What makes a maker or a taker state

December 3, 2013
(Credit: Federal Reserve Bank of San Francisco)
Average per capita net contribution to the federal government from 1998 to 2010. Contributions calculated as taxes paid minus transfers received. (Federal Reserve Bank of San Francisco)

Delawareans have it worst.

If you hail from the Diamond State, what you pay in taxes exceeds what you get back from the federal government by roughly $13, according to Federal Reserve Bank of San Francisco research published Monday. That’s higher than in any other state. In Mississippi, taxes paid exceed federal transfers back to the state by only $0.50 per person, less than any other state.

States with smaller net contributions, such as Mississippi, can be described as takers. States with net contributions closer to Delaware’s are makers. The federal system of collecting taxes and then handing some funds back in the form of transfers — payments to people, businesses and organizations — tends to do two things: it redistributes funds among states and stabilizes them during downturns.

But that effect, it turns out, is almost entirely due to taxes. The researchers found that with every extra dollar a state resident makes, net federal contributions — taxes minus transfers — rise by $0.31. Part of the reason why is obvious: The more you make, the more goes to the federal government in taxes. But that can be offset by how much the federal government gives back per person. You might assume that the richer a state gets, the more it loses in transfers per person. You’d be right, but just barely.

Of the $0.31 increase in net contributions with each extra dollar in income, $0.30 cents was correlated with higher taxes paid and just one cent with fewer transfers coming back to the state. A state’s wealth, it turns out, is barely correlated with how much it gets from the federal government per person.

The first graph below shows the relatively strong correlation between taxes and rising income. The second shows that there’s little connection between the level of federal transfers and income.

(Credit: Federal Reserve Bank of San Francisco.)
(Federal Reserve Bank of San Francisco.)

The same holds when incomes fall.

Each dollar lost in per capita income is correlated with a $0.38 decline in net federal contributions (again, calculated as taxes minus transfers). Of that, $0.36 is due to less taxes paid. Just two cents are due to an increase in federal transfers.

The Fed paper was focused on lessons U.S. states hold for the European Union, but it explains a lot about how a state’s maker or taker status is determined. Taxes, it turns out, explains most of it.

Notes: Data for the map above comes from the Census Bureau and Internal Revenue Service. Transfers include grants to state and local governments and direct payments to businesses, nonprofit organizations, and individuals — excluding federal retirement and disability benefits. A broader measure showed similar results, according to the researchers.

Niraj Chokshi reports for GovBeat, The Post's state and local policy blog.
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