Federal spending and taxation across states

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The monitoring of Federal spending and taxation and its variation between states in the United States began in 1977 under a query ran by Daniel Patrick Moynihan, Democratic senator of New York. The query was designed to determine whether the state of New York was paying more out in taxes than it was receiving in federal spending. The determination is made by looking at an individual states’ Balance of Payments (BOP), which is total income minus outlays. Initially, many thought New York was a net gainer (receiving more funding than it was paying out in taxes) because of large payments to the Federal Reserve Bank of New York, but in actuality, those payments were interest payments on the United States Federal debt, which were distributed to foreign individuals and governments for purchasing of US Treasury Bonds (Leonard and Walder, Page 9). After separating those expenditures from actual expenditures in New York, it was found that the state was actually a donor. This event stimulated more controversy over the topic of spending and taxation.

After the Federal Community Services Administration noticed the flaw in the Balance of Payments in New York revised its data and provided the revised data under the title, The Geographical Distribution of Federal Expenditures, which was used in determining the expenditures for this analysis, which is now, entitled "the Fisc".

Contents

[edit] 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, should federal spending be neutral, meaning federal taxation should roughly equal expenditures. Second, should it be redistributive, meaning rich states should be taxed more 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 New York. The effect of not indexing to costs of living make some states look more 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 break-down of federal spending is done in the following ways: defense (military), non-defense discretionary, Social Security, Medicare, grants, and other various 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 politically 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 Main (Leonard and Walder, Page 30).

[edit] Trends

The balance of payments receipts have typically remained fairly stable over the past fifteen years with limited changes between those states with net benefits and those with next contributions. The Fisc states that the federal deficit increased due to human resource expenditures, increased tax cuts, and increased military expenditure during the 1980’s. The Fisc further reports that in expectations and defense spending declined in the 1990’s 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/Medicare have a small negative correlation, and as a result large reductions in defense spending do not bode well for increases 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.

[edit] 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 dollars given the population increase since the early 1980’s. 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).

Social Security has increased in expenditure primarily in the Southern states. It was thought that since the largest expenditure is retirement aid that social security expenditure was following the elderly. However, this was not the case, as the data did not correlate between elderly population and increases in social security expenditure. Further expenditures in social security are caused by the increase in disability insurance. The Fisc argues that the later policy changes in the 1980’s involving beneficiary eligibility may have a time lag, meaning the causes of those changes are just now being felt. Medicare costs have continued to increase as well as the population ages and as health care costs increases. Most of the increased expenditure has again been seen in the south. Grants have increased, but have been relatively stable over the fifteen year period taken into consideration. The largest increase has been in the form of Medicaid expenditures (Leonard and Walder, Page 47-54).

The changes in taxes have remained fairly stable over time, and are strongly correlated with income per capita per state. It follows that as state’s per capita income rises, its tax receipt also increases. The data between changes in per capita taxes to the national averages in ratio to the changes in the per capita income to the national average has a correlation of .88 (Leonard and Walder, Page 56-57).

[edit] See also

[edit] References