Federal taxation and spending by state

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The ability of the 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/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, they 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 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 2012. Revenue is gross collections which indicates the total federal tax revenue collected by the IRS from each U.S. state and 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.

Rank State Dollars (millions) Ratio to GSP[4]
Revenue[5] Spending[6] Net Revenue Spending Net
1 Minnesota 78,685 27,594 51,091 26.7% 9.4% 17.3%
2 Delaware 21,835 10,915 10,921 33.1% 16.5% 16.6%
3 Nebraska 19,795 11,304 8,491 19.9% 11.4% 8.5%
4 Illinois 124,431 69,535 54,897 17.9% 10.0% 7.9%
5 Ohio 111,094 70,881 40,213 21.8% 13.9% 7.9%
6 Indiana 51,239 34,060 17,179 17.2% 11.4% 5.8%
7 Massachusetts 79,827 57,839 21,988 19.8% 14.3% 5.4%
8 Arkansas 25,300 19,639 5,661 23.1% 17.9% 5.2%
9 Wisconsin 41,498 28,406 13,092 15.9% 10.9% 5.0%
10 Kansas 21,905 15,542 6,362 15.8% 11.2% 4.6%
11 New York 201,168 151,719 49,449 16.7% 12.6% 4.1%
12 Connecticut 47,263 39,266 7,997 20.6% 17.1% 3.5%
13 New Jersey 111,377 94,236 17,142 21.9% 18.6% 3.4%
14 Colorado 41,253 33,515 7,738 15.1% 12.2% 2.8%
15 Pennsylvania 108,962 95,340 13,622 18.1% 15.9% 2.3%
16 Rhode Island 10,992 9,998 994 21.6% 19.6% 2.0%
17 Oklahoma 27,087 23,987 3,100 16.8% 14.9% 1.9%
18 Utah 15,642 13,143 2,499 12.0% 10.1% 1.9%
19 California 292,564 258,919 33,645 14.6% 12.9% 1.7%
20 Wyoming 3,828 3,474 354 10.0% 9.0% 0.9%
21 Missouri 48,413 48,059 354 18.7% 18.6% 0.1%
22 Washington 52,444 53,058 -614 14.0% 14.1% -0.2%
23 Michigan 59,210 60,483 -1,273 14.8% 15.1% -0.3%
24 Tennessee 47,010 47,924 -914 17.0% 17.3% -0.3%
25 Georgia 65,498 68,297 -2,799 15.1% 15.8% -0.6%
26 New Hampshire 8,808 9,403 -595 13.6% 14.5% -0.9%
27 Iowa 18,754 20,511 -1,758 12.3% 13.5% -1.2%
28 Nevada 13,727 15,794 -2,067 10.3% 11.8% -1.5%
29 South Dakota 5,136 5,951 -815 12.1% 14.0% -1.9%
30 Oregon 22,717 26,835 -4,118 11.4% 13.5% -2.1%
District of Columbia 20,748 23,701 -2,954 18.9% 21.6% -2.7%
31 Alaska 4,899 6,954 -2,055 9.4% 13.4% -4.0%
32 Texas 219,460 277,457 -57,997 15.7% 19.9% -4.2%
33 North Carolina 61,600 81,971 -20,371 13.5% 18.0% -4.5%
34 Idaho 7,622 10,397 -2,775 13.1% 17.9% -4.8%
35 Maryland 48,107 63,638 -15,531 15.1% 20.0% -4.9%
36 Kentucky 25,086 33,586 -8,500 14.5% 19.4% -4.9%
37 North Dakota 5,665 7,993 -2,328 12.3% 17.4% -5.1%
38 Vermont 3,525 4,958 -1,433 12.9% 18.2% -5.2%
39 Montana 4,384 6,730 -2,346 10.8% 16.6% -5.8%
40 Arizona 34,850 50,992 -16,142 13.1% 19.1% -6.0%
41 Maine 6,229 11,044 -4,815 11.6% 20.6% -9.0%
42 Virginia 64,297 112,114 -47,816 14.4% 25.1% -10.7%
43 West Virginia 6,499 14,443 -7,945 9.4% 20.8% -11.5%
44 Alabama 20,883 45,489 -24,606 11.4% 24.8% -13.4%
45 New Mexico 7,866 21,585 -13,719 9.8% 26.8% -17.0%
46 Hawaii 6,512 20,169 -13,658 9.0% 27.8% -18.9%
47 Mississippi 10,459 32,113 -21,655 10.3% 31.6% -21.3%
48 South Carolina 18,557 74,098 -55,541 10.5% 42.0% -31.5%
49 Louisiana 34,811 116,008 -81,197 14.3% 47.7% -33.4%
50 Florida 122,250 528,376 -406,126 15.7% 68.0% -52.3%
TOTAL 2,511,771 2,969,443 -457,672 16.1% 19.1% -2.9%

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 the state was a net negative effect on the federal budget in that fiscal year.

State Federal Spending to Revenue ratio by Fiscal Year[6][7]
2012 2011 2010 2009 2008 2007 2006 2005 2004 2003
Minnesota 0.35 0.43 0.49 0.53 0.32 0.21 0.43 0.44 0.49 0.49
Delaware 0.50 0.53 0.45 0.60 0.20 0.18 0.45 0.52 0.58 0.60
Illinois 0.56 0.60 0.72 0.80 0.50 0.30 0.61 0.61 0.66 0.67
Nebraska 0.57 0.72 0.62 0.74 0.37 0.30 0.86 0.85 0.93 0.92
Ohio 0.64 0.61 0.65 0.87 0.53 0.38 0.82 0.72 0.77 0.80
Indiana 0.66 0.89 0.95 1.18 0.82 0.57 1.06 1.05 1.12 1.07
Wisconsin 0.68 0.94 1.05 1.18 0.59 0.46 0.77 0.81 0.84 0.86
Kansas 0.71 0.85 0.95 1.38 0.72 0.47 0.99 1.00 1.11 1.13
Massachusetts 0.72 0.80 0.94 0.98 0.59 0.43 0.81 0.81 0.86 0.91
New York 0.75 0.76 0.76 0.91 0.47 0.29 0.71 0.70 0.82 0.87
Arkansas 0.78 0.73 0.71 0.92 0.53 0.36 0.71 0.76 0.86 0.88
Colorado 0.81 0.80 0.86 0.87 0.49 0.38 0.70 0.67 0.71 0.73
Connecticut 0.83 0.85 0.71 0.81 0.54 0.36 0.62 0.68 0.74 0.79
Utah 0.84 0.90 1.03 1.02 0.59 0.61 0.91 0.97 1.04 1.10
New Jersey 0.85 0.88 0.54 0.79 0.40 0.26 0.74 0.74 0.78 0.81
Pennsylvania 0.87 0.93 0.99 1.08 0.71 0.49 0.92 0.94 0.99 1.05
California 0.88 0.97 0.87 1.07 0.59 0.41 0.88 0.91 1.01 1.06
Oklahoma 0.89 0.98 1.06 1.19 0.61 0.46 0.78 0.79 1.08 1.12
Wyoming 0.91 1.03 0.87 1.01 0.55 0.43 0.84 1.03 1.04 1.17
Rhode Island 0.91 0.99 0.85 0.97 0.56 0.34 0.89 0.86 0.97 0.98
Missouri 0.99 0.95 1.05 1.19 0.86 0.60 1.04 1.05 1.05 1.07
Washington 1.01 1.00 0.92 1.05 0.52 0.46 0.76 0.88 0.91 0.91
Tennessee 1.02 1.04 1.00 1.21 0.73 0.53 0.91 0.98 1.06 1.08
Michigan 1.02 1.07 1.17 1.48 0.85 0.53 0.90 0.86 0.89 0.90
Georgia 1.04 1.19 0.87 1.12 0.64 0.46 0.86 0.86 0.90 0.92
New Hampshire 1.07 1.06 0.89 1.05 0.67 0.60 0.89 0.91 0.98 0.94
Iowa 1.09 1.14 1.20 1.25 0.80 0.59 1.45 1.30 1.55 1.49
District of Columbia 1.14 1.37 1.66 1.62 1.29 0.97 1.29 1.11 1.10 0.98
Nevada 1.15 1.13 1.05 1.18 0.65 0.42 0.75 0.80 0.91 0.86
South Dakota 1.16 1.37 1.43 1.30 0.90 0.64 1.72 1.87 2.10 1.98
Oregon 1.18 1.24 1.13 1.27 0.69 0.53 1.08 1.13 1.17 1.28
Texas 1.26 1.48 0.94 1.09 0.59 0.40 1.14 1.15 1.21 1.31
Maryland 1.32 1.34 1.27 1.45 0.93 0.69 1.23 1.11 1.22 1.19
North Carolina 1.33 1.45 1.07 1.16 0.60 0.38 0.98 1.04 1.08 1.18
Kentucky 1.34 1.35 1.41 1.63 1.46 0.85 1.49 1.54 1.56 1.71
Idaho 1.36 1.77 1.65 1.71 0.87 0.67 1.16 1.14 1.32 1.29
Vermont 1.41 1.45 1.49 1.41 0.90 0.79 1.32 1.23 1.33 1.38
North Dakota 1.41 1.77 1.34 1.59 0.88 0.76 2.29 2.48 2.58 2.53
Alaska 1.42 1.46 1.66 1.79 1.17 1.21 1.71 1.98 1.94 1.96
Arizona 1.46 1.58 1.54 1.62 1.07 0.79 1.36 1.42 1.56 1.59
Montana 1.54 1.73 2.01 1.94 1.08 0.84 1.76 1.95 2.13 2.18
Virginia 1.74 1.96 1.73 1.78 1.25 1.05 1.44 1.46 1.60 1.50
Maine 1.77 2.36 1.84 1.98 1.15 0.91 1.62 1.81 1.80 1.83
Alabama 2.18 2.37 2.00 2.34 1.35 1.08 1.88 1.88 1.95 2.00
West Virginia 2.22 2.35 2.68 2.71 1.72 1.25 2.53 2.71 2.77 3.01
New Mexico 2.74 2.61 2.70 2.78 1.56 1.49 2.61 2.67 2.84 3.04
Mississippi 3.07 4.26 2.69 3.46 1.57 1.46 4.68 3.06 2.60 2.63
Hawaii 3.10 3.51 1.63 2.77 0.94 0.80 1.60 1.59 1.20 1.87
Louisiana 3.33 3.84 1.89 2.75 0.78 0.51 4.30 3.31 3.71 3.68
South Carolina 3.99 4.41 2.42 3.18 1.31 0.93 1.70 2.79 2.86 2.84
Florida 4.32 4.97 1.71 2.48 0.80 0.49 3.01 3.02 3.39 3.34
Total 1.18 1.30 1.01 1.22 0.66 0.46 1.09 1.08 1.15 1.18

See also[edit]

US taxation:

General:

Notes[edit]

References[edit]

Main article:

Table: