Some States Get Fat, Others Fleeced

Published January 1, 2008

Some states feast at the expense of others when the federal government hands out money, 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.”

Federal Government Outlays to Taxes Paid
By State, FY 2005
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

Dubay added, “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 autopilot, donor states are almost certain to keep sending more to Washington than they get in return.”

Various Causes

Some states’ high ratios have a clear spending-related cause, the report, released in October, noted. 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 nation’s 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 most from the give-and-take with Uncle Sam, receiving $2.03 in federal outlays for every $1 the state’s taxpayers sent to Washington. This first-place finish is nothing new in New Mexico, which has perched atop the list for many years. Other big winners in 2005 were Mississippi ($2.02), Alaska ($1.84), Louisiana ($1.78), and West Virginia ($1.76).

New Jersey’s Biggest Loser

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).

The tax collection data released by the Department of the Treasury show only 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.

Nate Bailey ([email protected]) is manager of media relations at the Tax Foundation in Washington, DC.