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, along with an estimated per capita average. 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[5]
Revenue[6] Spending[7] Net Revenue Spending Net Revenue Spending Net
Delaware 19,040 6,106 12,934 30.3% 9.7% 20.6% 20,350 6,526 13,824
New Jersey 134,870 55,994 78,876 24.6% 10.2% 14.4% 15,089 6,265 8,825
Minnesota 96,227 59,217 37,010 30.4% 18.7% 11.7% 17,633 10,851 6,782
Nebraska 23,885 11,329 12,556 21.3% 10.1% 11.2% 12,695 6,021 6,673
Illinois 148,332 70,137 78,195 19.9% 9.4% 10.5% 11,516 5,445 6,071
Rhode Island 13,888 8,376 5,512 25.3% 15.2% 10.0% 13,162 7,938 5,224
Ohio 129,901 73,434 56,467 22.3% 12.6% 9.7% 11,204 6,334 4,870
Arkansas 30,729 20,453 10,276 25.3% 16.8% 8.5% 10,359 6,895 3,464
Kansas 25,897 14,737 11,160 17.6% 10.0% 7.6% 8,918 5,075 3,843
New York 250,618 146,029 104,589 17.8% 10.4% 7.4% 12,692 7,395 5,297
Texas 265,336 147,380 117,956 16.1% 8.9% 7.2% 9,843 5,467 4,376
Massachusetts 100,161 68,067 32,094 21.8% 14.8% 7.0% 14,849 10,091 4,758
Missouri 61,512 44,575 16,937 21.6% 15.7% 6.0% 10,144 7,351 2,793
Louisiana 43,023 29,411 13,612 17.1% 11.7% 5.4% 9,253 6,325 2,928
Colorado 52,003 35,650 16,353 17.0% 11.6% 5.3% 9,710 6,656 3,053
California 369,193 248,251 120,942 16.0% 10.7% 5.2% 9,515 6,398 3,117
Georgia 79,566 55,438 24,127 16.7% 11.6% 5.1% 7,880 5,490 2,389
Oklahoma 32,611 25,358 7,253 17.8% 13.8% 4.0% 8,409 6,539 1,870
Washington 67,813 51,271 16,542 15.9% 12.0% 3.9% 9,603 7,261 2,342
New Hampshire 11,044 8,517 2,527 15.4% 11.9% 3.5% 8,324 6,419 1,904
Utah 18,389 13,465 4,925 13.0% 9.5% 3.5% 6,249 4,575 1,673
Wyoming 4,892 3,562 1,330 11.1% 8.1% 3.0% 8,374 6,098 2,276
North Carolina 72,472 59,910 12,561 15.0% 12.4% 2.6% 7,288 6,025 1,263
Iowa 22,309 19,440 2,869 13.1% 11.4% 1.7% 7,180 6,257 923
South Dakota 6,734 6,039 695 14.7% 13.2% 1.5% 7,892 7,078 814
Nevada 16,579 14,629 1,949 12.6% 11.1% 1.5% 5,839 5,153 687
Florida 154,353 150,038 4,315 18.4% 17.9% 0.5% 7,759 7,542 217
Michigan 71,184 69,070 2,114 15.8% 15.3% 0.5% 7,183 6,970 213
District of Columbia 26,433 26,372 60 22.9% 22.8% 0.1% 40,117 40,025 91
Oregon 28,409 28,488 -79 13.2% 13.2% 0.0% 7,156 7,176 -20
Maryland 59,614 62,426 -2,813 17.1% 17.9% -0.8% 9,975 10,445 -471
Vermont 4,325 4,688 -364 14.6% 15.8% -1.2% 6,902 7,482 -580
Idaho 9,224 10,926 -1,702 14.4% 17.1% -2.7% 5,643 6,685 -1,042
Connecticut 57,697 65,028 -7,330 22.8% 25.7% -2.9% 16,042 18,080 -2,038
Alaska 5,449 7,498 -2,049 9.5% 13.1% -3.6% 7,396 10,178 -2,782
Virginia 75,049 92,007 -16,959 16.2% 19.8% -3.7% 9,013 11,050 -2,037
Hawaii 7,723 10,714 -2,991 10.0% 13.8% -3.9% 5,440 7,548 -2,107
Montana 5,338 7,269 -1,931 12.1% 16.4% -4.4% 5,215 7,101 -1,886
Tennessee 56,937 72,706 -15,770 18.9% 24.2% -5.2% 8,693 11,101 -2,408
Arizona 40,530 58,731 -18,201 14.3% 20.7% -6.4% 6,021 8,725 -2,704
Maine 6,902 10,556 -3,654 12.4% 18.9% -6.5% 5,189 7,936 -2,747
Pennsylvania 126,374 181,911 -55,537 19.1% 27.4% -8.4% 9,883 14,226 -4,343
Wisconsin 49,592 78,647 -29,055 16.9% 26.9% -9.9% 8,613 13,660 -5,046
West Virginia 6,885 14,612 -7,727 9.1% 19.4% -10.3% 3,721 7,897 -4,176
Mississippi 11,011 21,877 -10,866 10.5% 20.9% -10.4% 3,678 7,307 -3,629
New Mexico 8,758 21,215 -12,456 9.4% 22.8% -13.4% 4,200 10,172 -5,973
Indiana 54,607 106,582 -51,975 17.2% 33.5% -16.4% 8,278 16,156 -7,879
Alabama 23,789 61,808 -38,018 11.9% 31.0% -19.1% 4,906 12,745 -7,840
Kentucky 30,128 71,528 -41,400 16.0% 37.9% -22.0% 6,826 16,207 -9,380
South Carolina 22,242 73,087 -50,845 11.7% 38.4% -26.7% 4,603 15,124 -10,522
North Dakota 7,585 56,972 -49,386 13.8% 103.3% -89.6% 10,257 77,043 -66,785
Total 3,047,160 2,661,534 385,626 17.6% 15.4% 2.2% 9,557 8,347 1,209

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[7][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
Arkansas 0.67 0.65 1.13 0.73 0.71 0.92 0.53
California 0.67 0.71 0.97 0.99 0.87 1.07 0.59
Massachusetts 0.68 0.78 0.99 0.82 0.94 0.98 0.59
Louisiana 0.68 1.39 3.38 3.84 1.89 2.75 0.78
Colorado 0.69 0.68 0.88 0.82 0.87 0.88 0.49
Georgia 0.70 0.72 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 0.76 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 1.20 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 1.12 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 1.46 1.70 1.63 1.30
Oregon 1.00 0.91 1.33 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 1.17 1.54 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 1.78 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 1.66 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 3.26 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 1.66 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 1.83 1.72 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 2.72 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: