Question 12 - Reading and Writing Practice Test for the PSAT/NMSQT Exam

Federal, state, and local governments depend on different sources of revenue to finance their annual expenditures. In 2014, total revenue (or receipts) reached $3.2 trillion for the federal government, $1.7 trillion for the states, and $1.2 trillion for local governments.13 Two important developments have fundamentally changed the allocation of revenue since the early 1900s. First, the ratification of the Sixteenth Amendment in 1913 authorized Congress to impose income taxes without apportioning it among the states on the basis of population, a burdensome provision that Article I, Section 9, had imposed on the national government.14 With this change, the federal government’s ability to raise revenue significantly increased and so did its ability to spend.

The second development regulates federal grants, that is, transfers of federal money to state and local governments. These transfers, which do not have to be repaid, are designed to support the activities of the recipient governments, but also to encourage them to pursue federal policy objectives they might not otherwise adopt. The expansion of the federal government’s spending power has enabled it to transfer more grant money to lower government levels, which has accounted for an increasing share of their total revenue.

The sources of revenue for federal, state, and local governments are detailed in Figure 3.4. Although the data reflect 2020 results, the patterns we see in the figure give us a good idea of how governments have funded their activities in recent years. For the federal government, 47 percent of 2020 revenue came from individual income taxes and 38 percent from payroll taxes, which combine Social Security tax and Medicare tax.