Federal Taxing and Spending Benefit Some States, Leave Others Paying Bill

New Mexico gets $2 for every dollar in taxes, New Jersey only 61 cents

Oct 09, 2007, 01:00 ET from Tax Foundation

    WASHINGTON, Oct. 9 /PRNewswire-USNewswire/ -- Some states feast at the
 expense of others, according to the Tax Foundation's latest annual analysis
 of federal taxing and spending patterns.
     Using newly released Fiscal Year 2005 spending data from the Census
 Bureau's annual Consolidated Federal Funds Report, the Tax Foundation
 compared the federal tax burden in each state with the amount of federal
 spending in each state. The result is a ranking of which states got the
 best deal in 2005 from Uncle Sam's tax and spending policies.
     "All taxpayers know that the federal government uses tax and spending
 policy to redistribute income for citizens with high incomes to those who
 make little," said study author Curtis Dubay, a Tax Foundation economist.
 "Citizens are less aware of geographically based income redistribution."
     Dubay continued, "High income states cannot hope to receive back from
 the federal government more than they send in federal taxes because of the
 progressive nature of the federal income tax. Since the tax structure is
 unlikely to change, and federal spending is largely on auto-pilot, donor
 states are almost certain to keep sending more to Washington than they get
 in return."
     Some states' high ratios have a clear spending-related cause. The large
 number of retirees collecting Social Security in Florida increases the flow
 of federal funds. An even bigger difference is created by the
 disproportionately large federal grants funneled to Alaska and the District
 of Columbia. Virginia and Maryland benefit greatly from their proximity to
 the capital in salaried federal employment. Alaska, Hawaii and New Mexico
 also receive disproportionately large sums in this category.
     During fiscal 2005, taxpayers in New Mexico benefited the most from the
 give-and-take with Uncle Sam, receiving $2.03 in federal outlays for every
 $1.00 the state's taxpayers sent to Washington. This first-place finish is
 nothing new in New Mexico, which has perched atop this list for many years.
 Other big winners in 2005 were Mississippi($2.02), Alaska($1.84),
 Louisiana($1.78), and West Virginia($1.76).
     2005's biggest loser was New Jersey, which received 61 cents in outlays
 per tax dollar. Other low ranking states included Nevada(65 cents),
 Connecticut(69 cents), New Hampshire(71 cents), and Minnesota(72 cents).
                               FY 2005  RANKINGS
          State          Outlay to Tax Ratio            Ranking
     New Mexico                $2.03                        1
     Mississippi               $2.02                        2
     Alaska                    $1.84                        3
     Louisiana                 $1.78                        4
     West Virginia             $1.76                        5
     North Dakota              $1.68                        6
     Alabama                   $1.66                        7
     South Dakota              $1.53                        8
     Kentucky                  $1.51                        9
     Virginia                  $1.51                       10
     Montana                   $1.47                       11
     Hawaii                    $1.44                       12
     Maine                     $1.41                       13
     Arkansas                  $1.41                       14
     Oklahoma                  $1.36                       15
     South Carolina            $1.35                       16
     Missouri                  $1.32                       17
     Maryland                  $1.30                       18
     Tennessee                 $1.27                       19
     Idaho                     $1.21                       20
     Arizona                   $1.19                       21
     Kansas                    $1.12                       22
     Wyoming                   $1.11                       23
     Iowa                      $1.10                       24
     Nebraska                  $1.10                       25
     Vermont                   $1.08                       26
     North Carolina            $1.08                       27
     Pennsylvania              $1.07                       28
     Utah                      $1.07                       29
     Indiana                   $1.05                       30
     Ohio                      $1.05                       31
     Georgia                   $1.01                       32
     Rhode Island              $1.00                       33
     Florida                   $0.97                       34
     Texas                     $0.94                       35
     Oregon                    $0.93                       36
     Michigan                  $0.92                       37
     Washington                $0.88                       38
     Wisconsin                 $0.86                       39
     Massachusetts             $0.82                       40
     Colorado                  $0.81                       41
     New York                  $0.79                       42
     California                $0.78                       43
     Delaware                  $0.77                       44
     Illinois                  $0.75                       45
     Minnesota                 $0.72                       46
     New Hampshire             $0.71                       47
     Connecticut               $0.69                       48
     Nevada                    $0.65                       49
     New Jersey                $0.61                       50
     District of Columbia      $5.55
     These numbers will be detailed to a great extent in the forthcoming Tax
 Foundation Special Report, "Federal Tax Burdens and Expenditures by State:
 Which States Gain Most from Federal Fiscal Operations?"
     Federal Tax Burdens
     The tax collection data released by the Department of the Treasury
 simply shows where the taxes are collected, not where the burden is
 ultimately borne. For example, alcohol and tobacco tax data show high tax
 collections in the states where the alcohol is distilled and the tobacco
 grown. And all the corporations registered in Delaware show up as paying
 their corporate income taxes from Delaware. The Tax Foundation's tax
 incidence model corrects these lopsided collections, apportioning them to
 the states where the residents actually bore the burden of the tax.
     Federal Expenditures
     Each year the Census Bureau releases the Consolidated Federal Funds
 Report, which estimates the amount of federal spending in each state and
 territory during the prior fiscal year. The latest report allocates
 approximately 92 percent of total FY 2005 federal spending. The 8 percent
 not allocated includes net interest outlays, foreign aid, and other outlays
 that are not allocable to the states. For the purposes of this report, the
 Tax Foundation uses this census data as is.
     In the calculation of spending-to-tax ratios, however, an adjustment
 must be made to bring federal tax collections and federal spending into
 alignment. Therefore, a deficit is treated as an unfunded tax liability in
 the current year, allocated in the same fashion as the federal tax burden.
 Similarly, the model assumes that a surplus is used to pay down the federal
 debt to domestic capital holders.
     The nonpartisan, nonprofit Tax Foundation has monitored tax policy at
 the federal, state and local levels since 1937. Best known for its annual
 calculation of Tax Freedom Day(R), the Tax Foundation is a nonprofit,
 nonpartisan 501(c)(3) organization.

SOURCE Tax Foundation