Sharing Federal Taxes: Who Wins and Who Loses?

• Position: Brief Article - Statistical Data Included

Are they making money or losing it? Many states are curious about whether they gain or lose from their financial relationship with the federal government.

To find out, officials can check "The Federal Government and the States," an annual report issued by the Kennedy School of Government.

The report calculates a measure of the "balance of payments" between states and the federal government--the difference between federal spending in a state and federal taxes paid by state taxpayers. A positive balance means that federal spending exceeds federal taxes. A negative balance indicates that a state pays more in federal taxes than it receives in federal spending.

Thirty-one states had a positive balance of payments in FY 1999, while 19 states paid more in federal taxes than they received in spending. Per capita balance of payments ranged from $3,944 in New Mexico to -$2,840 in Connecticut. New Mexico has ranked first since FY 1984 because it has low per capita income, as well as high federal spending on defense and assistance programs. Connecticut ranks last because its residents have the highest per capita income in the nation. In addition, defense spending, which historically has been a major component of federal expenditures in the state, has declined substantially over the past decade.

Southern states tend to have positive balances because they have a greater proportion of the elderly population, which leads to more funding for Social Security and Medicare. In addition, they tend to have relatively lower per capita income and, thus, pay less in federal taxes.

Generally, states...