Federal taxation and spending by state

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The ability of the United States government to tax and spend in specific regions has large implications to economic activity and performance. Taxes are highly indexed to wages and profits and therefore places of high taxation are geographically found in areas with higher per capita income and more economic activity.

Spending is largely focused on areas of poverty, the elderly, and centers of federal employment such as military bases.

Background[edit]

The ability of the government to tax and spend in specific regions has large implications to economic activity and performance. The main question behind this issue stems into three different approaches. First, federal spending should be neutral, meaning federal taxation should roughly equal expenditures. Second, it should be redistributive, meaning rich states should be taxed more heavily and poorer states should receive more benefits. Third, spending and taxation should be accidental per se, meaning higher taxation should be performed based on income but with little relation to geographic region and spending should be done where it allows for the most efficiency. The main issue driving this research is the question between equity and equality (Leonard and Walder, Page 17).

Typically, it is seen taxes are highly indexed to wages and therefore places of high taxation are geographically found in areas with higher per capita income. The problem with taxation indexed to wages is that it does not consider cost of living. In areas with higher per capita income, it is highly likely that the cost of living is also higher; for instance, this is the case in New York. The effect of not indexing to costs of living makes some states look wealthier compared to others. It is typical that states with low costs of living receive more in spending than states with high costs of living (Leonard and Walder, Page 19). After discounting income with costs of living, New York's poverty level increases a significant amount (Pear, Page 2). The significance level between high levels of poverty and high taxation may be arguable.

Spending is not so easily located geographically. The breakdown of federal spending is done in the following ways: defense (military), non-defense discretionary, Social Security, Medicare, grants, and various other programs. Defense spending is the most volatile, as it is usually found to be higher in states with established defense contractors and other defense facilities. Areas of higher social insurance spending are typically seen in areas of larger elderly population. Social security is the dominant expenditure of per dollar federal expenditures.

Other factors of spending are largely political in the sense that politicians who can effectively argue for more spending get the most spending for their states. Some trends of spending as of 1999 are as follows: defense spending in the South and the national capital, non-defense discretionary spending between the Midwest and the Rockies, most Medicare and Social Security is located in the East and Central/Midwest, and other assistance programs following the Appalachian Mountains from Louisiana/Mississippi to Maine (Leonard and Walder, Page 30).

Trends[edit]

The balance of payments receipts has typically remained fairly stable over the past fifteen years with limited changes between those states with net benefits and those with net contributions. The Fisc states that the federal deficit increased due to human resource expenditures, increased tax cuts, and increased military expenditure during the 1980s. The Fisc further reports that in expectations and defense spending declined in the 1990s one would expect the expenditure per state to decrease along with the government. However, some states, such as Kentucky, Idaho and Oklahoma, actually saw large increases in defense spending, which increased their BOP. Overall, though, increases in non-defense spending were not on the same magnitude as the decline of defense spending (Leonard and Walder, Page 36–39).

The report argues that defense and Social Security and Medicare have a small negative correlation, and as a result large reductions in defense spending do not bode well for increases in spending on Social Security or Medicare. Defense expenditures tend to be the most volatile over time and state, however, total expenditures are roughly constant, which means that increases (decreases) in defense correlate with decreases (increases) in other non-defense and non- social insurance expenditures. Income taxes used to finance expenditures are not extremely volatile around the national average.

Changes in expenditure[edit]

Decrease in defense expenditure has been a large key to overall changes in expenditure, both in salaries for bases and for procurement of defense. Due to restructuring or closing military bases, as determined by the Base Closure and Realignment Commission, most states have incurred declines in defense spending via salaries. California, with 24 recommendations for closure or realignment, has had the largest decline in defense spending, which attributes to a loss of roughly $50 billion, given the population increase since the early 1980s. Most states have also seen decline in procurement defense spending, but eight states have seen it increase, and in Kentucky's case it has doubled (Leonard and Walder, Page 36-39, 44-47).

Social Security has increased in expenditure primarily in the Southern states. It was thought that since the largest expenditure is retirement aid that social security expenditure was following the elderly. However, this was not the case, as the data did not correlate between elderly population and increases in social security expenditure. Further expenditures in social security are caused by the increase in disability insurance. The Fisc argues that the later policy changes in the 1980s involving beneficiary eligibility may have a time lag, meaning the causes of those changes are just now being felt. Medicare costs have continued to increase as well as the population ages and as health care costs increase. Most of the increased expenditure has been seen in the south. Grants have increased, but have been relatively stable over the fifteen-year period taken into consideration. The largest increase has been in the form of Medicaid expenditures (Leonard and Walder, Page 47-54).

The changes in taxes have remained fairly stable over time, and are strongly correlated with income per capita per state. It follows that as state's per capita income rises, its tax receipt also increases. The data between changes in per capita taxes to the national averages in ratio to the changes in the per capita income to the national average has a correlation of .88 (Leonard and Walder, Page 56-57).

History of federal monitoring of taxation and spending by state[edit]

The monitoring of federal spending and taxation and its variation between states in the United States began in 1977 under a query run by Daniel Patrick Moynihan, Democratic senator of New York. The query was designed to determine whether the state of New York was paying more in taxes than it was receiving in federal spending. The determination is made by looking at an individual state's balance of payments (BOP), which is total income minus outlays.

Initially, many thought New York was a net gainer, receiving more funding than it was paying out in taxes, because of large payments to the Federal Reserve Bank of New York, but in actuality, those payments were interest payments on the United States federal debt, which were distributed to foreign individuals and governments for purchasing of US Treasury bonds (Leonard and Walder, Page 9). After separating those expenditures from actual expenditures in New York, it was found that the state was actually a donor. This event stimulated more controversy over the topic of spending and taxation.

After the Federal Community Services Administration noticed the flaw in the balance of payments in New York, it revised its data and provided the revised data under the title The Geographical Distribution of Federal Expenditures, which was used in determining the expenditures for this analysis. This is now entitled "the Fisc".

Politics and controversy of unequal contributions by states to the federal budget[edit]

The US Constitution requires that direct taxes be apportioned to the states according to their population, so that per capita revenues from the states would be equal. Indirect taxes do not have this restriction. After a US Supreme Court case held that an income tax on income derived from property was in the same category as a direct tax on property, the 16th amendment was passed to allow indirect taxation on income in proportion to their income, from what ever source.[1] Since that time, taxation as well as spending per capita has ranged widely between the states. (See table below). At the same time, one of the great controversies of national politics has become whether to increase or decrease federal spending and the size of the federal government, with Republicans largely in favor of decreasing its size and Democrats pushing to keep it the same or increase it.[2]

Several commentators have pointed out that the states that benefit the most by federal spending are the very states whose populations tend to vote for leaders who promise to reduce federal spending, while those that benefit the least from large government vote for politicians who promise to make it even larger at their expense. In other words, Democratic-leaning states tend to be net contributors to the federal budget while Republican-leaning states are more often net recipients of federal spending. Various explanations for this seemingly contradictory situation exist.[3]

Tables of federal taxation and spending by state[edit]

The following table shows the net federal contribution of each state as a percentage of the state's gross state product for fiscal year 2014. Revenue is gross collections which indicates the total federal tax revenue collected by the IRS from each U.S. state and the District of Columbia. The figure includes all individual and corporate income taxes, estate taxes, gift taxes, and excise taxes. This table does not include federal tax revenue data from U.S. Armed Forces personnel stationed overseas, U.S. territories, Puerto Rico, and U.S. citizens and legal residents living abroad. Spending includes all federal outlays consisting of retirement, disability, and other direct payments; grants; procurement; and salaries and wages. Spending does not include interest on the debt and other spending not allocated by the individual states.

State Dollars (millions) Ratio to GSP[4] Dollars Per Capita
Revenue[5] Spending[6] Net Revenue Spending Net Population[7] Revenue Spending Net
Delaware 19,040 6,105 12,935 30.3% 9.7% 20.6% 953,614 20,840 6,402 14,438
New Jersey 134,870 55,998 78,872 24.6% 10.2% 14.4% 9,838,175 13,709 5,692 8,017
Minnesota 96,227 59,213 37,014 30.4% 18.7% 11.7% 5,457,173 17,633 10,850 6,783
Nebraska 23,885 11,335 12,550 21.3% 10.1% 11.2% 1,881,503 12,695 6,024 6,671
Illinois 148,332 70,118 78,215 19.9% 9.4% 10.5% 12,880,580 11,516 5,444 6,072
Rhode Island 13,888 8,373 5,514 25.3% 15.2% 10.0% 1,055,173 13,162 7,935 5,226
Ohio 129,901 73,441 56,460 22.3% 12.6% 9.7% 11,594,163 11,204 6,334 4,870
Arkansas 30,729 20,447 10,282 25.3% 16.8% 8.5% 2,966,369 10,359 6,893 3,466
Kansas 25,897 14,729 11,168 17.6% 10.0% 7.6% 2,904,021 8,918 5,072 3,846
New York 250,618 145,994 104,624 17.8% 10.4% 7.4% 19,746,227 12,692 7,394 5,298
Texas 265,336 147,338 117,998 16.1% 8.9% 7.2% 26,956,958 9,843 5,466 4,377
Massachusetts 100,161 68,024 32,137 21.8% 14.8% 7.0% 6,745,408 14,849 10,084 4,764
Missouri 61,512 44,587 16,925 21.6% 15.7% 5.9% 6,063,589 10,144 7,353 2,791
California 369,193 236,560 132,633 16.0% 10.2% 5.7% 38,802,500 9,515 6,097 3,418
Louisiana 43,023 29,411 13,612 17.1% 11.7% 5.4% 4,649,676 9,253 6,325 2,923
Colorado 52,003 35,559 16,444 17.0% 11.6% 5.4% 5,355,866 9,710 6,639 3,070
Georgia 79,566 55,473 24,093 16.7% 11.6% 5.1% 10,097,343 7,880 5,494 2,386
Oklahoma 32,611 25,341 7,270 17.8% 13.8% 4.0% 3,878,051 8,409 6,534 1,875
Washington 67,813 51,083 16,730 15.9% 12.0% 3.9% 7,061,530 9,603 7,234 2,369
New Hampshire 11,044 8,513 2,531 15.4% 11.9% 3.5% 1,326,813 8,324 6,416 1,908
Utah 18,389 13,459 4,930 13.0% 9.5% 3.5% 2,942,902 6,249 4,573 1,675
Wyoming 4,892 3,560 1,331 11.1% 8.1% 3.0% 584,153 8,375 6,094 2,279
North Carolina 72,472 59,945 12,527 15.0% 12.4% 2.6% 9,943,964 7,288 6,028 1,260
Iowa 22,309 19,434 2,875 13.1% 11.4% 1.7% 3,107,126 7,180 6,255 925
South Dakota 6,734 6,033 700 14.7% 13.2% 1.5% 853,175 7,893 7,071 820
Nevada 16,579 14,629 1,949 12.6% 11.1% 1.5% 2,839,099 5,840 5,153 686
Florida 154,353 150,037 4,316 18.4% 17.9% 0.5% 19,893,297 7,759 7,542 217
Michigan 71,184 69,061 2,123 15.8% 15.3% 0.5% 9,909,877 7,183 6,969 214
Oregon 28,409 28,482 -72 13.2% 13.2% 0.0% 3,970,239 7,155 7,174 -18
District of Columbia 26,433 26,551 -118 22.9% 23.0% -0.1% 658,893 40,117 40,296 -179
Maryland 59,614 62,445 -2,831 17.1% 17.9% -0.8% 5,976,407 9,975 10,449 -474
Vermont 4,325 4,688 -363 14.6% 15.8% -1.2% 626,562 6,903 7,482 -579
Idaho 9,224 10,924 -1,700 14.4% 17.1% -2.7% 1,634,464 5,643 6,684 -1,040
Connecticut 57,697 64,994 -7,296 22.8% 25.7% -2.9% 3,596,677 16,042 18,071 -2,029
Alaska 5,449 7,502 -2,052 9.5% 13.1% -3.6% 736,732 7,396 10,183 -2,785
Virginia 75,049 92,321 -17,272 16.2% 19.9% -3.7% 8,326,289 9,013 11,088 -2,074
Hawaii 7,723 10,706 -2,983 10.0% 13.8% -3.9% 1,419,561 5,440 7,542 -2,101
Montana 5,338 7,248 -1,910 12.1% 16.4% -4.3% 1,023,579 5,215 7,081 -1,866
Tennessee 56,937 72,691 -15,755 18.9% 24.2% -5.2% 6,549,352 8,694 11,099 -2,406
Arizona 40,530 58,723 -18,193 14.3% 20.7% -6.4% 6,731,484 6,021 8,724 -2,703
Maine 6,902 10,525 -3,624 12.4% 18.8% -6.5% 1,330,089 5,189 7,913 -2,725
Pennsylvania 126,374 182,015 -55,640 19.1% 27.5% -8.4% 12,787,209 9,883 14,234 -4,351
Wisconsin 49,592 78,632 -29,040 16.9% 26.8% -9.9% 5,757,564 8,613 13,657 -5,044
West Virginia 6,885 14,611 -7,726 9.1% 19.4% -10.3% 1,850,326 3,721 7,896 -4175
Mississippi 11,011 21,879 -10,867 10.5% 20.9% -10.4% 2,994,079 3,678 7,307 -3,629
New Mexico 8,758 21,212 -12,454 9.4% 22.8% -13.4% 2,085,572 4,199 10,171 -5,972
Indiana 54,607 106,579 -51,973 17.2% 33.5% -16.4% 6,596,855 8,278 16,156 -7,879
Alabama 23,789 61,806 -38,016 11.9% 31.0% -19.1% 4,849,377 4,906 12,745 -7,839
Kentucky 30,128 71,522 -41,394 16.0% 37.9% -21.9% 4,413,457 6,823 16,205 -9,379
South Carolina 22,242 73,069 -50,827 11.7% 38.4% -26.7% 4,832,482 4,603 15,120 -10,518
North Dakota 7,585 56,969 -49,384 13.8% 103.3% -89.6% 739,482 10,257 77,040 -66,782
Total 3,047,160 2,649,893 397,267 17.6% 15.3% 2.3% 318,857,056

The following historical table shows the annual ratio of federal spending to the corresponding federal revenue collected from each state. Values greater than 1 indicate a state having a net negative effect on the federal budget in that fiscal year.

State Federal spending to revenue ratio by fiscal year[6][8]
2014 2013 2012 2011 2010 2009 2008
Delaware 0.32 0.33 0.51 0.54 0.45 0.61 0.20
New Jersey 0.42 0.50 0.89 0.88 0.55 0.80 0.40
Illinois 0.47 0.48 0.58 0.61 0.73 0.80 0.50
Nebraska 0.47 0.43 0.60 0.73 0.62 0.75 0.37
Texas 0.56 0.82 1.45 1.49 0.95 1.09 0.59
Ohio 0.57 0.53 0.68 0.61 0.65 0.87 0.53
Kansas 0.57 0.56 0.78 0.86 0.95 1.39 0.72
New York 0.58 0.62 0.82 0.77 0.76 0.92 0.47
Rhode Island 0.60 0.80 1.59 1.00 0.85 0.97 0.56
Minnesota 0.62 0.56 0.58 0.43 0.49 0.53 0.32
California 0.64 0.71 0.97 0.99 0.87 1.07 0.59
Arkansas 0.67 0.65 1.13 0.73 0.71 0.92 0.53
Massachusetts 0.68 0.78 0.99 0.82 0.94 0.98 0.59
Louisiana 0.68 1.39 3.37 3.84 1.89 2.75 0.78
Colorado 0.68 0.67 0.88 0.82 0.87 0.88 0.49
Georgia 0.70 0.73 1.07 1.20 1.00 1.17 0.64
Missouri 0.72 0.86 1.09 0.96 1.06 1.20 0.86
Wyoming 0.73 0.62 0.97 1.04 0.87 1.02 0.55
Utah 0.73 0.70 0.91 0.91 1.05 1.03 0.59
Washington 0.75 0.80 1.09 1.02 0.93 1.06 0.53
New Hampshire 0.77 0.85 1.11 1.07 0.90 1.06 0.67
Oklahoma 0.78 0.77 0.95 1.01 1.06 1.20 0.61
North Carolina 0.83 0.92 1.37 1.46 1.08 1.16 0.60
Iowa 0.87 0.89 1.16 1.15 1.20 1.26 0.80
Nevada 0.88 0.90 1.19 1.14 1.05 1.18 0.65
South Dakota 0.90 0.88 1.22 1.40 1.44 1.31 0.89
Michigan 0.97 0.92 1.11 1.08 1.18 1.49 0.85
Florida 0.97 2.04 4.59 4.97 1.71 2.49 0.80
Oregon 1.00 0.91 1.32 1.32 1.13 1.27 0.69
District of Columbia 1.00 0.93 1.28 1.47 1.70 1.63 1.30
Maryland 1.05 1.06 1.65 1.35 1.28 1.46 0.93
Vermont 1.08 1.17 1.53 1.47 1.52 1.42 0.90
Connecticut 1.13 1.07 1.33 0.86 0.71 0.81 0.54
Idaho 1.18 1.22 1.44 1.80 1.67 1.72 0.87
Virginia 1.23 1.30 1.79 1.96 1.73 1.79 1.25
Tennessee 1.28 1.33 1.67 1.05 1.00 1.22 0.73
Montana 1.36 1.38 1.65 1.76 2.01 1.95 1.08
Alaska 1.38 1.25 1.67 1.58 1.66 1.79 1.18
Hawaii 1.39 1.60 3.25 3.52 1.63 2.78 0.94
Pennsylvania 1.44 1.44 1.33 0.94 1.00 1.08 0.71
Arizona 1.45 1.51 1.65 1.58 1.54 1.63 1.07
Maine 1.53 1.64 1.84 2.38 1.87 1.98 1.14
Wisconsin 1.59 1.82 1.71 0.91 1.05 1.19 0.59
Indiana 1.95 1.84 2.05 0.90 0.95 1.18 0.82
Mississippi 1.99 2.42 3.41 4.38 2.70 3.48 1.56
West Virginia 2.12 2.00 2.30 2.36 2.69 2.71 1.72
Kentucky 2.37 2.23 2.42 1.35 1.41 1.63 1.45
New Mexico 2.42 2.28 2.91 2.64 2.71 2.79 1.57
Alabama 2.60 2.52 3.33 2.39 2.01 2.34 1.35
South Carolina 3.29 5.42 7.90 4.41 2.43 3.18 1.30
North Dakota 7.51 3.90 5.38 1.78 1.35 1.60 0.87
Total 0.87 0.99 1.43 1.32 1.02 1.22 0.66

See also[edit]

US taxation:

Notes[edit]

References[edit]

Main article:

Table: