The federal tax system takes money from taxpayers in all 50 states, and the government then spends it on programs across the nation. That leads to a substantial redistribution of financial resources, with some states paying more than they get back, while others end up ahead on a net basis. Recently, opponents of the new tax laws have argued that taking away federal deductions for state and local income tax payments only worsens the imbalance between net donor states and net receiver states as measured by what they pay and get back from the federal government.
One way to measure that redistribution is to look at per-capita federal taxes paid and compare it to per-capita benefits from federal spending. The New York State Comptroller's office did exactly that, and its report from late last year showed the results.
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5 states that get back more than they pay in federal taxes
Dealing with low incomes
For the most part, the states that top this list all have a lot in common. They tend to have relatively rural populations spread out across their respective states, and their incomes are generally low. The list includes the three lowest-income states in the nation, and when you look slightly beyond the top five, you'll find a number of other states that look quite similar from a macroeconomic perspective.
Conversely, the federal government supports these states in different ways. Mississippi tops the list in terms of direct payments from the federal government, while New Mexico and West Virginia are near the top in terms of federal grant expenditures. Federal procurements play a vital role in Alabama and New Mexico as well. Between the money that residents get from social programs aimed at low-income individuals, such as SNAP assistance, and the spending that the government makes on facilities like military bases, national parks and forests, and national laboratories like those in Los Alamos, some states end up well ahead of what they send to the federal government in tax revenue.
1 of these states is not like the others
The big outlier on this list is Virginia. It's far from low-income, with a tax burden that's among the top 15 states in the nation. But what sets Virginia apart is that it gets by far the largest total per capita expenditures from the federal government.
Much of that has to do with the fact that the nation's capital borders on Virginia. That's true to some extent for Maryland as well, which falls just short of making this list, but a historical oddity explains the disparity a bit more clearly. Because the original District of Columbia ceded back the portion of Virginia land that it originally obtained on the south side of the Potomac River, the federal agencies located there all use federal money to compensate Virginia workers. That makes Virginia the top recipient of federal procurement funds and ranks it No. 3 in terms of wages and salaries, behind only Hawaii and Alaska.
Are these states in financial danger?
The question facing these states is whether federal budget cuts would hit them harder than their peers. Many of the entitlement programs recipients in these states get are aimed at the entire nation, so eliminating them would require massive action from lawmakers. Moreover, federal spending on military needs is likely to rise rather than fall under the current administration, potentially strengthening those states on this list that have a military presence.
For now, it's unlikely that these states will stop being net winners from the collection and spending of federal financial resources. It would take a dramatic upsurge in economic activity in these historically lagging areas in order to turn the tide and lift these states out of the financial cellar.
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