In 2022, the federal government spent $6.27 trillion1. Most of the government’s revenue comes from taxes collected from individuals and businesses across the U.S. Though taxes are mostly collected by the federal government, individual states are primary recipients of that same tax revenue. In a way, tax inflows and outflows act as a form of wealth redistribution among U.S. states.
To find out which states are most and least reliant on the federal government – and thus taxpayers from other states – SmartAsset evaluated tax and government spending data to determine which states are getting the best and worst return for their tax dollars.
Key Findings
The top one percent of earners paid about 42% of the income tax revenue in the United States. This accounts for 10% of the government’s total federal tax revenue. Californian one percenters paid 16.13% of the national income tax, while New York’s top 1% paid 8.34%, Texas one percenters paid 7.85% and Floridians paid 7.58%. In some states, including Florida, Nevada and Wyoming, the top 1% of earners pay more than half of the state’s total income taxes.
New Mexico is the only state paying less in taxes than it receives in support – paying only 85 cents in federal taxes for each dollar of support. This was the only state with that paid less in federal taxes than it received back. The next four most dependent states – West Virginia, Alaska, Mississippi and Montana – receive nearly as much in support as they send to the federal government each year. Hawaii, Vermont, Louisiana, Alabama and Wyoming also top the list of most dependent states.
Minnesota, New Jersey, Delaware, Illinois and Florida are least dependent on the federal government. These states all contribute multiples more to the federal government than they receive, with residents paying at least $5 in taxes for every $1 in direct support received from the federal government. Minnesota – the least dependent state – pays nearly $6.88 in taxes for each dollar it receives back. Other states that made the top 10 least dependent list include Washington, South Dakota, Massachusetts, Nebraska and California.
Texas’s love of vices disproportionately supports federal income. Texas pays an exorbitant $17B in excise taxes to the federal government – more than any other state by far and more than the income taxes on Texas’s top 1% of earners. Texas pays nearly three times as much in taxes on items like alcohol, gas, cigarettes, gambling and other specialty items as the second most state, Ohio.
States Most Dependent on the Federal Government
1. New Mexico
New Mexico pays an inexpensive $0.85 to the federal government for every dollar of support received. “Brain drain” – where highly educated workers leave for better opportunities elsewhere – has been a problem for New Mexico’s economy2. Left behind are a particularly high number of residents 65 and older.
2. West Virginia
West Virginians end up getting back almost every dollar they submit to the federal government – paying $1.04 for every dollar redistributed back to their state.
With a poverty rate of 16.8%3, West Virginia also placed third in a recent SmartAsset study determining states where residents are financially hurting the most. Additionally, just about 22% of residents have completed a college education – less than any other state in the nation.
3. Alaska
Being uniquely situated away from the United States mainland and in a particularly harsh climate, Alaska requires more support than most states. The state pays in about $1.09 for every support dollar it receives, and in 2022 had the third smallest state GDP.
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4. Mississippi
Mississippi has a handful of factors working against its economic independence, leading it to receive $1 from the federal government for every $1.19 it collects from residents, businesses and transactions. The state has historically ranked high in poverty and low in education – Mississippi also ranked as the second most state where residents are hurting financially in a recent SmartAsset study. It’s also prone to natural disasters that require cleanup.
5. Montana
Known for much of its natural scenery, Montana is also home to a number of federal agencies, of which a few maintain landmarks like the Yellowstone and Glacier National Park. The Treasure State received roughly $5.1 billion from the federal government in 2021 and paid back approximately $1.53 for every federal dollar received.
States Least Dependent on the Federal Government
1. Minnesota
Between personal and corporate income taxes, excise taxes, estate taxes and gift taxes, Minnesota contributes $6.88 to the federal government for every dollar it receives for support. As the least dependent state on the federal government, Minnesota has a median household income of around $77,720 – above the U.S. median of $69,717 – and is the fifth most prominent agricultural state4.
2. New Jersey
New Jersey’s dense population, proximity to New York City and Philadelphia, beaches, and a major port and airport are an effective combination for a productive economy. New Jersey also has a particularly educated workforce, which helps support the internal economy: With 41.5% of residents completing college5, it ranks fourth in the nation for 2017-2021. For every $6.28 New Jersey forks over to the federal government, it receives $1 back.
3. Delaware
More than 65% of Fortune 500 companies in the United States are incorporated in The First State6, which is known for its business-friendliness. Delaware pays roughly $32.3 billion to the federal government in collective taxes or $6.09 for every federal dollar received.
4. Illinois
Illinois is the sixth most populous state at over 12.5 million people – it’s also got the fifth largest GDP by state7,8. And by contributing $5.88 tax dollars for every $1 in returned to it, Illinois also takes the fourth place spot for least dependent on the federal government. Chicago’s location on the Great Lakes makes it an economic hub for the midwest, and like Minnesota, it is one of the top 10 agricultural states by production in the U.S.
5. Florida
The Sunshine State is the fifth-least dependent state on the federal government contributing $5.78 tax dollars for every $1 in federal aid it receives. As a popular tourist destination, Florida had the fourth largest GDP of all states in 2022.
Data and Methodology
To compare outflowing tax dollars to support dollars incoming from the federal government, we examined personal income tax, corporate income tax, excise tax, gift tax and estate tax data, all of which were classified as gross receipts to the federal government. Gross receipts include taxes, additional fees and interest.
We compared gross receipts to federal government distributions to state and local governments for 2021 to find the ratio of tax dollars paid to federal dollars received.
Data:
Collective tax revenue paid by states.
Income tax, excise, estate, gift and business income tax data came from SOI Tax Stats: “Gross Collections, by Type of Tax and State” for 2021.
Income tax data by earning percentile comes from SOI Tax Stats - Adjusted Gross Income (AGI) Percentile Data by State from the IRS for 2020. This statistic was not used for the purpose of state rankings.
Federal share of state government revenue.This is the percentage of the state government’s revenue that comes from intergovernmental aid. Data comes from the U.S. Census Bureau’s 2020 Annual Survey of State Government Finances.
Previous editions of this study utilized a different methodology, and thus are not comparable to the 2023 study.
1FiscalData.Treasury.gov
2The University of New Mexico
3U.S. Census Bureau ACS 1 Year, 2021
4USDA Economic Research Service, 2021 data
5USDA Economic Research Service, 2017-2021 Education data
6Delaware Division of Corporations
7U.S. Census Bureau Population Clock
8Bureau of Economic Analysis, State annual gross domestic product summary for 2022
Tax Planning Tips
Work with a finance professional. A financial advisor can help you make the most of your money. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Do the math. If you’re considering itemizing your deductions instead of taking the standard deduction, it’s important to keep track of your expenses and do the math to determine whether they exceed the standard deduction.
Know your tax liability. SmartAsset has a number of tools to help you calculate your tax liability in a given year, including an income tax calculator, capital gains calculator and a property tax calculator.
Questions about our study? Contact us at press@smartasset.com
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The post Where Your Tax Dollars Go: States Most Dependent on the Federal Government – 2023 Study appeared first on SmartAsset Blog.
The article delves into the intricate relationship between federal tax inflows, outflows, and the varying levels of dependency on the federal government across U.S. states. It discusses how tax revenue is collected and redistributed among states, shedding light on the disparities in contributions versus benefits received.
The key concepts covered in this article are:
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Federal Government Spending and Taxation: The federal government spent $6.27 trillion in 2022, primarily funded through taxes collected from individuals and businesses. This spending and taxation form the basis of wealth redistribution among states.
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Tax Contributions by States: The analysis highlights the tax contributions of different states, especially focusing on the top 1% of earners and their contribution to income tax revenue. States like California, New York, Texas, and Florida have high tax contributions from their top earners.
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Dependency on Federal Support: States like New Mexico, West Virginia, Alaska, Mississippi, and Montana are noted as being more dependent on federal support, receiving more funds than they contribute in taxes. Factors like poverty rates, education levels, natural disasters, and economic activities impact this dependency.
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States Least Dependent on Federal Support: Minnesota, New Jersey, Delaware, Illinois, and Florida are the least dependent states, contributing significantly more in taxes than they receive in federal support. Factors like education, GDP, population density, and economic diversity contribute to their lower dependency.
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Tax Planning Tips: The article concludes with tax planning advice, urging readers to work with financial advisors, understand tax liabilities, and utilize tools for better financial planning.
The methodology used in the study involves analyzing various tax types (personal income tax, corporate income tax, excise tax, gift tax, and estate tax) and comparing them to federal government distributions to states and local governments in 2021. Data sources include SOI Tax Stats, IRS, U.S. Census Bureau, USDA Economic Research Service, among others.
The article is a comprehensive study that not only presents the current scenario but also offers insights into the complex dynamics of federal taxation, state dependency, and wealth redistribution.
