Minnesota: Paying More Federal Taxes, Receiving Less Federal Spending

Here's an op-ed column of mine that appeared in the (Minneapolis) Star Tribune on Sunday, March 18. I'll put the opening paragraphs here, and all of it below the fold:

"Minnesota taxes: More blessed to give?"
"Minnesota pays its fair share -- and then some -- in federal taxes, while federal spending here is decidedly below average. Why the imbalance?"

The great state of Minnesota rides in a lifeboat with 49 other states, tossed by the wind and waves of global politics and the global economy.

States vary in many ways -- population, size of the state economy, age distribution, industry mix, geography. No one should expect that they will all make the same contribution to keeping the lifeboat afloat.

But still, it's eyebrow-raising to discover that Minnesota is one of the states consistently putting a lot more into the federal budget than it gets back. That's the message when you compare federal taxes paid by residents and businesses within each state with federal spending in each state.


"Minnesota taxes: More blessed to give?"
"Minnesota pays its fair share -- and then some -- in federal taxes, while federal spending here is decidedly below average. Why the imbalance?"
Article by: TIMOTHY TAYLOR

The great state of Minnesota rides in a lifeboat with 49 other states, tossed by the wind and waves of global politics and the global economy.
States vary in many ways -- population, size of the state economy, age distribution, industry mix, geography. No one should expect that they will all make the same contribution to keeping the lifeboat afloat.
But still, it's eyebrow-raising to discover that Minnesota is one of the states consistently putting a lot more into the federal budget than it gets back. That's the message when you compare federal taxes paid by residents and businesses within each state with federal spending in each state.
The most recent data seems to be for 2009. The U.S. Census Bureau, in its Consolidated Federal Funds report, breaks down domestic federal spending to the state level.
It includes government payments to individuals, procurement, grants, and the salaries and wages of federal employees. Minnesota received $45.7 billion in federal spending in 2009.
On the tax side, the Internal Revenue Service Data Book for 2009 reports that gross federal taxes collected from Minnesota in 2009 were $67.6 billion.
This includes all federal taxes: individual and corporate income taxes; payroll taxes for Social Security and Medicare, and estate, gift and excise taxes. Minnesota has an above-average per capita income, and so it pays more than average in federal taxes.
Do the math: In 2009, Minnesota received about 68 cents in federal spending for every $1 paid in federal taxes. Putting the tax and spending numbers in per-capita terms is especially striking.
For the United States as a whole, federal spending was $10,395 per person in 2009.
For Minnesota, federal spending was $8,676 per person -- about 16 percent below the average.
For the United States as a whole, federal taxes paid were $7,690 per person in 2009.
In Minnesota, federal taxes paid were $12,763 per person -- about 66 percent above average. (Of course, the U.S. government had an enormous budget deficit in 2009, so the average spending per person far exceeded the average taxes per person.)
This general pattern has held for a number of years. Analysts at the Tax Foundation calculated that if you rank states on the basis of federal taxes paid per capita, Minnesota ranked from 11th to 15th over the years from 2001 to 2005. But when states are ranked on the basis of federal spending per capita, Minnesota ranked from 45th to 48th.
In the Tax Foundation's combined rankings -- that is, federal spending received per dollar of federal taxes paid -- Minnesota ranked from 45th to 48th over the 2001-2005 time period.
Writers at the Economist magazine performed similar research last summer. By their calculations, over the 20-period from 1990 to 2009, this gap between federal taxes paid by Minnesotans and federal spending received by Minnesotans added up to the equivalent of two years worth of gross state product for Minnesota.
By this measure, Minnesota ranked 49th among the states over this time in federal spending received relative to federal taxes paid, ahead of only Delaware.
What leads to a situation where a state is consistently sending more to the federal government than it is receiving back? Or vice versa?
Along with Minnesota and Delaware, other states with a habit of paying more in federal taxes than they receive in federal spending include New Jersey, Illinois, Connecticut, New York and New Hampshire.
States typically at the other end of the range, with a pattern of more federal spending received than taxes paid, include New Mexico, Mississippi, West Virginia, Alabama, North Dakota and Alaska.
No one explanation applies equally to all of these states, but following are four main factors.
Income. States with a pattern of paying more to the federal government than they receive are all above-average in income. Also, Delaware, New York and Illinois are all places with large numbers of major corporate headquarters, thus boosting the corporate taxes from those states.
Poverty. States with fewer people below the poverty line have less need for federal support through antipoverty programs like food stamps or Medicaid. Minnesota ranks fourth among states for lowest poverty rate. New Hampshire, Delaware, New Jersey and Connecticut all rank in the top 10 for lowest poverty rate. On the other side, Mississippi, New Mexico, Alabama and West Virginia all rank among the top eight in states with the highest poverty levels.
Elderly. A large proportion of elderly means a group whose members typically have lower incomes and are receiving Social Security and Medicare benefits. Minnesota ranks 40th among states in share of population older than 65. West Virginia and North Dakota are in the top five.
Defense. Spending on defense is quite unevenly distributed across states. Some Minnesota companies have defense contracts, but the state does not have large military bases, national research laboratories or the truly enormous defense contractors. Defense spending in 2009 averaged $1,753 per person for the United States as a whole; in Minnesota, federal defense spending averaged $786 per person.
Of course, it would be silly to argue that every state should receive just as much in federal spending as it contributed in tax revenue. The United States is more than the sum of 50 states.
Even if Minnesota doesn't have large military bases and ports, people here benefit from national defense spending.
If someone spends their working life in Minnesota, then retires and draws Social Security in New Mexico, it doesn't seem unfair in the least. States with higher incomes should pay more in taxes, and states with higher poverty should receive more federal support.
Nonetheless, Minnesota's status as a state that consistently pays more to the federal government than it receives should make us all ponder.
Higher federal spending on national defense, antipoverty programs, transportation, health insurance and more will typically lead to a situation in which Minnesota taxpayers will be paying more to support those programs than Minnesotans are going to receive in direct spending.
Federal tax cuts, by the same logic, will tend to disproportionately benefit Minnesota; federal tax increases will disproportionately burden Minnesota.
In a number of cases, a narrowly Minnesota perspective suggests that it would be more in our state's collective interest to pursue state-level taxing and spending policies, rather than supporting national policies in which Minnesota's federal tax dollars will exceed federal spending within Minnesota.
As an American, I don't advocate a purely Minnesota-centric perspective on federal spending and taxes. But as a Minnesotan, I find myself paraphrasing the sentiments of Tevye from the old musical "Fiddler on the Roof":
"Of course, there's no shame in being consistently near the bottom of state rankings comparing federal spending received to federal taxes paid.
"But it's no great honor, either."
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Timothy Taylor is managing editor of the Journal of Economic Perspectives, based at Macalester College in St. Paul. He blogs at conversableeconomist.blogspot.com.






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