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GRAPHIC ORGANIZER
Government Budget
CHART
30.0%
STEP 2
11.7%
22.2%
House and Senate pass
budget resolutions that
outline spending and taxes
5.9%
34.3%
25.9%
The Federal Budget Process
INFOGRAPHICS
The Federal Budget, FY 2011
State and Local Government
Revenue and Expenditures
GRAPHS
Comparing Federal Spending
State Income Tax Revenue
Property Tax Revenue
GAME
Lesson 1
The Federal Budget:
Revenues and Expenditures
ESSENTIAL QUESTION How does government influence the economy and
economic institutions?
It Matters Because
Government tax and spending policies affect you.
SS.7.E.1.2 Discuss the importance of
borrowing and lending in the United States,
the government’s role in controlling
financial institutions, and list the
advantages and disadvantages of using
credit.
SS.7.E.1.6 Compare the national budget
process to the personal budget process.
SS.7.E.2.1 Explain how federal, state, and
local taxes support the economy as a
function of the United States government.
LA.7.1.6.1 The student will use new
vocabulary that is introduced and taught
directly.
LA.7.1.7.3 The student will determine the
main idea or essential message in
grade-level or higher texts through
inferring, paraphrasing, summarizing, and
identifying relevant details.
Reading HELP DESK
Taking Notes: Categorizing
As you read, create a concept web
linking related concepts, such as
taxes and revenues. LA.7.1.6.1
606 Financing the Government
Understanding the Federal Budget
GUIDING QUESTION How does the federal budget reflect choices?
Do you know how to make a personal budget? First, you figure
out what your income is for a period of time, such as a month.
Then, you estimate your savings and expenses for that month.
You must think about regular expenses, such as weekly food
costs. You also have to account for occasional costs—such as a
birthday present for a parent. If expenses exceed, or are greater
than, income, then you need to cut costs or find a way to earn
more income.
The Budget Process
The federal government also has a budget. The federal budget
covers a period called a fiscal (FIHS•kuhl) year. A fi scal year
is any 12-month period chosen for keeping accounts. The fiscal
year of the federal government begins October 1 and ends
September 30 of the next year. Fiscal year 2015 begins October 1,
2014, and ends September 30, 2015.
The diagram of the federal budget process shows the steps in
making a federal budget. This process is complex because of the
size of the budget and the number of parties involved.
Government
Budget
Revenues
Content Vocabulary
• fiscal year
• appropriations bill
• mandatory spending • intergovernmental revenue
• discretionary spending • sales tax
PHOTO: (tc) William Perlman/Star Ledger/Corbis
NGSSS covered in
“Understanding the Federal
Budget”
The process starts when the president transmits, or sends, a
budget message to Congress. This message states how much the
president wants to spend on each federal program. The message
must be sent no later than the first Monday in February.
Next, key members of Congress agree on a budget resolution.
This is Congress’s plan for revenue and for spending on broad
categories such as health. The budget has two different kinds of
spending: mandatory and discretionary. Mandatory spending
is set by laws outside the budget process. One example is
Social Security, which makes payments to retirees. Mandatory
spending is generally fixed from year to year. Discretionary
(dis•KREH•shuh•nehr•ee) spending involves spending
choices made and approved each year. It includes items such as
national defense and highways and can differ from year to year.
Next, Congress must set spending on each program for
the coming year. That process starts when committees in
the House write appropriations bills. An appropriations
(uh•proh•pree•AY•shuhnz) bill gives official approval for
the government to spend money. All appropriations bills start
in the House but must be approved by both houses. After the
Senate and House pass each bill, it is sent to the president.
The president can either sign it into law or veto it. If the bill is
vetoed, Congress can rewrite the bill or override the veto.
Sometimes Congress does not pass the budget in time. It
then approves a continuing resolution. This law sets spending for
the coming year at the same level as the year before.
THE FEDERAL BUDGET PROCESS
CHART SKILLS
Congress faces deadlines for
acting on the budget. It is
supposed to approve the budget
resolution by April 15. It does not
always meet this date, however.
STEP 1
STEP 2
STEP 3
President sends Congress a
budget message that:
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expenses;
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House and Senate pass
budget resolutions that
outline spending and taxes
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Caps on spending are set
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House and Senate pass bills
authorizing spending,
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• entitlement program
• subsidize
• property tax
fiscal year any
12-month period chosen
for keeping accounts
CRITICAL THINKING
1 Make Connections Why are
tax revenue estimates
included in the budget?
2 Make Inferences What
relationship does the budget
resolution have to the
president’s budget?
LA.7.1.7.3
mandatory spending the federal
spending required by law that continues without
the need for congressional approval each year
Lesson 1 607
THE FEDERAL BUDGET, FY 2011*
Receipts
Expenditures
FY 2011
3.4%
4%
%
Receipts
43.7%
1.0%
Expenditure
15.7%
$2,567
– $3,834
19.6%
6.5%
10.5%
1.0%
111.6%
2.9%
9%
%
(Deficit)
– $1,267
(in billions of dollars)
36.4%
Personal income tax
Payroll tax
Corporate income tax
Excise tax
Estate tax
Customs duties
Other
13.0%
National defense
Social security
Income security
Medicare
19.2%
15.5%
Health
Interest on debt
Other
Source: Economic Report of the President 2010; figures given are estimates for FY 2011
INFOGRAPHIC
Federal spending for Fiscal Year
2011 was nearly $354 trillion
higher than revenues for that
year. You will learn more about
this in Lesson 2.
CRITICAL THINKING
1 Make Predictions What
happens to federal revenue
when many people lose their
jobs? Why?
2 Categorize What are the
two largest spending
categories? Which is
mandatory and which is
discretionary? LA.7.1.7.3
Reading HELP DESK
discretionary spending
the spending for federal programs
that must receive approval each year
608 Financing the Government
Revenues
The federal budget is made up of two main parts—revenues
and expenditures. Revenue is the money a government collects
to fund its spending.
The biggest source of federal revenue is the personal income
tax. This tax is paid by all people who earn income above a
certain amount. The second-largest share of revenue is from
payroll taxes. These are taken from workers’ paychecks to fund
social insurance programs such as Social Security and Medicare.
Medicare provides some health care coverage for people age 65
and older. The third-largest source of revenue comes from the
tax that corporations pay on their profits.
Taxes fall into three categories: progressive, proportional,
and regressive. With a progressive tax, the tax rate goes up as
income goes up. The federal income tax is a progressive tax. A
proportional tax has a constant tax rate, regardless of income. The
tax for Medicare is proportional because it is the same rate for
all wage earners. A regressive tax takes a smaller percentage of
your income as the amount you earn goes up. The sales tax is an
example of a regressive tax.
appropriations bill the legislation
that sets spending on particular programs for
the coming year
Academic Vocabulary
exceed to be greater than
transmit to send a document or a message
Expenditures
The circle graph of federal expenditures shows federal spending
for Fiscal Year 2011. National defense spending is the largest
category. Close behind is Social Security. Spending in this area
will likely increase in the future as the population ages and
more people retire. Income security ranks third. It includes
unemployment benefits, welfare, and retirement benefits for
some government workers and other groups.
The fourth category is Medicare. This area is also likely to
rise as the population ages. The fifth-largest category is health.
This includes health care and long-term care for low-income
people of all ages as well as those with disabilities.
The sixth category is interest on borrowed money. When the
federal government borrows, it must pay interest on the debt,
just like any consumer who takes out a loan. As government
borrowing goes up, so does the interest it owes. “Other” includes
programs in education, veteran benefits, and highway costs.
Spending in the “other” category is discretionary spending.
When the federal government began, it had fewer sources of
revenue and spent less than government today. The budget
process was very informal, with little overall planning.
Over time, federal spending increased. As a result, the
budget process had to be improved. Congress passed a law
in 1921 that made the process more formal. For the first time,
the president was required to send a budget to Congress each
year. In 1974 Congress passed another law to improve the
budget process. It required Congress to set up committees to
focus on the budget. It also set up the Congressional Budget
Office (CBO). That office has the job of tracking spending and
revenue measures and
making reports to Congress.
The budget process
still faces difficulties
today, however. Members
of Congress often add
spending for pet projects
to major bills. These addons can increase overall
spending.
Elderly people have much of their health
care costs covered by the Medicare
program.
▲
PHOTO: William Perlman/Star Ledger/Corbis
How the Budget Process Changed Over Time
CRITICAL THINKING
Making Connections What source of
revenue pays for this program? SS.7.E.2.1
PROGRESS CHECK
Comparing and Contrasting How
is making the federal budget
similar to and different from
making a personal budget?
Lesson 1 609
Florida
CONNECTION
Budgeting for State and Local
Governments
State Taxes
GUIDING QUESTION How do state and local revenues and expenditures differ from those of
Only a handful of states,
including Florida, do not require
residents to pay state income tax.
This makes Florida an appealing
place to live and work. Florida
does have a 6 percent state sales
tax though. In addition, local
sales taxes vary from region to
region. For example, the tax for
hotel rooms may be as high as 13
percent in some areas and less
than 10 percent in others.
SS.7.E.2.1
the federal government?
NGSSS covered in
“Budgeting for State and Local
Governments”
SS.7.E.2.1 Explain how federal, state, and
local taxes support the economy as a
function of the United States government.
Reading HELP DESK
intergovernmental
revenue the funds that one
level of government receives from
another level of government
610 Financing the Government
State and local governments also prepare budgets. The
governments of all states except Vermont cannot, by law, spend
more than they receive in revenue. Local governments also have
to limit spending so it does not exceed revenues.
State Governments
The circle graphs of state government revenue and spending
are for all states combined. Intergovernmental revenue is the
largest source of state income. This refers to funds that one
level of government receives from another level of government.
States receive this money from the federal government.
Sales taxes are the states’ second-most-important source
of revenue. A sales tax is paid when someone buys a good or
service. All but five states have sales taxes. Tax rates range from
2.9 percent to 7 percent. A 3 percent sales tax on clothing means
that a person spending $100 on clothes pays another $3 in taxes.
Sales taxes can be regressive and hurt the poor, however. As a
result, many states do not tax essential goods, such as food and
medicine. Some states also declare sales tax holidays. During
these periods, purchases of school supplies are not taxed.
All but five states have a personal income tax. In some states
this tax is proportional, with all taxpayers paying a flat rate. In
others it is progressive, with high incomes taxed at higher rates.
The single biggest area of state spending is public welfare.
This refers to programs meant to help those people with little
money to maintain basic health and living conditions. Most of
this spending goes to states’ share of funding of entitlement
programs. These are called “entitlements” because the
requirements for benefits are set by law. An example is the
Medicaid program. This program helps poor people get health
care services.
Education is another large category of state spending. Some
of this spending goes to local governments to help fund public
schools. Some of it is used to subsidize (SUHB•suh•deyez), or
pay part of the cost of, students’ state college education. This
subsidy helps make state colleges more affordable.
sales tax a tax
paid by consumers at
the time they buy
goods or services
entitlement program a government
program that makes payments to people who must
meet certain requirements in order to help them
meet minimum health, nutrition, and income needs
subsidize to aid or
support a person, business,
institution, or undertaking
with money or tax breaks
STATE AND LOCAL GOVERNMENT REVENUE AND EXPENDITURES
STATE GOVERNMENT REVENUE
STATE GOVERNMENT EXPENSES
13.4%
26.6%
27.6%
42.6%
20.4%
3.4%
3.1%
17.2%
22.1%
5.3%
5.2%
2.6%
10.5%
Intergovernmental
revenue
Corporate income tax
Sales and gross receipts
Retirement and unemployment
insurance receipts
Personal income tax
Miscellaneous revenue
Education
Public welfare
Health and hospitals
Highways
LOCAL GOVERNMENT REVENUE
30.0%
5.9%
Retirement and unemployment
insurance
Other
LOCAL GOVERNMENT EXPENSES
34.3%
43.4%
1.7%
2.2%
Interest on general debt
37.3%
25.9%
7.3%
3.2%
4.9%
3.9%
Intergovernmental
revenue
Personal and corporate
income tax
Education
Highways
Property tax
Other taxes
Public welfare
Police protection
Sales tax
Miscellaneous revenue
Health and hospitals
Other
Source: U.S. Bureau of the Census, Statistical Abstract of the United States
INFOGRAPHIC SKILLS
The federal government provides money to
state governments. State governments, in
turn, provide funds for local governments.
CRITICAL THINKING
1 Comparing What is one specific tax that
local government collects and state
government does not?
2 Making Inferences Which level of
government, state or local, would be hurt
more by an end to intergovernmental
revenue? Why? LA.7.1.7.3
Lesson 1 611
21st Century
SKILLS
Internet Research
Use the Internet to find out how
your state ranks among other
states in terms of state sales taxes
and personal income taxes. In a
few sentences, explain how this
information might influence
people to live in your state.
LA.7.1.7.3
“Other” refers to additional state spending in all other areas.
This includes insurance payments to retired state employees
and spending in such areas as state police, prisons, and parks.
Local Governments
Like states, local governments must raise money. The biggest
difference is that, unlike state governments, local governments
rely heavily on property taxes. A property tax is a tax based on
the value of land and property that people own. Generally, the
higher the value of the property, the higher the property tax that
is paid. Many states allow their local governments to charge
sales taxes and collect income taxes as well. Fines for traffic
and other violations, along with fees for permits and special
services, also provide income for local governments.
Local governments provide many of the basic services on
which citizens depend. Education is the largest portion of local
spending. Police and fire protection are another important
part of local budgets. Police services are always provided by
professionals. Fire protection can be provided by volunteers in
small communities. Larger cities, though, have professionals as
firefighters.
Local governments build and maintain city and county
streets, too. In areas with harsh winter weather, city workers
must clear the streets of snow and apply salt to melt snow and
ice to make driving safe. Finally, local governments supply
people with water, remove and treat sewage, and take care of
trash removal. Larger communities have staffs of workers to do
these jobs.
PROGRESS CHECK
property tax a tax on the value
of land and property that people own
Summarizing What is the biggest spending area for state governments?
What is the largest local government expenditure?
LESSON 1 REVIEW
Review the Vocabulary
1. What is a fiscal year? How is it related to a budget?
LA.7.1.6.1
2. What is the difference between mandatory and
discretionary spending? LA.7.1.6.1
3. What is intergovernmental revenue? How does it
subsidize lower levels of government? LA.7.1.6.1
Answer the Guiding Questions
4. Analyzing What kinds of choices are involved in
making the federal budget? SS.7.E.1.6
612 Financing the Government
5. Comparing and Contrasting How are tax
revenues spent differently by state, local, and federal
governments? SS.7.E.2.1
6. NARRATIVE WRITING Write a paragraph
explaining the process by which the federal
government prepares a budget and makes spending
decisions. Include all steps through appropriations.
SS.7.E.1.6