Dealing with Uncle Sam

Published December 1, 2003

All taxpayers know that the federal government uses tax and spending policy to redistribute income from citizens with high incomes to those who earn little. But most taxpayers are less aware of how the government also redistributes income based on geography. (See accompanying table.

Comparing the Census Bureau’s 2002 data on federal spending in each state with information on each state’s federal tax burden allows states to be ranked according to the “bang for the buck” each got from Uncle Sam’s tax and spending policies.

In FY 2002, New Mexico received $2.37 from the federal government for every $1.00 the state’s taxpayers sent to Uncle Sam. Only one other state got a 2-1 ratio: North Dakota, where Uncle Sam spent $2.07 for each tax dollar. Other big winners were Alaska ($1.91), Mississippi ($1.89), and West Virginia ($1.82).

Combining the third-highest tax burden per capita with the ninth-lowest federal spending, New Jersey had the lowest federal spending-to-tax ratio (62¢). Other states with low federal spending-to-tax ratios in FY 2002 were Connecticut (65¢), New Hampshire (66¢), Nevada (74¢), Massachusetts (75¢), and California (76¢).

District of Columbia’s Special Status

Though not comparable as a state, the District of Columbia is by far the biggest beneficiary of federal spending: In 2002 it received $6.44 in federal outlays for every dollar its taxpayers sent to the U.S. Treasury.

The District’s share of federal largesse amounted to $58,347 for every man, woman, and child living there. That is more than nine times the national average, and it includes more than $8,000 per person in grants, more than $19,000 per person in procurement, and more than $24,000 per person in federal wages.

Those funds are rarely mentioned by District lawmakers who assert that being the site of the federal government is a major financial burden.

States That Help Others

If some states are beneficiaries, then naturally some must be benefactors–those states where so much is collected in federal taxes that any federal spending they receive is overwhelmed.

New York has often been the biggest payer in the Tax Foundation’s annual comparison of taxes to spending, which inspired Daniel Patrick Moynihan and the Kennedy School of Government to launch their annual reference book comparing state taxes with spending ( more than 25 years ago. In recent years, however, other states have eclipsed New York for the “honor” of being the state that gives far more than it receives.

Changing Ranks

The state that raised its ratio the most over the past 10 years is Alaska, where federal spending rose from $1.26 to $1.91 for each dollar in taxes. That 65¢ increase beats out North Dakota, where federal spending increased 53¢ per dollar of tax, North Dakota (43¢), and West Virginia (38¢).

The ratio fell most dramatically in Colorado and Massachusetts. Colorado has seen its federal spending-to-tax ratio fall 28¢ from $1.06 in FY 1992 to 78¢ in FY 2002. Massachusetts’s fell 27¢.

What to Do?

Federal spending on defense and other procurement dollars are often funneled to the states of powerful congressmen, and state governments can grab more federal grant money by skillfully–some would say slavishly–manipulating their spending to comply with federal regulations.

Demography, however, is at least as influential as politics. States with more residents on Social Security, Medicare, and other large federal entitlements are bound to rank fairly high. Similarly, the high spending levels in Virginia, Maryland, and the District of Columbia are explained by the predominance of federal employees.

On the tax side of the equation, states with higher incomes per capita–Connecticut stands out–pay much higher federal taxes per capita because of the income tax’s progressive structure. The citizens in these high-income, high-tax states do not always live better or save more than people in low-income, low-tax states because the higher cost of living is usually that much higher or more.

Scott Moody is senior economist for the Tax Foundation. His email address is [email protected].

For more information …

The full text of Moody’s July 2003 Special Report, “Federal Tax Burdens and Expenditures by State,” is available from the Tax Foundation’s Web site in Adobe Acrobat PDF format at