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

October 09, 2007

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

For more information, contact: Nate Bailey at (202) 464-5102.

WASHINGTON, D.C., October 9, 2007-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 from 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 greater extent in the forthcoming Tax Foundation Special Report, "Federal Tax Burdens and Expenditures by State: Which States Gain Most from Federal Fiscal Operations?"

Methodology

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®, the Tax Foundation is a nonprofit, nonpartisan 501(c)(3) organization.

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