Posted by: John S Kiernan

One big point of difference among state economies is the tax burden of the average citizen. This number varies greatly. But what are the reasons behind why some states tax their residents more or less?

If a state can afford not to tax its residents at high rates, there are multiple explanations. One is that their economic policies are sound and the state economy is doing well. But another is that the state gets disproportionately more funding from the federal government than states with harsher tax codes.

Americans have looked at federal assistance programs with growing scrutiny. According to a 2018 Rasmussen report, 61% of American adults think there are too many people receiving government financial aid. On the other hand, only 9% think not enough people are receiving funds. Regardless of overall trends, though, it is true that some states receive a far higher return on their federal income-tax contributions than others.

Just how big is this difference? And to what extent does it change our perception of state and local tax rates around the country? WalletHub sought to answer those questions by comparing the 50 states in terms of three key metrics. Read on for our findings, commentary from a panel of experts, and a detailed explanation of our methodology.

1. Main Findings
2. Red vs. Blue States
3. Correlation Analysis
4. Ask the Experts: Making Sense of Funding Disparities
5. Methodology

Main Findings Embed on your website<iframe src="//d2e70e9yced57e.cloudfront.net/wallethub/embed/2700/dependent-geochart1.html" width="556" height="347" frameBorder="0" scrolling="no"></iframe> <div style="width:556px;font-size:12px;color:#888;">Source: <a href="http://ift.tt/2G87fTu>

 

Most Federally Dependent States

Rank (1 = Most Dependent)	State	Total Score	‘State Residents’ Dependency’ Rank	‘State Government’s Dependency’ Rank
1	New Mexico	83.22	3	5
2	Kentucky	78.96	5	4
3	Mississippi	75.84	8	2
4	Alabama	71.86	4	13
5	West Virginia	67.83	6	16
6	South Carolina	67.81	2	29
7	Arizona	67.22	11	3
8	Alaska	64.16	9	10
9	Montana	63.80	15	6
10	Louisiana	58.91	34	1
11	Indiana	58.89	7	22
12	Oregon	54.35	25	7
13	Tennessee	54.30	21	8
14	Maine	53.70	14	18
15	Vermont	50.96	18	15
16	Missouri	49.23	31	9
17	Maryland	47.82	12	33
18	South Dakota	47.22	23	14
19	Wyoming	44.95	22	20
20	Oklahoma	44.75	19	26
21	Idaho	44.49	20	27
22	Arkansas	44.06	39	11
23	Pennsylvania	42.78	17	34
24	Georgia	42.57	32	17
25	Michigan	42.15	30	19
26	North Dakota	40.90	1	50
27	Ohio	40.56	47	12
28	Florida	39.79	26	25
29	Iowa	37.99	29	28
30	Texas	37.81	42	21
31	Rhode Island	37.75	38	24
32	Wisconsin	36.98	16	41
33	Washington	36.33	27	32
34	North Carolina	36.03	36	30
35	New Hampshire	35.57	37	31
36	New York	35.25	44	23
37	Nevada	34.17	33	36
38	Hawaii	33.65	10	48
39	California	31.44	43	35
40	Nebraska	28.09	46	37
41	Virginia	27.99	13	49
42	Connecticut	27.78	24	45
43	Utah	27.06	28	44
44	Colorado	26.55	35	43
45	Minnesota	25.28	40	42
46	Massachusetts	24.34	45	39
47	New Jersey	23.35	49	38
48	Illinois	22.53	48	40
49	Kansas	18.57	41	47
50	Delaware	14.97	50	46

 

Red vs. Blue States

 

Correlation Analysis

 

Embed on your website<iframe src="//d2e70e9yced57e.cloudfront.net/wallethub/embed/2700/dependent-correl21.html" width="700" height="450" frameBorder="0" scrolling="no"></iframe> <div style="width:700px;font-size:12px;color:#888;">Source: <a href="http://ift.tt/2G87fTu>

 

Embed on your website<iframe src="//d2e70e9yced57e.cloudfront.net/wallethub/embed/2700/dependent-correl2.html" width="700" height="450" frameBorder="0" scrolling="no"></iframe> <div style="width:700px;font-size:12px;color:#888;">Source: <a href="http://ift.tt/2G87fTu>

Ask The Experts: Making Sense of Funding Disparities

For further clarity on the problems contributing to federal-funding disparities, we talked to a panel of economics and public policy experts. Click on the experts’ profiles to read their bios and responses to the following key questions:

1. Should Federal resources be allocated to states according to how much they pay in federal taxes or should some states subsidize others?
2. What programs should be a state/local responsibility and what should be a federal responsibility?
3. What is the fairest way to redistribute federal resources back to the states?
4. Will the new tax code have a positive effect on the economy?

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• Robert R. Preuhs Associate Professor in the Department of Political Science at Metropolitan State University of Denver
• George DeMartino Professor of International Economics and Co-Director of the MA Program in Global Finance, Trade and Economic Integration at the University of Denver
• John Donahue Raymond Vernon Senior Lecturer in Public Policy at Harvard Kennedy School
• Kenneth Chilton Associate Professor in the Department of Public Administration at Tennessee State University
• Kenneth Kickham Professor of Public Administration at the University of Central Oklahoma
• Akheil Singla Assistant Professor in the School of Public Affairs at Arizona State University

Robert R. Preuhs Associate Professor in the Department of Political Science at Metropolitan State University of Denver

Should Federal resources be allocated to states according to how much they pay in federal taxes or should some states subsidize others?

While on its face, it may seem reasonable to simply return the amount of discretionary spending to a state in proportion to federal taxes paid, a number of issues arise that simply make this impractical, or unreasonable, to do so. States have diverse needs relative to federal expenditures. From military bases to transportation infrastructure and even national laboratories or national parks, not to mention social welfare and educational needs, the variation in federal projects and programs across the states results in some redistribution of resources, which presumably reflects the preferences of the citizens and benefits the national as a whole. Moreover, if we simply allocated resources based on how much states pay in taxes, the federal budget essentially becomes a pass-through vehicle to return funds to the states and undermines the potential for more efficient distributions based on national priorities.

What programs should be a state/local responsibility and what should be a federal responsibility?

While the Constitution provides guidelines for which types of programs the federal government and/or the states may pursue, the interpretation of those powers is debated and often decided by the courts. Outside of the legal constraints, arguments based on efficiency and effectiveness play a role in determining what types of policies should be the responsibility of each level of government. One basic principle is that if a program’s effects reach beyond a state’s border, such as air pollution control or transportation of people and goods, then the federal government should be the responsible entity.

Federal responsibility should also emerge when the desire is to provide equity in policy provisions for all U.S. citizens regardless of the state of residence, such as protecting basic civil rights and liberties. When these considerations do not hold, states can often more closely match programs to their citizens’ preferences and objective needs, and even provide laboratories for new policies before more widespread adoption.

What is the fairest way to redistribute federal resources back to the states?

It may be impossible to devise an objectively fair way to redistribute federal resources. States will find a way to feel slighted regardless of the outcome. In short, as my father used to say, “Fair is where you buy popcorn and cotton candy.” With that said, perhaps the best way to mitigate claims that allocations are unfair is to be transparent in the process of allocation and base the expenditures on objective criteria of effectiveness, efficiency, or equity, in light of clearly defined federal goals, without consideration of the taxes paid by each states’ residents. However, with such a large variety of federal programs that require vastly different resources, one state’s fair outcome will always seem inequitable to another.

Will the new tax code have a positive impact on the economy?

The new tax code should boost the economy in the short run, at least. More dollars in the pocketbooks of individuals may spur consumption, particularly at the mid- to lower-end of the income spectrum. Corporate tax cuts should also boost bottom lines for many businesses, freeing up capital for investment in future growth. In the long run, the picture is not as clear. Spurring growth in an already growing economy comes with risks, including inflation, which erodes corporate bottom lines. Moreover, if government revenues fall short of optimistic projections, budget cuts and/or ballooning deficits may offset any short-term benefits. For the states, budget cuts would mean a greater fiscal burden as they attempt to take up the slack from reduced federal spending. In short, it is a mixed bag, and much depends on attributes of the national and global economies beyond the influence of federal fiscal policy.

George DeMartino Professor of International Economics and Co-Director of the MA Program in Global Finance, Trade and Economic Integration at the University of Denver

Should Federal resources be allocated to states according to how much they pay in federal taxes or should some states subsidize others?

A key piece of the social contract that unifies a democratic country like the U.S. entails shifting resources to places where the need is greatest and the purpose is most pressing. We see this most dramatically in the wake of natural disasters, but in fact, it is a normal, appropriate pattern in any civilized society.

What programs should be a state/local responsibility and what should be a federal responsibility?

There is no fixed answer to this question. Some things are handled adequately at the local, state, or national level for long periods of time -- and then, circumstances change, such that the same functions need to be centralized. When most pollution sources had only local effects, for instance, it might have been appropriate for pollution regulation to occur primarily at the local or state level. Now that so many pollutants have national and even global effects, minimum environmental standards need to be set and enforced at the national, and even international levels. This shouldn’t preclude local jurisdictions (like states) from raising their standards above those minima -- it requires only that national government takes the lead in regulating pollutants with wide impacts. The same can be said of labor rights protections. In the wake of economic globalization with increasing international trade and investment, labor rights now need to be harmonized across national borders.

What is the fairest way to redistribute federal resources back to the states?

Policies that ensure that all citizens are entitled to basic protections, paid for by income taxes. A single-payer health care system, for instance, can achieve this. The issue isn’t “should New York subsidize Louisiana?” The issue is, should all residents of the country be provided with access to those goods and services that are fundamental to living a good human life, regardless of where they live?

Will the new tax code have a positive impact on the economy?

The new tax code is apt to provide a short-term bump in economic activity at a time when we don’t need further stimulus, but at the expense of long-term economic problems, such as rising inequality and fiscal cutbacks that will be proposed to pay for the rising deficit in the years ahead.

John Donahue Raymond Vernon Senior Lecturer in Public Policy at Harvard Kennedy School

Should Federal resources be allocated to states according to how much they pay in federal taxes or should some states subsidize others?

It would be difficult or impossible to balance resource flows to and from Washington. That’s because there are at least three major categories of resource flows to the states. The most obvious is money that goes from the federal government to be spent by state governments. I am confident that this is no large share of the total. Another category is money that goes to serve the needs of individuals and institutions within states, but not through the intermediary of state government. This is huge -- Social Security, Medicare, public pensions and (though some would dispute this) tax preferences, like health care and mortgage deductions. The third category is money that goes to buy goods and services to meet federal goals: military salaries, procurement contracts, R&D spending, etc.

What programs should be a state/local responsibility and what should be a federal responsibility?

It’s a balancing act. The more a program deals with conditions and preferences that vary across locales, the stronger the case for state or local control. And the more a program’s impacts spill across borders, the stronger the case for national responsibility.

Will the new tax code have a positive impact on the economy?

My guess is that it will have a mild positive effect in the short run and a mild-to-moderate negative effect in the longer run.

Kenneth Chilton Associate Professor in the Department of Public Administration at Tennessee State University

Should Federal resources be allocated to states according to how much they pay in federal taxes or should some states subsidize others?

No, federal resources should not be allocated to states based upon how much federal taxes are paid. Some states are poorer than others and lack robust tax bases. Historically, we’ve typically followed the model of redistributing tax revenues to bolster the public good. School funding formulas in states, for the most part, are based on this model. Urban districts have larger tax bases than rural districts. State legislatures direct funds from more affluent districts to less affluent districts to promote funding equity. The same general principle applies to states. Cities often complain of “leaked” revenue to states, but this neglects the fact that a new transportation corridor in Eastern Kentucky might make interstate commerce more efficient and generate new revenues and trade opportunities for states. Without subsidies, some regions of the U.S. would be unable to fund schools, build infrastructure, pay teachers or promote economic development.

What programs should be a state/local responsibility and what should be a federal responsibility?

There are multiple schools of thought on the issue. We are currently in a situation that pits federalists against anti-federalists. The anti-federalists have been trying to undo FDR’s New Deal since the 1930s. They want low taxes and little government intervention in markets. They oppose federal mandates such as Obamacare and argue that states should design their own systems. Others would argue for a strong federal role in funding education, enforcing environmental protections, mandating health care access for all, subsidizing mass transit and so on. The old models are fraying and that is manifested in the current environment of political chaos. Folks are seeking certainty and nostalgia for the way things used to be. But, our tax system has not evolved. Many of the programs and policies enacted that drive current debates about the proper role of government were implemented during the industrial era.

The mechanisms we have to capture revenues are not compatible with a digital knowledge economy. We try to retrofit our old legacy tax system when states impose taxes on Amazon and other online retailers. While most “anti-federalists” promote the idea of local control, they contradict themselves in many cases. For example, when more politically progressive regimes in cities try to impose affordable housing mandates or minimum wage increases, more rural state legislatures nullify those local initiatives. Or, businesses fight attempts by localities to raise local revenues. Local leaders in Williamson County, Tennessee, one of the wealthiest counties in the U.S., implemented fees on new development to help offset the costs of residential growth. A group of developers have sued the county, and none of the money from the impact fees can be allocated to public projects that would help build roads and schools until after the lawsuit is settled.

What is the fairest way to redistribute federal resources back to the states?

I’m not sure there is a “fairest” way to allocate resources back to the states. Every state thinks their projects are the most important. State legislatures across the country -- Wisconsin, Kansas, Kentucky and many others -- continue to cut budgets. The federal government has cut taxes and will cut programs, except military spending. This will require localities to be more creative in terms of revenues. Ultimately, individuals will continue to be burdened by increased costs for health care, education, and retirement. We’re all free agents now without a “nanny state” to protect us from the whims of the market.

Will the new tax code have a positive impact on the economy?

It’s too early to say how the new tax code will affect the economy in the long term. In the short term, it could fuel increased consumer spending. But, the majority of the benefits go to those who are already doing quite well. Wages have been sticky for decades and there was some evidence prior to tax reform that wages were starting to rise. My biggest concern is that the new cuts will exacerbate existing debt problems and will be used to justify future cuts to Medicaid, Medicare, federal/state pensions and social security. This is the long game that anti-federalists have played. They want to starve the beast (big government) and then say “see, government doesn’t work.”

Kenneth Kickham Professor of Public Administration at the University of Central Oklahoma

Should Federal resources be allocated to states according to how much they pay in federal taxes or should some states subsidize others?

Our federalist system of sharing power among the states and the national government has strengths and weaknesses, each of which depends to some degree on one’s political preferences. Those favoring a strong national government might justify such a preference on the basis of the national government’s capacity for smoothing out disparities across states, in things like quality of life, justice, equality, etc. States’ rights advocates, on the other hand, might instead emphasize how innovation can begin in one state, and spread to others, in which case letting the states have as much autonomy as possible makes more sense.

I have been teaching federalism for 20 years, and the idea of some sort of injustice arising from some states subsidizing others has never been a significant part of the discussions I have had. It has always simply been a fact that any system of federal taxes and expenditures inevitably leads to redistribution not only across households, but also across states. From my perspective, that’s part and parcel of, or maybe even the whole point of, becoming “a union of states.” A federation is a collective, and thus, collectivism in fiscal policy makes perfect sense.

What programs should be a state/local responsibility and what should be a federal responsibility?

In theory, responsibilities should locate at the “lowest” level of government that can handle said responsibility. In practice, however, we live in a complex world that doesn’t fit its component responsibilities nicely into our preconceived templates. Distinctions between state and federal, or among public, private and nonprofit sectors, are fluid, reflecting our rapidly changing needs and differential capabilities, both geographically and organizationally. Current federalism and management theories speak of policy-centered networks cutting across these arbitrary lines, so that real problems in society can be addressed in the best way possible.

We don’t get caught up so much in the sorting out of responsibilities, but strive to cobble together collaborative networks and arrangements that leverage our available resources efficiently and effectively. Institutional boundaries are less important than finding ways to address problems. There have been attempts to sort responsibilities by level of government, such as Reagan’s “Big Swap” proposal (the idea was for the federal government to take responsibility for Medicaid and the states to take responsibility for income maintenance), but people actually running public and nonprofit programs tend to see that line of reasoning as less productive.

What is the fairest way to redistribute federal resources back to the states?

If you accept that the whole point of collectivizing states, which federalism does, is to redistribute resources to make the whole nation stronger, then obviously, “need” is the basis for redistribution. Most intergovernmental programs are funded this way. Formulas take account primarily of population, resources (i.e., capacity) and need. That is how it has always been done.

Will the new tax code have a positive impact on the economy?

No one knows, of course, because it was written and passed in such a haphazard and hurried manner that we really don’t even know what all is in there. Congress is now considering how it will repair the many glitches and unintended consequences of that process. When they used reconciliation to get around working with the opposition party, the GOP bypassed a valuable check on their own work. My experience tells me not to expect positive impact on “the economy” from the tax overhaul. A better question, in my opinion, is how the tax overhaul will affect different groups differently.

Akheil Singla Assistant Professor in the School of Public Affairs at Arizona State University

Should Federal resources be allocated to states according to how much they pay in federal taxes or should some states subsidize others?

It is important not to think of federal resources as a single pot of money from which certain states draw more and other states draw less. Though one can work out how much federal spending ends up going to one state versus another, the actual process of allocating federal dollars does not work that way. Congress allocates money to particular programs that in turn benefit different people. And because states have differing demographic compositions, some states benefit more from certain programs than others.

Whether federal dollars going into a state should be dependent on the federal tax revenues being extracted from that state depends on the nature of the program in question. Medicaid, for instance, provides access to health care for low-income individuals. The federal government funds between 50 and 80 percent of Medicaid spending; states with lower per capita incomes receive more Medicaid funding because they have a larger share of low-income residents and, by extension, have more Medicaid-eligible residents. If Medicaid funding was based on state contributions to federal tax revenue, states with more low-income, Medicaid-eligible residents would effectively be punished, receiving a smaller pool of money to be spread across a greater number of people than wealthier states with lower numbers of qualifying residents. This, of course, defeats the purpose of the program.

On the other hand, federal programs that are not targeted toward providing aid to lower-income populations may not suffer from the same issues. Highway funding, for instance, is largely about building and maintaining the network of roads; ideally, this determination would be made based on some objective measure of need. Given that no such measure exists, program allocations tied to state contributions to federal taxes may make some level of sense, as states with higher per capita incomes likely have more economic activity that requires increased use of infrastructure.

In practice, most of federal spending goes toward some form of social assistance (e.g., Medicaid, Medicare, Social Security, TANF, SNAP). As a result, federal allocations do not correspond with state-level contributions to federal revenues.

What programs should be a state/local responsibility and what should be a federal responsibility?

Richard Musgrave argued that there are three major functions of government: economic stabilization, income redistribution, and resource allocation. Economic stabilization mostly focuses on things like unemployment, price stability (e.g., low inflation), and economic growth. Income redistribution covers much of what we would consider social policy, wherein resources are allocated toward ensuring people do not fall below a socially-defined floor. And resource allocation covers the provision of public goods, or things that markets fail to provide in socially-optimal amounts. These categories are useful to address this question.

Economic stabilization, both in theory and in practice, is best handled at the federal level. State and local governments are constrained from borrowing to finance their operations, which means in the event of a recession, they are forced to cut spending when revenues invariably fall. The federal government, on the other hand, engages in counter-cyclical spending due to its ability to borrow. It also controls macroeconomic policy via the Federal Reserve, which is far better suited to manage the potentially opposing forces of price stability and economic growth as a singular entity than 50 state-level banks would be.

Income redistribution, in theory, also ought to be conducted at the federal level. The theoretical wisdom suggests that allowing state and local governments to set their own redistribution policies will encourage higher-income individuals to leave communities that allocate more resources to those ends and attract lower-income individuals who benefit from them. This is known as a welfare magnet. In practice, however, communities see a different effect: though there is evidence of a “welfare magnet” effect, it is diluted, because low-income individuals aren’t typically very mobile. More broadly, most people do not make relocation decisions based on the generosity of social policy in their jurisdiction; indeed, there is evidence that most citizens have no idea what differences there are in the policies of different states or municipalities. As a result, the federal government and states tend to share the responsibility of income redistribution programs (e.g., Medicaid, TANF, SNAP).

Resource allocation, or the provision of public goods, does not allow for such easy distinctions. Instead, here we need to consider how the benefit of a particular program accrues to society. In the case of something like national defense, the benefits extend to all residents of the nation, so it should be provided federally. On the other hand, police and fire services typically only benefit people within a small geographic area; they are correspondingly provided at the local level. K-12 education receives funding from all three levels of government, with the states and municipalities covering about 90 percent of the cost. This implies that most of the benefit of a K-12 education system accrues to the school district and the state it resides in. To the extent it is possible to do so, funding for public goods should account for the benefits that accrue to higher or lower levels of government.

What is the fairest way to redistribute federal resources back to the states?

The source of funding should be based on the nature of the services being provided. Providing health care is different than building roads or educating children, and the funding for those services should reflect those differences. If the federal government chooses to expand the social safety net, this will invariably mean poorer states will receive larger shares of federal resources. Ultimately, this question is based on what the federal government chooses to allocate resources toward, which is more of a political question than anything else.

Will the new tax code have a positive impact on the economy?

The University of Chicago’s Booth School asked 42 senior economists this same question. Only one of them suggested the new tax code was likely to spur economic growth. Nothing I have seen has given me cause to disagree with those scholars.

Methodology

In order to determine the most and least federally dependent states, WalletHub compared the 50 states across two key dimensions, “State Residents’ Dependency” and “State Government’s Dependency.”

We evaluated those dimensions using three relevant metrics, which are listed below with their corresponding weights. Each metric was graded on a 100-point scale, with a score of 100 representing the highest level of federal dependency.

We then determined each state’s weighted average across all metrics to calculate its total score and used the resulting scores to rank-order our sample.

State Residents’ Dependency – Total Points: 50

• Return on Taxes Paid to the Federal Government: Triple Weight (~37.50 Points)Note: This metric was calculated by dividing federal funding in U.S. dollars by IRS collections in U.S. dollars.
• Share of Federal Jobs: Full Weight (~12.50 Points)

State Government’s Dependency – Total Points: 50

• Federal Funding as a Share of State Revenue: Full Weight (~50.00 Points)Note: This metric reflects the proportion of state revenue that comes from the federal government in the form of intergovernmental aid.

 

The following metrics were included in the infographic above for context only. They represent subsets of federal funding and are reflected in the first two metrics.

• “Federal Contracts” divided by “IRS Collections”
• “Grants” divided by “IRS Collections”
• “Other Financial Assistance” divided by “IRS Collections”

Sources: Data used to create this ranking were collected from the Internal Revenue Service, U.S. Census Bureau, USAspending.gov, Bureau of Labor Statistics and Governing.com. Unless noted otherwise, the statistics underlying this report are from 2015 and 2016.

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