The ability of the United States government to tax and spend in specific regions has large implications to economic activity and performance. Taxes are indexed to wages and profits and therefore areas of high taxation are correlated with areas of higher per capita income and more economic activity.

Spending is largely focused on areas of poverty, the elderly, and centers of federal employment such as military bases.

Background

The ability of the government to tax and spend in specific regions has large implications to economic activity and performance. The main question behind this issue stems into three different approaches. First, federal spending should be neutral, meaning federal taxation should roughly equal expenditures. Second, it should be redistributive, meaning rich states should be taxed most heavily and poorer states should receive more benefits. Third, spending and taxation should be accidental per se, meaning higher taxation should be performed based on income but with little relation to geographic region and spending should be done where it allows for the most efficiency. The main issue driving this research is the question between equity and equality (Leonard and Walder, Page 17).

Typically, it is seen taxes are highly indexed to wages and therefore places of high taxation are geographically found in areas with higher per capita income. The problem with taxation indexed to wages is that it does not consider cost of living. In areas with higher per capita income, it is highly likely that the cost of living is also higher; for instance, this is the case in New York. The effect of not indexing to costs of living makes some states look wealthier compared to others. It is typical that states with low costs of living receive more in spending than states with high costs of living (Leonard and Walder, Page 19). After discounting income with costs of living, New York's poverty level increases a significant amount (Pear, Page 2). The significance level between high levels of poverty and high taxation may be arguable.

Spending is not so easily located geographically. The breakdown of federal spending is done in the following ways: defense (military), non-defense discretionary, Social Security, Medicare, grants, and various other programs. Defense spending is the most volatile, as it is usually found to be higher in states with established defense contractors and other defense facilities. Areas of higher social insurance spending are typically seen in areas of larger elderly population. Social security is the dominant expenditure of per dollar federal expenditures.

Other factors of spending are largely political in the sense that politicians who can effectively argue for more spending get the most spending for their states. Some trends of spending as of 1999 are as follows: defense spending in the South and the national capital, non-defense discretionary spending between the Midwest and the Rockies, most Medicare and Social Security is located in the East and Central/Midwest, and other assistance programs following the Appalachian Mountains from Louisiana/Mississippi to Maine (Leonard and Walder, Page 30).

Federal spending by state as of FY 2013

Through fiscal year 2010, the Census Bureau produced the annual Consolidated Federal Funds Report, tracking Federal expenditures both geographically and by agency and program. As of 2011, funding for the Federal Financial Statistics program, of which the CFFR was part, was cut from the Federal budget. Private organizations such as the National Priorities Project and The Pew Charitable Trusts have since developed their own reports. (The tables below are from the 2014 Pew report.)

Total federal spending in millions of dollars, by state, federal fiscal 2013 Statefederal district or territoryRetirement benefitsNonretirement benefitsGrantsContractsSalaries and wagesTotal United States$1,061,181$870,048$506,475$407,277$303,990$3,148,971 Alabama$20,923$14,662$6,155$9,668$5,355$56,762 Alaska$2,073$1,589$2,649$1,628$2,628$10,568 Arizona$22,360$18,262$9,058$12,350$5,275$67,306 Arkansas$11,865$8,315$5,484$944$1,906$28,514 California$101,841$98,526$66,693$47,657$29,008$343,725 Colorado$16,020$10,896$7,092$8,013$6,641$48,664 Connecticut$11,646$10,527$7,047$10,401$1,831$41,452 Delaware$3,673$2,668$1,742$272$692$9,047 District of Columbia$3,116$1,867$4,963$16,784$21,056$47,785 Florida$76,959$66,541$19,062$14,089$14,180$190,831 Georgia$31,894$25,590$11,625$7,625$11,797$88,532 Hawaii$5,336$3,444$2,881$1,898$5,750$19,309 Idaho$5,440$3,629$2,377$2,574$1,118$15,139 Illinois$38,047$35,761$17,614$6,497$7,565$105,483 Indiana$22,338$17,623$9,434$3,140$2,961$55,496 Iowa$10,461$7,697$4,783$1,600$1,341$25,883 Kansas$9,854$7,267$1,888$1,720$3,514$24,243 Kentucky$16,765$13,003$6,604$6,436$5,219$48,027 Louisiana$14,740$13,849$9,019$3,437$3,656$44,701 Maine$5,610$3,976$3,186$2,079$1,227$16,078 Maryland$23,739$15,129$9,950$25,598$18,570$92,987 Massachusetts$21,146$20,795$15,039$14,572$4,077$75,631 Michigan$37,086$31,458$16,488$4,810$4,173$94,014 Minnesota$16,866$12,757$9,051$3,045$2,585$44,304 Mississippi$11,134$9,516$5,153$5,786$2,719$34,308 Missouri$22,206$16,613$11,566$9,933$5,135$65,452 Montana$3,933$2,392$2,272$443$1,109$10,148 Nebraska$6,231$4,300$2,539$968$1,598$15,636 Nevada$8,694$6,830$2,721$2,884$2,052$23,181 New Hampshire$5,096$3,229$1,649$1,788$653$12,414 New Jersey$28,547$27,645$15,393$6,442$4,546$82,573 New Mexico$7,710$5,471$4,690$6,696$2,987$27,554 New York$61,170$59,858$52,863$10,744$10,700$195,334 North Carolina$35,810$27,085$14,202$4,954$11,856$93,907 North Dakota$2,215$1,499$1,566$490$1,035$6,805 Ohio$39,271$33,182$16,221$6,265$6,633$101,573 Oklahoma$14,606$10,148$6,400$2,031$4,666$37,851 Oregon$14,355$10,490$4,515$1,123$2,231$32,713 Pennsylvania$48,861$40,341$21,898$16,181$7,707$134,989 Rhode Island$3,819$3,420$2,410$767$1,134$11,549 South Carolina$19,388$13,637$5,695$5,440$4,624$48,784 South Dakota$2,963$1,984$1,558$565$955$8,025 Tennessee$24,307$19,083$9,378$7,641$4,100$64,508 Texas$72,354$64,922$35,184$39,051$22,947$234,459 Utah$7,095$5,049$3,516$2,237$2,723$20,620 Vermont$2,359$1,729$1,888$393$546$6,915 Virginia$34,719$17,910$9,081$51,186$25,133$138,029 Washington$24,551$16,688$10,541$11,736$9,422$72,937 West Virginia$8,485$5,855$3,992$1,153$1,831$21,317 Wisconsin$19,570$14,181$8,623$3,224$2,137$47,735 Wyoming$1,935$1,157$1,081$317$687$5,177

Per capita federal spending, by state, federal fiscal 2013

Statefederal district or territoryRetirement benefitsNonretirement benefitsGrantsContractsSalaries and wagesTotal United States$3,357 $2,752 $1,602 $1,288 $962 $9,961 Alabama$4,329 $3,033 $1,273 $2,000 $1,108 $11,743 Alaska$2,820 $2,162 $3,604 $2,215 $3,575 $14,375 Arizona$3,374 $2,756 $1,367 $1,864 $796 $10,157 Arkansas$4,009 $2,810 $1,853 $319 $644 $9,635 California$2,657 $2,570 $1,740 $1,243 $757 $8,967 Colorado$3,041 $2,068 $1,346 $1,521 $1,261 $9,237 Connecticut$3,238 $2,927 $1,960 $2,892 $509 $11,527 Delaware$3,967 $2,882 $1,882 $294 $748 $9,773 District of Columbia$4,820 $2,887 $7,678 $25,963 $32,572 $73,920 Florida$3,936 $3,403 $975 $721 $725 $9,760 Georgia$3,192 $2,561 $1,163 $763 $1,181 $8,860 Hawaii$3,801 $2,453 $2,052 $1,351 $4,095 $13,752 Idaho$3,375 $2,251 $1,474 $1,597 $693 $9,390 Illinois$2,953 $2,776 $1,367 $504 $587 $8,188 Indiana$3,400 $2,682 $1,436 $478 $451 $8,446 Iowa$3,385 $2,491 $1,548 $518 $434 $8,375 Kansas$3,405 $2,511 $652 $594 $1,214 $8,377 Kentucky$3,814 $2,958 $1,502 $1,464 $1,188 $10,927 Louisiana$3,187 $2,994 $1,950 $743 $790 $9,664 Maine$4,223 $2,993 $2,399 $1,565 $924 $12,104 Maryland$4,004 $2,552 $1,678 $4,318 $3,132 $15,684 Massachusetts$3,160 $3,107 $2,247 $2,177 $609 $11,300 Michigan$3,748 $3,179 $1,666 $486 $422 $9,501 Minnesota$3,112 $2,354 $1,670 $562 $477 $8,174 Mississippi$3,722 $3,181 $1,723 $1,934 $909 $11,469 Missouri$3,674 $2,749 $1,914 $1,643 $850 $10,829 Montana$3,874 $2,356 $2,238 $436 $1,092 $9,996 Nebraska$3,335 $2,301 $1,359 $518 $855 $8,368 Nevada$3,116 $2,448 $975 $1,033 $735 $8,308 New Hampshire$3,850 $2,440 $1,246 $1,351 $493 $9,380 New Jersey$3,208 $3,106 $1,730 $724 $511 $9,279 New Mexico$3,697 $2,624 $2,249 $3,211 $1,432 $13,213 New York$3,113 $3,046 $2,690 $547 $544 $9,940 North Carolina$3,636 $2,750 $1,442 $503 $1,204 $9,536 North Dakota$3,062 $2,072 $2,165 $678 $1,430 $9,407 Ohio$3,394 $2,868 $1,402 $541 $573 $8,778 Oklahoma$3,793 $2,636 $1,662 $528 $1,212 $9,830 Oregon$3,653 $2,669 $1,149 $286 $568 $8,324 Pennsylvania$3,825 $3,158 $1,714 $1,267 $603 $10,568 Rhode Island$3,632 $3,252 $2,292 $729 $1,078 $10,984 South Carolina$4,060 $2,856 $1,193 $1,139 $968 $10,217 South Dakota$3,507 $2,348 $1,844 $669 $1,131 $9,499 Tennessee$3,742 $2,938 $1,444 $1,176 $631 $9,930 Texas$2,736 $2,455 $1,330 $1,477 $868 $8,865 Utah$2,446 $1,740 $1,212 $771 $939 $7,108 Vermont$3,764 $2,760 $3,013 $628 $871 $11,036 Virginia$4,203 $2,168 $1,099 $6,197 $3,043 $16,710 Washington$3,522 $2,394 $1,512 $1,683 $1,351 $10,462 West Virginia$4,576 $3,158 $2,153 $622 $988 $11,496 Wisconsin$3,408 $2,469 $1,502 $561 $372 $8,312 Wyoming$3,321 $1,986 $1,856 $544 $1,178 $8,885

Trends

The balance of payments receipts has typically remained fairly stable over the past fifteen years with limited changes between those states with net benefits and those with net contributions. The Fisc states that the federal deficit increased due to human resource expenditures, increased tax cuts, and increased military expenditure during the 1980s. The Fisc further reports that in expectations and defense spending declined in the 1990s one would expect the expenditure per state to decrease along with the government. However, some states, such as Kentucky, Idaho and Oklahoma, actually saw large increases in defense spending, which increased their BOP. Overall, though, increases in non-defense spending were not on the same magnitude as the decline of defense spending (Leonard and Walder, Page 36–39).

The report argues that defense and Social Security and Medicare have a small negative correlation, and as a result large reductions in defense spending do not bode well for increases in spending on Social Security or Medicare. Defense expenditures tend to be the most volatile over time and state, however, total expenditures are roughly constant, which means that increases (decreases) in defense correlate with decreases (increases) in other non-defense and non- social insurance expenditures. Income taxes used to finance expenditures are not extremely volatile around the national average.

Changes in expenditure

Decrease in defense expenditure has been a large key to overall changes in expenditure, both in salaries for bases and for procurement of defense. Due to restructuring or closing military bases, as determined by the Base Closure and Realignment Commission, most states have incurred declines in defense spending via salaries. California, with 24 recommendations for closure or realignment, has had the largest decline in defense spending, which attributes to a loss of roughly $50 billion, given the population increase since the early 1980s. Most states have also seen decline in procurement defense spending, but eight states have seen it increase, and in Kentucky's case it has doubled (Leonard and Walder, Page 36-39, 44-47).