By Ryan McMaken, Mises.org
Last month, we looked at military spending by state, and how some states — South Carolina and Virginia, for example — have military spending as a major component of their local economies. Proposing cuts to government spending via military spending would likely be political suicide in any of these places.
But of course military spending is just one type of government spending, and some states are heavily dependent on government spending whether the spending be on civilian federal employees, the military, or transfer payments such as Social Security and Medicare.
Federal Spending as a Percentage of State GDP
If we look at federal spending as a proportion of each state’s overall GDP, we find that the recipients are not exactly evenly distributed:
Source: Pew Charitable Trusts (based on data from 2004–2013)
This is all federal spending, so these totals are a combination of military spending, social welfare programs such as Medicare, and ordinary civilian federal spending, including civilian research facilities and other programs funded by federal grants.
These are proportional numbers, so they are a function of both the amount of federal spending as well as the overall size of GDP. So, in California, for example, which receives immense amounts of government spending, is nevertheless a state where federal spending is offset by a very large private sector. In a more rural state with few major private industries, such as New Mexico, the state shows up as being highly reliant on federal spending.
By this measure, the state most reliant on federal spending is Mississippi where federal spending is equal to 32 percent of the state’s GDP. The state least reliant on federal spending is Wyoming where federal spending is equal to 11 percent of the state’s GDP:
Source: Pew Charitable Trusts (based on data from 2004–2013)
The above measure gives us a sense of how much federal spending is taking place relative to overall economic activity. But, it tells us little about how much the feds are spending in each state relative to the tax revenue being produced in each state.
To discover that, we need to compare federal spending to tax collections from each state. So, I took gross tax collection by state, and then subtracted refund totals. I then compared the “net” collections to Pew’s total federal spending data in each state. (The tax data used was 2013 data.) We can then measure the result in terms of dollars spend in each state per dollar in tax revenue collected. States that have a value of less than a dollar in the map below receive less than a dollar in federal spending for every dollar in taxes paid from that state. So, for example, Ohio receives 91 cents in federal spending for every dollar collected in taxes from Ohio:
I’ve divided this graph up into “net tax payer states,” “break-even states” and “net tax receiver” states. The lightest shade of blue are states that, by far, pay in more than they receive back, such as New Jersey and Minnesota. The next lightest shade of blue are states that are more or less “break even” in the sense that spending and tax collections hover somewhat around a 1-for-1 relationship. The darker blue states are states that receive considerably more in federal spending than they pay in taxes.
Here are all states, including values:
Naturally, these values aren’t spread evenly within the states themselves, either. Areas that are more rural and reliant on agriculture will tend to be net tax receiver areas both because farmers and ranchers receive a lot of government subsidies, and also because agricultural work tends to have lower productivity than urban work.
Urban areas, in contrast, produce most of the tax revenue, so highly urbanized states will tend to more often be “break even” or “net tax payer” states.
One thing that must not be ignored is the fact that the US government spends more than it takes in nationwide. During 2013, for example, the federal government spent a dollar for every 80 cents it took in via taxes.
Nationwide, the tax-spending ratio is not one dollar, but it about $1.20. So, states that are getting around $1.20 back for every dollar extracted in taxes are really just at the national average.
This is being made possible by old-fashioned deficit spending and also by monetization of the debt which the Federal Reserve facilitates by expanding the money supply. Once interest rates rise or the international value of the dollar begins to fall significantly, this sort of overspending will no longer be possible, and many states will find themselves in dire straits. (States that are “net tax payer” or “break even” states will adjust the best to any significant disruptions in federal spending.)
On the other hand, the realities of the central bank tend to favor the richer, more urban states at the expense of the poorer tax-receiver states.
For example, the Fed’s war on interest rates tends to more heavily impact communities that have a relatively large number of modest savers and risk-averse investors. By driving down interest rates so far, the Fed is favoring wealthy investors with access to high-yield investments at the expense of ordinary Main-Street households who rely on more conservative, easily-accessed forms of saving and investment, such as savings accounts and CDs. As a result, capital accumulation is negatively impacted most in parts of the country that produce the least tax revenue and have less productive workers.
In other words, the central banking regime perpetuates the current imbalance between net tax payer states and net tax receiver states by making it more difficult for poorer parts of the country to accumulate wealth and increase productivity.
Simultaneously, the money creation process tends to favor the financial sectors in large urban areas at the expense of less urban and poorer areas. Thanks to the way the central bank creates money, it is the urban investor classes that get to spend the new money first — before prices adjust to the new, larger money supply — while more rural, less urban, and less productive parts of the country receive this money only after prices have risen. This further perpetuates the tax-spending imbalance.
So while it is true that urban, coastal taxpayers are often paying more in taxes and financing government spending in other parts of the country, those same taxpayers do indeed benefit from national policy that favors the investor class (and those who work with them) over others. They’re paying more taxes because they have higher incomes, but these higher incomes come, to a certain extent, at the expense of Americans outside these corridors of financial power.
Beyond the monetary angle, of course, is the fact that states also are restrained in their ability to fully utilize resources in their own states by federal regulations.
Western states, especially, are not able to access resources on federal lands except in a manner consistent with federal laws written primarily by politicians from outside the state. Such policies are unresponsive to local needs and economic realities.
And, of course, trade regulations, when implemented at the national level, may have significant negative impacts on certain states that are not free to negotiate their own trade arrangements with foreign economies.
The Jones Act and trade barriers on sugar are just two examples.
While we can see that the net tax receiver states do indeed benefit from large amounts of federal spending, we must also take into account the fact that federal policy may also be hobbling those local economies while favoring and redirecting wealth toward the net tax payer states.
That is, the tax-and-spend wealth transfers from net taxpayer states to net tax receiver states could be viewed as something that merely helps to diminish the effects of impoverishment that are the result of national policy. Were it not for these policies, it is entirely possible that these net tax receiver areas would not have become so reliant on federal spending in the first place.
This post was originally published at Mises.org and is reposted here under a CreativeCommons, Non-Commericial 3.0 license.