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Comparative Federal Tax Contribution by State

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Old 02-06-2009, 05:14 PM   #1
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Comparative Federal Tax Contribution by State

I had some free time last night and I put together a spreadsheet that does some analysis on Federal Taxes paid by each state. This analysis looks at the percentage of population by State as it relates to percentage of Federal Income Taxes paid to determine whether a State pays its fair share of the Federal Income Tax. Think of it this way, if we all went out for drinks every Friday which one of us isn't paying their fair share of the tab? Whether you don't think you should pay at all or your beer should cost less because we should be drinking cheap beer is a different story.

A Drag Index (DI) is assigned to each State that is calculated based on the percentage of total population that live in the State, percentage of total taxes paid by individuals in the state, and percentage of total effective taxes paid. A lower DI indicates that a State does not pay its fair share of Federal Taxes while a larger DI indicates that the State pays its fair share or more of the tax burden. Note that even though Puerto Rico and District of Columbia are not States they were included in this analysis because individuals that inhibit these territories also pay Federal Taxes.



A few things to note:
  1. Puerto Rico gets more aid than taxes it pays (negative effective tax rate of -0.07%).
  2. New York is the most generous tax contributor.
  3. Washington D.C.residents pay the most taxes per capita at ~35K per person.
  4. Alaska has the second worst effective tax rate at 0.07%.
  5. Florida has nearly the same size of population as New York yet pays 100 billion dollars in less taxes. One possible explanation for this anomaly is the presence of significant number of older people in Florida who don't pay as much taxes.
  6. Wyoming is the most effective tax payer with 0.87 DI followed by Washington State with 4.94 DI.
  7. California is the biggest tax contributor with roughly 10% effective Federal Taxes. That's more than the bottom 27 States combined even though the combined population of the bottom States is ~57 million.

Questions and feedback are welcomed and encouraged.

Here's the spreadsheet.
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Last edited by saden1; 02-06-2009 at 06:41 PM.
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Old 02-06-2009, 05:23 PM   #2
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Re: Comparative Federal Tax Contribution by State

Goodness, that's some impressive work saden.

When I have free time...I read posts in the Parking Lot
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Old 02-06-2009, 06:11 PM   #3
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Re: Comparative Federal Tax Contribution by State

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Originally Posted by SmootSmack View Post
Goodness, that's some impressive work saden.

When I have free time...I read posts in the Parking Lot
For real. I enjoy political discussion in-person with friends, by my motto for the parking lot is the same as your current user title - f...political threads. However, this is impressive stuff.

I do love reading Parking Lot threads though...

Question- how do you determine the dollar amount of what (ideally) each state's "fair share" should be?
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Old 02-06-2009, 06:38 PM   #4
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Re: Comparative Federal Tax Contribution by State

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Originally Posted by GMScud View Post
For real. I enjoy political discussion in-person with friends, by my motto for the parking lot is the same as your current user title - f...political threads. However, this is impressive stuff.

I do love reading Parking Lot threads though...

Question- how do you determine the dollar amount of what (ideally) each state's "fair share" should be?
Thanks guys, it was a great learning experience.

The total Federal tax contribution (~2.6 trillion) divided by total population of the United States (~306 million) gives you ideal contribution per capita. If a State houses 10% of the population it should pay 10% of the tax burden. The effective tax rate throws a monkey wrench into our ideal world scenario so that has to be factored in.

New York for example has the highest DI index because it has 6.32% of the population and pays 9.15% of the total tax burden (+2.83%). When you factor in the aid money they receive they have an effective tax rate of 7.53%. That is to say even though they make up 6.32% of the population they still pay 7.53% of the effective tax (1.21% more than they should).
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Old 02-06-2009, 09:50 PM   #5
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Re: Comparative Federal Tax Contribution by State

Really, that is impressive Saden.
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Old 02-06-2009, 10:05 PM   #6
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Re: Comparative Federal Tax Contribution by State

As I look through the work here, the biggest thing this tells me is the per capita income by state.

New York is the most effective taxpayer, even net of federal aid, because they have such a high number of citizens earning very high salaries. Wall Street, big corporate execs, investment bankers, consultants, employees of the accounting firms, media outlets, and on and on. These same citizens are the ones who generate a great deal of income and capital gains through their securities assets - this also generates tax for the federal government. It is these high earners that are contributing the lion's share of the tax money, as a great percentage of their income is taxed at the highest tax bracket, 35% or more.

New Jersey and Connecticut also rank high on the list for this reason. Many citizens from these areas commute into New York.

You'll note similar contributions amongst Massachussets (Boston, a large financial center), Illinois (Chicago). Then note poor states who are suffering most from economic troubles, Michigan's unemployment in the Detroit area pulls it down to one of the biggest drags.

Wage index also plays a huge role here. The states at the top of the list are high wage index states. An accountant coming out of college may start at 60K in NYC, and 40K in the south. Note the presence of South Carolina, Kentucky, Alabama, Mississippi, and Georgia near the bottom of the list. Cost of living in these areas is some of the lowest around, resulting in lower wages, resulting in lower taxes paid.

Florida is indeed an anomaly because of the retirees. They don't pay taxes on the social security checks they're drawing.

It is important that people not interpret this chart, particularly the drag index, as an indicator of one state doing more than another to fund the federal budget. It is not attributable to anything the state or the citizens are doing, it is merely reflective of:

- The geography of high paying jobs - where are the lion's share located? Major cities.
- The cost of living (and as a byproduct, wage index) of each state.

Unless you're a believer in a flat tax, one should expect New York to contribute more taxes on a per capita basis than any other state, simply because they make so much money. And it should be no surprise that California pays more than most states in taxes. They have way more people than most states and plenty of urban centers with high paying jobs, not to mention a booming tourism industry.

Saden, a very valuable analysis would be to add mean household income by state to the report, and then calculate (Gross Tax Paid - Federal Aid Received) / (Population x Mean Household Income). This would show you the percent of income paid to the federal government, net of aid. I'd postulate that you'll see a much more even distribution amongst the states.
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Old 02-06-2009, 10:26 PM   #7
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Re: Comparative Federal Tax Contribution by State

By the way, great thread. I can't turn down taking a good look at a financial analysis (said the financial analyst).
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Old 02-06-2009, 10:31 PM   #8
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Re: Comparative Federal Tax Contribution by State

I never saw the cogency of the drag index. My best econ profs used the ratio of total federal funds allocated over total federal taxes collected, for instance 1.82 reflects $1.82 of federal money for every $1 the "state" pays in federal taxes. The numbers are pretty friggin staggering... if memory serves basically the middle of the country suck money away from the coastal states, which pay in far more than they receive in aid.
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Old 02-06-2009, 10:32 PM   #9
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Re: Comparative Federal Tax Contribution by State

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I never saw the cogency of the drag index. My best econ profs used the ratio of total federal funds allocated over total federal taxes collected, for instance 1.82 reflects $1.82 of federal money for every $1 the "state" pays in federal taxes. The numbers are pretty friggin staggering... if memory serves basically the middle of the country suck money away from the coastal states, which pay in far more than they receive in aid.
Again, that's reflective of cost of living and wage index by state. A pretty meaningless stat.
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Old 02-07-2009, 12:10 AM   #10
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Re: Comparative Federal Tax Contribution by State

What Schneed10 is correct. In the interest of discloser the reason why I spend time looking at these numbers was not because I have too much time but because some people really do think kicking states like California out of the union is a good idea. I also wanted to see whether Temple was really paying his full bill if all things were equal.

Note that each "state" except for Puerto Rico can self-sustain especially when you factor in state taxes into the picture. Drag Index is a bit incendiary word but I couldn't think of a better word. Obviously each state has something unique to offer the union but let's not kid ourself, the big boys make this nation a super power. I mean Cali has a negative DI but kicking them out of the union would not be wise at all.

Thanks for the suggestion Schneed10. There's lots of numbers (GDP, SS payment, unemployment percentage, factor in corporate tax contribution into the picture, etc) worth looking at to make this analysis more meaningful. It's a working progress.

p.s. I was really surprised by how significant the contributions from Minnesota, Ohio, and D.C. were.
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Last edited by saden1; 02-07-2009 at 12:17 AM.
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Old 02-07-2009, 09:25 AM   #11
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Re: Comparative Federal Tax Contribution by State

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Originally Posted by saden1 View Post
What Schneed10 is correct. In the interest of discloser the reason why I spend time looking at these numbers was not because I have too much time but because some people really do think kicking states like California out of the union is a good idea. I also wanted to see whether Temple was really paying his full bill if all things were equal.

Note that each "state" except for Puerto Rico can self-sustain especially when you factor in state taxes into the picture. Drag Index is a bit incendiary word but I couldn't think of a better word. Obviously each state has something unique to offer the union but let's not kid ourself, the big boys make this nation a super power. I mean Cali has a negative DI but kicking them out of the union would not be wise at all.

Thanks for the suggestion Schneed10. There's lots of numbers (GDP, SS payment, unemployment percentage, factor in corporate tax contribution into the picture, etc) worth looking at to make this analysis more meaningful. It's a working progress.

p.s. I was really surprised by how significant the contributions from Minnesota, Ohio, and D.C. were.
LOL on the bolded part.

It is very cool what you're doing here, I've never looked at the numbers by state like this.

DC doesn't surprise me so much, the housing within the district is very expensive which of course dictates that those living there need to make a lot of dough to afford it. With the DC area being one of the highest cost of living areas in the nation, the wage index matches, and you get a high per capita income.

But Ohio and especially Minnesota do surprise me. Minnesota's tax paid per capita is through the roof. I wonder if that's because the state is sparsely populated except for the areas surrounding Minneapolis-St. Paul. You might simply have the lion's share of people living around a metropolitan area that has a significant wage index.

Question, how is Federal Aid calculated? Is it welfare payments + disaster relief?
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Old 02-07-2009, 10:00 AM   #12
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Re: Comparative Federal Tax Contribution by State

The Federal Aid data comes from census.
Quote:
Federal government aid to state and local governments includes the following:
  1. Direct cash grants to state or local government units.
  2. Payments for grants-in-kind, such as purchases of commodities distributed to state or local government institutions (e.g., school lunch and breakfast programs).
  3. Payments to nongovernment entities when such payments result in cash or in-kind services passed on to state or local governments.
  4. Payments to regional commissions and organizations that are redistributed to the state or local level.
  5. Federal government payments to state and local governments for research and development that is an integral part of the provision of public services.
  6. Federal revenues shared with state and local governments.
Oh and the the tax data is from the IRS.
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Old 02-07-2009, 12:19 PM   #13
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Re: Comparative Federal Tax Contribution by State

I think that Federal Taxes paid is based on income so that explains some of your findings. FL has a large population of retired people who don't pay much in taxes and most of their income (beside SS) comes from money they have already paid taxes on.

I must ask. You think its fair that the richest 10% pay most of the federal taxes while the bottom 40% pay little to no fed taxes. Then you say its not fair that some states pay more then their share while others pay very little.
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Old 02-08-2009, 11:27 AM   #14
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Re: Comparative Federal Tax Contribution by State

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I think that Federal Taxes paid is based on income so that explains some of your findings. FL has a large population of retired people who don't pay much in taxes and most of their income (beside SS) comes from money they have already paid taxes on.

I must ask. You think its fair that the richest 10% pay most of the federal taxes while the bottom 40% pay little to no fed taxes. Then you say its not fair that some states pay more then their share while others pay very little.

I believe in the progressive tax wholeheartedly. It's the best system to sustain a capitalistic nation around the globe. I do look forward to, however, the day where we are all on equal footing and therefore pay equally into the system.
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Old 02-08-2009, 12:13 PM   #15
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Re: Comparative Federal Tax Contribution by State

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I believe in the progressive tax wholeheartedly. It's the best system to sustain a capitalistic nation around the globe. I do look forward to, however, the day where we are all on equal footing and therefore pay equally into the system.
How do you envision everyone achieving "equal footing"?
AND BTW, Schneed, you may want to seriously consider getting a.......woman
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