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 2013. 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]
Revenue[5] Spending[6] Net Revenue Spending Net
Delaware 20,062 6,560 13,502 32.0% 10.5% 21.5%
Minnesota 90,704 50,478 40,226 29.1% 16.2% 12.9%
Nebraska 23,802 10,255 13,547 21.7% 9.4% 12.4%
New Jersey 128,052 63,984 64,068 23.6% 11.8% 11.8%
Ohio 124,731 66,304 58,427 22.1% 11.7% 10.3%
Illinois 137,068 65,119 71,949 19.0% 9.0% 10.0%
Arkansas 28,772 18,784 9,989 23.2% 15.1% 8.0%
Kansas 24,729 13,861 10,867 17.2% 9.6% 7.5%
New York 231,880 142,992 88,888 17.7% 10.9% 6.8%
Colorado 46,539 31,400 15,139 15.8% 10.7% 5.1%
Rhode Island 13,011 10,375 2,637 24.5% 19.5% 5.0%
Georgia 74,301 53,864 20,437 16.3% 11.9% 4.5%
Wyoming 5,305 3,277 2,028 11.7% 7.2% 4.5%
Massachusetts 90,464 70,878 19,586 20.3% 15.9% 4.4%
California 334,425 238,732 95,693 15.2% 10.8% 4.3%
Oklahoma 30,057 23,121 6,936 16.5% 12.7% 3.8%
Utah 17,658 12,391 5,267 12.5% 8.8% 3.7%
Washington 59,880 47,670 12,210 14.7% 11.7% 3.0%
Texas 249,912 204,985 44,927 16.3% 13.4% 2.9%
Missouri 54,412 46,829 7,583 19.7% 16.9% 2.7%
New Hampshire 10,002 8,539 1,463 14.7% 12.6% 2.2%
South Dakota 6,317 5,549 769 13.5% 11.9% 1.6%
District of Columbia 24,464 22,779 1,685 21.6% 20.1% 1.5%
Iowa 21,189 18,859 2,330 12.8% 11.4% 1.4%
Michigan 68,915 63,521 5,394 15.9% 14.7% 1.2%
Nevada 15,858 14,264 1,594 12.0% 10.8% 1.2%
Oregon 25,716 23,362 2,354 11.7% 10.6% 1.1%
North Carolina 66,102 61,071 5,031 14.0% 13.0% 1.1%
Maryland 56,332 59,724 -3,391 16.5% 17.4% -1.0%
Connecticut 53,703 57,579 -3,876 21.5% 23.1% -1.6%
Alaska 5,293 6,635 -1,342 8.9% 11.2% -2.3%
Vermont 4,046 4,786 -740 13.7% 16.2% -2.5%
Idaho 8,669 10,621 -1,952 13.9% 17.1% -3.1%
Montana 4,997 6,882 -1,885 11.3% 15.6% -4.3%
Virginia 71,365 93,184 -21,819 15.8% 20.6% -4.8%
Hawaii 7,140 11,413 -4,274 9.5% 15.2% -5.7%
Louisiana 40,185 56,012 -15,827 15.8% 22.1% -6.2%
Tennessee 53,909 71,992 -18,083 18.7% 25.0% -6.3%
Arizona 36,769 55,691 -18,922 13.2% 20.0% -6.8%
Maine 6,745 11,062 -4,317 12.3% 20.2% -7.9%
Pennsylvania 120,398 173,411 -53,013 18.7% 26.9% -8.2%
West Virginia 6,799 13,672 -6,872 9.2% 18.5% -9.3%
New Mexico 8,547 19,507 -10,961 9.3% 21.1% -11.9%
Indiana 50,994 93,900 -42,906 16.1% 29.6% -13.5%
Wisconsin 46,381 84,650 -38,269 16.4% 30.0% -13.5%
Mississippi 10,430 25,297 -14,866 9.9% 24.1% -14.1%
Florida 141,178 287,943 -146,765 17.6% 36.0% -18.3%
Kentucky 27,744 61,990 -34,246 15.1% 33.8% -18.7%
Alabama 23,766 59,934 -36,168 12.3% 31.0% -18.7%
North Dakota 7,562 29,467 -21,905 13.4% 52.3% -38.9%
South Carolina 20,446 110,981 -90,535 11.1% 60.5% -49.3%
Total 2,837,725 2,806,133 31,593 17.0% 16.8% 0.2%

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][7]
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 1.14 0.75 0.72 0.92 0.53
Massachusetts 0.68 0.78 0.99 0.82 0.94 0.98 0.59
Colorado 0.68 0.67 0.88 0.82 0.87 0.88 0.49
Louisiana 0.68 1.39 3.37 3.84 1.89 2.75 0.78
Georgia 0.70 0.72 1.07 1.20 1.00 1.17 0.64
Missouri 0.73 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
District of Columbia 1.00 0.93 1.28 1.47 1.70 1.63 1.30
Oregon 1.00 0.91 1.32 1.32 1.13 1.27 0.69
Maryland 1.05 1.06 1.65 1.35 1.28 1.46 0.93
Vermont 1.08 1.18 1.53 1.47 1.56 1.42 0.90
Connecticut 1.13 1.07 1.33 0.86 0.71 0.81 0.54
Idaho 1.18 1.23 1.44 1.80 1.67 1.72 0.87
Virginia 1.23 1.31 1.79 1.96 1.73 1.79 1.25
Tennessee 1.28 1.34 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 1.80 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 1.48 1.51 1.65 1.58 1.54 1.63 1.07
Maine 1.52 1.64 1.84 2.38 1.87 1.98 1.14
Wisconsin 1.59 1.83 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 2.43 3.41 4.39 2.69 3.48 1.56
West Virginia 2.13 2.01 2.31 2.37 2.70 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 5.43 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: