Federal Tax Burdens and Expenditures by State

Download Special Report No. 139

Special Report No. 139

Executive Summary
The Tax Foundation’s annual federal tax burden and expenditure study clarifies the geographical patterns of income redistribution that federal tax and spending policies cause each year. The results of the study have been controversial for years because they show that the nation is not only redistributing income from the prosperous to the poor, but from the middle-income residents of high-cost states to the middle-income residents of low-cost states.

Thanks to a steeply progressive federal income tax, states with higher incomes pay vastly higher federal taxes, payments that are unlikely ever to be matched by federal spending directed to those states. Ironically, most of these high-paying states are the so-called blue states that have generally elected politicians who support a more steeply progressive tax system even though their own constituents bear a greater share of the burden as the code gets more progressive.

All categories of federal taxes, including income taxes on individuals and businesses, social insurance taxes, excise taxes, estate and gift taxes, customs duties and all other taxes, are tabulated and the total tax burden of each state is determined. This figure is compared to the flow of federal funds back to each state, bringing the two sides of federal fiscal operations together.

In fiscal year 2004, New Mexico, Alaska, West Virginia, Mississippi and North Dakota received substantially more from the federal government than they paid in taxes, while New Jersey, Connecticut, New Hampshire, Minnesota and Illinois paid much more in taxes than they received in spending. Tax burdens for fiscal year (FY) 2004, which starts October 1, 2003 and ends September 30, 2004, are used in this study because the most recent state-level federal expenditure data released by the Census Bureau, to which the tax burdens are compared, is for FY 2004.