Development Block Grant is the largest), and they have to comply with federal standards and monitoring.

Local governments receive transfers from both the federal and state governments, with the majority of grant funding coming from the state-level. A portion of state transfers comes indirectly from the federal government in the form of pass-through grants, ‘subawarded’ to local governments for carrying out specific grant programmes. State transfers to local authorities vary from state to state. In most cases they are earmarked, although some states provide general-purpose grants and have equalisation systems, through formulas based on such factors as population, tax capacity, and fiscal need. They are dedicated in particular to mitigate property tax disparities among local governments.

OTHER REVENUE: In addition to tax revenues, state and local governments levy fees and charges for services rendered which represent a larger share of their revenue than for the average of OECD countries (19.7% in the US vs 13.3% in OECD in 2020). Local governments may collect fees and charges on a variety of services such as sewerage, parking meter fees, accounting for approximately 18% of local revenue in 2019. On the other hand, states receive highway tolls, trust revenues, service charges for education and hospital-related services, interest revenue, and are increasingly relying on proceeds from lotteries.

In aggregate, tariffs and fees provide a substantial amount of revenue for subnational governments, especially for states that collect relatively little tax revenue. They also receive property income and tuition paid to state universities.

Subnational, state and local government fiscal rules and debt
2020	Dollars PPP / inh.			% GDP			% general government debt			% SNG debt			% SNG financial debt
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total outstanding debt	25 237	-	-	39.8%	-	-	24.7%	-	-	100%	-	-	-	-	-
Financial debt	9 654	-	-	15.2%	-	-	12.4%	-	-	38.3%	-	-	100%	-	-
Currency and deposits	0.00	-	-	-	-	-	-	-	-	0.0%	-	-	0.0%	-	-
Bonds / debt securities	9 587	-	-	-	-	-	-	-	-	38.0%	-	-	99.3%	-	-
Loans	67	-	-	-	-	-	-	-	-	0.3%	-	-	0.7%	-	-
Insurance pensions	12 253	-	-	-	-	-	-	-	-	48.6%	-	-	-	-	-
Other accounts payable	3 330	-	-	-	-	-	-	-	-	13.2%	-	-	-	-	-

Note: The breakdown between the states and local government is not available in the national accounts.

FISCAL RULES: The federal government does not impose fiscal rules on state or local governments. However, the statutory limit set on federal government debt and the federal budget procedures that constrain federal spending may have an indirect effect on state and local finances. Most important fiscal rules in the US federal system are set by the states, imposed upon themselves and on local governments within their jurisdictions, mostly by their own citizens via constitutional and statutory law. In that context, they vary from state to state, including various ceilings, prohibitions and conditions on deficit and debt.

Overall, almost every state and local government (with the exception of Vermont) is required to maintain a balanced operating budget. As of 2021, 26 states have some sort of tax and expenditure limitations of varying degrees, based on inflation or on the previous year’s budget or personal income growth. Many states go beyond their own fiscal rules to extend additional restrictions on local government finances, such as limits on property taxes and spending. States also impose financial management and audit requirements on local governments to ensure appropriate financial accountability for spending. The Congressional Budget Office (CBO), created in 1974, has the mandate to provide the Congress with nonpartisan and objective budget analysis at state level.

DEBT: All states have debt rules applying to their own debt and that of local governments, with statutory limits on tax receipts or general funds. Long-term debt is usually intended for capital projects (“golden rule”). A total of 27 states allow certain local governments to declare bankruptcy. To deal with the risk of local bankruptcy, however, 20 states have laws that allow them either to supervise local government debt or to assist local governments with debt restructurings in the face of a fiscal emergency.

In 2020, subnational governments had a total debt outstanding amounting up to 39.8% of GDP and 24.7% of public debt. These levels of debt are close to the OECD average of federal countries (36.6% of GDP and 26.5% of public debt). SNG debt is made up of pension liabilities (48.6%), financial debt (38.2%), and other accounts payable (13%). Since 2016, the make-up of subnational debt in the US shifted with a large decline in financial debt, and steep increase in pension liabilities. Financial debt comprises almost exclusively bonds, issued by states and local governments for the financing of infrastructure and capital expenditure, such as investments in schools, streets, highways, hospitals, bridges, water systems, and other public works.

Subnational government debt can take two forms: (i) general obligations, entirely funded by a general-purpose government, and (ii) non-general obligations, issued by governments and special entities, usually backed by a specific revenue source. The primary mechanism through which state and local governments raise capital to finance public projects is through tax-exempt bond issuances, most often municipal bond issuances. Between 2009 and 2019, municipal bond issuances totalled USD 4.2 trillion. The municipal bond market is well-established and both large and small subnational governments in the US have access to it, some of them through pooled financing mechanisms, i.e. the creation of a public financing entity acting as a financial intermediary between the capital market and smaller-size local governments. The 2017 tax reform (Tax Cuts and Jobs Act) shook up the subnational bond market by eliminating the ability to advance refund existing bonds with new tax-exempt bonds, and lead to a steep decline in municipal bond issuances in 2018. Within municipal bond issuances, green bonds are one of the fastest growing areas, increasing from USD 100 million in 2013 to nearly USD 16.3 billion in 2020. The proceeds raised from these issuances were largely used to fund water, sewer and mass transit infrastructure projects. Out of the 45 states that have issued green municipal bonds, California, New York, and Massachusetts rank the highest.

Another major form of pooled financing used in the United States is State Revolving Funds (SRFs). They were first developed in 1978 to leverage federal grants for revolving loans for local environmental and water projects.

TERRITORIAL MANAGEMENT OF THE CRISIS: In the United States, coordination between all three levels of governments in response to the pandemic was lacking and the response was largely considered to be inconsistent and fragmented. This lack of coordination can in part be attributed to the absence of intergovernmental coordination fora as well as an unclear division of powers between the federal government and state governments regarding pandemic response leading to overlapping jurisdictions and competing authorities. With regards to public health, authority rests with the 2 684 state, local, and tribal public-health departments, each one responsible for monitoring people within its jurisdiction and imposing isolation or quarantine as needed.

At the outset of the pandemic, subnational governments were quicker to act than the federal government, and took the lead early on to declare states of emergencies, secure PPE, and issue shelter-in-place orders. Intergovernmental coordination with regards to the nation-wide vaccination campaign was generally seen as more successful, with the federal government responsible for allocating doses to state governments, and state governments then working with state and local health departments to distribute the doses and to prioritize certain populations, for example frontline health care workers.

Despite an overall lack of coordination between federal and state governments, some inter-state cooperation flourished via regional pacts. In April 2020, the states of California, Colorado, Oregon, Nevada and Washington created the Western States Pact to coordinate and collaborate on their emergency responses and reopening plans. This was shortly followed by the creation of the Eastern States Multi-state Council which included seven states in the region and was comprised of one health expert, one economic development expert, and the respective Chief of Staff from each state. The council’s aim was to develop a regional plan to reopen the states’ economies while also minimizing the spread of the virus. In November 2020, a Midwest Governors Regional Pact was established between seven states in that region.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: To mitigate the economic and social impact of the pandemic on businesses and households, state and local governments implemented a variety of measures. Several cities adopted measures to halt or defer financial burdens placed on small businesses such as paying utilities, taxes, or licensing fees by waiving for example financial penalties for late tax payment or deferring payment (Seattle, New Orleans, San Francisco). Some cities also created a central, online repository for resources and information for SMEs, providing enhanced consultancy support to businesses app or granting zero-interest emergency loans (New York City, Los Angeles). At the state-level, some states implemented temporary state-wide eviction moratoriums (New York, Washington) and launched their own small business support programs (Ohio, Maine, and Michigan).

Measures of support from higher levels of governments towards lower levels of government primarily came in the form of grant funding via the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the American Rescue Plan (ARP) Act. The funding included increases in federal Medicaid contributions and in the case of the ARP, subnational governments were allowed to use the funds to offset revenue declines.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: The overall impact of the pandemic on subnational government finance in the United States was more limited than initially anticipated. Subnational government expenditure in the United States did not substantially increase in 2020 compared to 2019. Balanced budget rules at the state-level meant increases in expenditure brought on by the pandemic were offset by expenditure cuts in other areas. State government expenditure related to public health, Medicaid, and education saw the biggest increases, with variation amongst states based on economic and demographic factors. To cut down on personnel costs, the largest expenditure item for subnational governments in the US, 1.3 million state and local government jobs were cut in 2020, mostly in education.

Subnational government revenues increased by 6% in real terms between 2019 and 2020. Subsidies and grants increased the most (34%) and tax revenues increased only slightly (1%), in real terms. All other sources of revenues (i.e., tariffs and fees, asset revenues, etc.) saw a slight decrease. This large increase in grants can be linked to the two stimulus packages passed in 2020, which provided aid to state and local governments to offset increased public health, education, and Medicaid expenditures as well as lost revenues. Among tax revenues, PIT and CIT receipts increased by 2% and 8% respectively between 2019 and 2020, however, these gains were offset by declines in other tax revenues namely sales taxes and excise taxes. The impact of the pandemic on state revenues varied considerably depending on economic and demographic characteristics. States whose economies are tourism and/or energy dependent experienced greater revenue decreases compared to others. For example, in North Dakota, tax revenues were 50% lower in the second quarter of 2020 compared to the same quarter in 2019 due to the state’s reliance on a severance tax imposed on oil and gas production, which declined steeply in 2020.

Total outstanding subnational government debt did not change in real terms between 2019 and 2020 in the United States, however, loans and bond debt increased slightly, by 4% and 2% respectively. At the outset of the pandemic, several state governments (12 altogether) moved quickly to pass budget legislation allowing them to make extraordinary appropriations to education and health departments or tap into their rainy day funds (Arizona, Georgia, Maryland, Washington). To ensure liquidity, Congress created a lending backstop called the Municipal Liquidity Facility as part of the CARES Act, with USD 500 billion available to state and local bond issuers for deficit financing. The MLF increased liquidity available to state and local governments and reduced the risk that states and cities that were facing fiscal challenges would make bad policy choices (such as selling assets, drastically cutting local aid or social services, or considering debt service payment freezes) or face a cash crisis that could cause broader market disorder.

ECONOMIC AND SOCIAL STIMULUS PLANS: Between March 2020 and March 2021, the federal government provided two stimulus packages with direct aid for state, local, and tribal governments: the Coronavirus Aid, Relief, and Economic Security (CARES) Act (March 2020); and the American Rescue Plan (ARP) Act (March 2021). Combined, these packages allocated USD 745 billion in grant funding to state and local governments. The funding was largely targeted towards education (elementary, secondary, and higher education), Medicaid, and transportation. Included within the ARP, the Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program allocated USD 350 billion to state, local, and Tribal governments across the country. Funds are to be used for a wide variety of needs including responding to negative economic impacts, promoting workforce development, stabilizing government services, and investing in water, sewer, or broadband infrastructure. A separate Capital Projects Fund was also established as part of ARP to devote USD 10 billion towards longstanding infrastructure priorities such as transportation and sewage system upgrades. The funding goes directly to state governments, and while counties and local governments are not eligible to receive the funding, states are encouraged to include them in deciding on the use of the funds.

State and local governments have been given until 2026 to spend pandemic funds allocated to them. Some of the funding is narrowly earmarked for very specific purposes (e.g., Medicaid or education); however, a large portion is more broadly earmarked leaving flexibility for subnational governments to prioritise local needs.