American government has become much larger and more centralized over the past century. That has created winner and loser states as taxpayer cash floods into Washington and is then dispersed through more than 2,300 federal spending programs.

In 2020, the federal government will vacuum $3.6 trillion from taxpayer wallets in the 50 states and borrow $1 trillion from global capital markets. Then it will turn on the leaf blower to scatter $4.6 trillion back across the 50 states, except for the cut the middleman in D.C. will keep for itself.

The Rockefeller Institute has released a report detailing these cash flows. The report calculates a “balance of payments” for each state in 2018, which is federal spending less federal taxes paid by individuals and businesses in each state. The winner states have a positive balance and the loser states a negative one. Federal spending includes four items: benefits (such as Social Security), state‐​local grants (such as Medicaid), procurement (such as fighter jets), and pay for federal workers.

On a per capita basis, the biggest winner states are Virginia, Kentucky, Alaska, and New Mexico. The biggest loser states are Connecticut, Massachusetts, New Jersey, and New York. Those loser states have a large number of high‐​earning individuals who get hit hard under the federal income tax, which imposes higher rates on top incomes.

Figure 1 shows data from the Institute’s report. Taxes per capita are on the horizontal axis and spending per capita on the vertical axis. Each dot is a state. The figure excludes a portion of taxing and spending that could not be allocated by state.

States on the bottom right are the losers and those on the top left are winners. Connecticut is on the far right paying $14,004 in federal taxes per capita but receiving only $11,750 in federal spending. Connecticut would be better off in a decentralized United States with citizens paying their taxes to state and local governments rather than the federal government.

 

Every state is actually worse off than indicated in Figure 1 because federal borrowing in 2018 allowed for spending to be 22 percent larger than taxes. But borrowing is not a free lunch. It creates a cost that will hit residents of every state down the road — borrowing is just deferred taxes.

For Figure 2, I scaled up taxes to include both the current and deferred federal burdens. Connecticut residents paid $17,098 in current and deferred taxes per capita and received only $11,750 in spending. They are only getting back 69 cents in federal spending for every dollar of federal tax burden.

In the figure, the loser states from centralized government are below the line and the winner states above it. Actually, because centralization creates lower‐​quality government, residents of every state lose, as I discuss here.

The interesting political question is why do loser states such as Connecticut, Massachusetts, New Jersey, and New York stand for it? Politicians from those states should be pressing for a less progressive federal income tax and for devolution of government activities back to the states.

 

This article by Chris Edwards originally appeared in the CATO at Liberty blog in 2019. Research assistance from David Kemp.

Image: Reuters.